-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S811iH/4aphQhNfxl72hmTZ+BsJHHHWrNihfNgsTEZAR0Er0MFuj3dUa9LMtXyFm JDDuhWDmSBg9v4l1JshXwA== 0000950130-97-001909.txt : 19970428 0000950130-97-001909.hdr.sgml : 19970428 ACCESSION NUMBER: 0000950130-97-001909 CONFORMED SUBMISSION TYPE: 485B24E PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 19970425 EFFECTIVENESS DATE: 19970425 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: 485B24E SEC ACT: 1933 Act SEC FILE NUMBER: 002-74452 FILM NUMBER: 97587673 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1940 Act SEC FILE NUMBER: 811-03290 FILM NUMBER: 97587674 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 BUSINESS PHONE: 6092823319 485B24E 1 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1997. FILE NO. 2-74452 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] PRE-EFFECTIVE AMENDMENT NO. [_] [X] POST-EFFECTIVE AMENDMENT NO. 27 AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] [X] AMENDMENT NO. 28 (CHECK APPROPRIATE BOX OR BOXES) ---------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800 ARTHUR ZEIKEL MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 (NAME AND ADDRESS OF AGENT FOR SERVICE) ---------------- COPIES TO: PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ. MERRILL LYNCH ASSET MANAGEMENT, L.P. ROGERS & WELLS P.O. BOX 9011 200 PARK AVENUE PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166 IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX) [X]immediately upon filing pursuant to paragraph (b) [_]on (date) pursuant to paragraph (b) [_]60 days after filing pursuant to paragraph (a)(1) [_]on (date) pursuant to paragraph (a)(1) of Rule 485 [_]75 days after filing pursuant to paragraph (a)(2) [_]on (date) pursuant to paragraph (a)(2) of rule 485 IF APPROPRIATE, CHECK THE FOLLOWING BOX: [_]this post-effective amendment designates a new effective date for a previously filed post-effective amendment. ---------------- (continued on next page) THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON FEBRUARY 22, 1997. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Continued from previous page) CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM OF SHARES OFFERING AGGREGATE TITLE OF SECURITIES BEING PRICE OFFERING AMOUNT OF BEING REGISTERED REGISTERED PER SHARE PRICE* REGISTRATION FEE - -------------------------------------------------------------------------------- (1) Shares of Domestic Money Market Fund Stock, par value $.10 per share.............. 29,045,210 $1.00 $47,142 - -------------------------------------------------------------------------------- (2) Shares of Reserve Assets Fund Common Stock, par value $.10 per share.............. 2,697,439 $1.00 $47,142 - -------------------------------------------------------------------------------- (3) Shares of Natural Resources Focus Fund Common Stock, par value $.10 per share........ 168,556 $11.72 $47,138 - -------------------------------------------------------------------------------- (4) Shares of American Balanced Fund Common Stock, par value $.10 per share.............. 791,945 $13.97 $47,149 $100 - -------------------------------------------------------------------------------- (5) Shares of Global Bond Focus Fund Common Stock, par value $.10 per share.............. 573,932 $ 8.99 $47,144 - -------------------------------------------------------------------------------- (6) Shares of Global Strategy Focus Fund Common Stock, par value $.10 per share........ 23,422,992 $13.42 $47,145 - -------------------------------------------------------------------------------- (7) Shares of Global Utility Focus Fund Common Stock, par value $.10 per share........ 1,430,494 $12.09 $47,139
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- * Calculated as of April 21, 1997. (1) The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of Domestic Money Market Fund Common Stock redeemed or repurchased during Registrant's previous fiscal year was 146,504,203 shares. Of such amount 117,506,135 shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 28,998,068 of the shares redeemed during the Registrant's previous fiscal year are being used for the reduction of the registration fee in this post effective amendment to the Registration Statement. (2) The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of Reserve Assets Fund Common Stock redeemed or repurchased during Registrant's previous fiscal year was 10,800,490 shares. Of such amount 8,150,193 shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 2,650,297 of the shares redeemed during the Registrant's previous fiscal year are being used for the reduction of the registration fee in this post effective amendment to the Registration Statement. (3) The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of Natural Resources Focus Fund Common Stock redeemed or repurchased during Registrant's previous fiscal year was 737,357 shares. Of such amount 572,823 shares have been used for reductions pursuant to Rule 24e- 2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 164,534 of the shares redeemed during the Registrant's previous fiscal year are being used for the reduction of the registration fee in this post effective amendment to the Registration Statement. (4) The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of American Balanced Fund Common Stock redeemed or repurchased during Registrant's previous fiscal year was 1,921,234 shares. Of such amount 1,132,664 shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 788,570 of the shares redeemed during the Registrant's previous fiscal year are being used for the reduction of the registration fee in this post effective amendment to the Registration Statement. (5) The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of Global Bond Focus Fund Common Stock redeemed or repurchased during Registrant's previous fiscal year was 2,825,267 shares. Of such amount 2,256,579 shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 568,688 of the shares redeemed during the Registrant's previous fiscal year are being used for the reduction of the registration fee in this post effective amendment to the Registration Statement. The foregoing number of shares includes those shares redeemed or sold by the International Bond Fund prior to its merger with and into the Global Bond Focus Fund as of December 6, 1996. (6) The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of Global Strategy Focus Fund Common Stock redeemed or repurchased during Registrant's previous fiscal year was 29,750,613 shares. Of such amount 6,331,134 shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 23,419,479 of the shares redeemed during the Registrant's previous fiscal year are being used for the reduction of the registration fee in this post effective amendment to the Registration Statement. The foregoing number of shares includes those shares redeemed or sold by the Flexible Strategy Fund prior to its merger with and into the Global Strategy Focus Fund as of December 6, 1996. (7) The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of Global Utility Focus Fund Common Stock redeemed or repurchased during Registrant's previous fiscal year was 2,881,155 shares. Of such amount 1,454,560 shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 1,426,595 of the shares redeemed during the Registrant's previous fiscal year are being used for the reduction of the registration fee in this post effective amendment to the Registration Statement. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. CROSS REFERENCE SHEET FORM N-1A
ITEM FORM N1-A LOCATION --------- -------- PART A 1. Cover Page................. Cover Page 2. Synopsis................... * 3. Financial Highlights....... Financial Highlights; Performance Data 4. General Description of Investment Objectives and Policies of Registrant................ the Funds; Additional Information 5. Management of the Fund..... Investment Adviser; Directors; Portfolio Transactions and Brokerage; Additional Information 5A. Management Discussion of Fund Performance.......... * 6. Capital Stock and Other Cover Page; Dividends, Distributions and Securities................ Taxes; Additional Information 7. Purchase of Securities Purchase of Shares; Additional Being Offered............. Information 8. Redemption or Repurchase... Redemption of Shares 9. Pending Legal Proceedings.. * STATEMENT OF ADDITIONAL INFORMATION CAPTION ----------------------------------- PART B 10. Cover Page................. Cover Page 11. Table of Contents.......... Table of Contents 12. General Information and Additional Information History................... 13. Investment Objectives and Investment Objectives and Policies; Policies.................. Investment Restrictions; Portfolio Transactions and Brokerage 14. Management of the Management of the Company Registrant................ 15. Control Persons and Principal Holders of Management of the Company; Additional Securities................ Information 16. Investment Advisory and Management of the Company Other Services............ 17. Brokerage Allocation and Portfolio Transactions and Brokerage Other Practices........... 18. Capital Stock and Other * Securities................ 19. Purchase, Redemption and Pricing of Securities Determination of Net Asset Value; Being Offered............. Redemption of Shares 20. Tax Status................. Dividends, Distributions and Taxes 21. Underwriters............... Distribution Arrangements 22. Calculation of Performance Performance Data Data...................... 23. Financial Statements....... Financial Statements PART C Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of this Registration Statement.
- -------- * Item inapplicable or answer negative. EXPLANATORY NOTE This registration statement contains four forms of prospectus: the first prospectus to be found herein is to be used in connection with the sale of Class A shares of the Funds to fund variable annuity contracts and/or variable life insurance contracts issued by insurance companies including Merrill Lynch Life Insurance Company ("MLLIC") or ML Life Insurance Company of New York ("ML of New York"); the second prospectus to be found herein is to be used in connection with the sale of Class A shares of the Funds to fund benefits under variable life insurance contracts issued by MLLIC or ML of New York; the third and fourth prospectuses to be found herein are to be used in connection with the sale of Class A shares of certain Funds to certain insurance companies, including insurance companies owned by Merrill Lynch & Co., Inc., for certain separate accounts to fund benefits under variable life insurance contracts and/or variable annuities contracts issued by the insurance companies. PROSPECTUS APRIL 25, 1997 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800 ---------------- Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end management investment company which has a wide range of investment objectives among its sixteen separate funds (hereinafter referred to as the "Funds" or individually as a "Fund"). A separate class of common stock ("Common Stock") is issued for each Fund. The Company is offering shares of its Class A Common Stock pursuant to this Prospectus. The shares of the Funds are sold to separate accounts ("Separate Accounts") of certain insurance companies (the "Insurance Companies") to fund benefits under variable annuity contracts ("Variable Annuity Contracts") and/or variable life insurance contracts (together with the Variable Annuity Contracts, the "Contracts") issued by such companies. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. Certain Insurance Companies are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). The investment objectives of the Funds and certain investment policies, each of whose name is preceded by "Merrill Lynch," are as follows: DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term domestic money market securities. RESERVE ASSETS FUND. Preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term money market securities. PRIME BOND FUND. As high a level of current income as is consistent with prudent investment management, and as a secondary objective, capital appreciation when consistent with the foregoing objective, by investing primarily in long-term corporate bonds rated A or better by either Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("Standard & Poor's"). HIGH CURRENT INCOME FUND. As high a level of current income as is consistent with its investment policies and prudent investment management, and as a secondary objective, capital appreciation when consistent with the foregoing objective. The Fund invests principally in fixed-income securities that are rated in the lower rating categories of the established rating services or in unrated securities of comparable quality. (continued on next page) THE RESERVE ASSETS FUND AND THE DOMESTIC MONEY MARKET FUND ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO. AN INVESTMENT IN THE RESERVE ASSETS FUND OR THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND AND DEVELOPING CAPITAL MARKETS FOCUS FUND INVEST OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES." ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. ---------------- MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR (continuation of cover page) QUALITY EQUITY FUND. Highest total investment return consistent with prudent risk. The Fund uses a fully managed investment policy utilizing equity securities, primarily common stocks of large-capitalization companies, as well as investment grade debt and convertible securities. EQUITY GROWTH FUND. Long-term capital growth by investing primarily in common shares, of small companies and of emerging growth companies regardless of size. NATURAL RESOURCES FOCUS FUND. Long-term growth of capital and protection of the purchasing power of shareholders' capital by investing primarily in equity securities of domestic and foreign companies with substantial natural resource assets. AMERICAN BALANCED FUND. A level of current income and a degree of stability of principal not normally available from an investment solely in equity securities and the opportunity for capital appreciation greater than is normally available from an investment solely in debt securities by investing in a balanced portfolio of fixed income and equity securities. GLOBAL STRATEGY FOCUS FUND. High total investment return by investing primarily in a portfolio of equity and fixed income securities of U.S. and foreign issuers. BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND). High total investment return by investing in a global portfolio of fixed income securities denominated in various currencies, including multinational currency units. GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation and, secondarily, income, through investment in securities, principally equities, of issuers in countries other than the United States. DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. GOVERNMENT BOND FUND (FORMERLY, THE INTERMEDIATE GOVERNMENT BOND FUND). Highest possible current income consistent with the protection of capital afforded by investing in debt securities issued or guaranteed by the United States Government, its agencies or instrumentalities. INDEX 500 FUND. Investment results that, before expenses, correspond to the aggregate price and yield performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index"). For more information on the Funds' investment objectives and policies, please see "Investment Objectives and Policies of the Funds," page 17. 2 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY BE MADE. ---------------- TABLE OF CONTENTS
PAGE ---- Financial Highlights...................................................... 4 The Insurance Companies................................................... 18 Reserve Assets Fund and Domestic Money Market Fund Yield Information...... 18 Investment Objectives and Policies of the Funds........................... 19 Directors................................................................. 43 Investment Adviser........................................................ 45 Portfolio Transactions and Brokerage...................................... 47 Purchase of Shares........................................................ 48 Redemption of Shares...................................................... 48 Dividends, Distributions and Taxes........................................ 48 Performance Data.......................................................... 49 Additional Information.................................................... 50 Appendix A................................................................ A-1 Appendix B................................................................ B-1
3 FINANCIAL HIGHLIGHTS The financial information in the tables below with the exception of the three month period ending March 31, 1997 for the Index 500 Fund, has been audited in conjunction with annual audits of the financial statements of each of the Company's Funds by Deloitte & Touche LLP, independent auditors. Financial Statements and the independent auditors' report thereon for the fiscal year ended December 31, 1996 are included in the Statement of Additional Information. The following per share data and ratios, with the exception of the three month period ending March 31, 1997 for the Index 500 Fund, have been derived from information provided in the Company's audited financial statements. Further information about the performance of the Company is contained in the Company's most recent annual report to shareholders which may be obtained, without charge, by calling or by writing the Company at the telephone number or address on the front cover of this prospectus.
AMERICAN BALANCED FUND -------------------------------------------------------------------------------------- FOR THE PERIOD JUNE 1, FOR THE YEAR ENDED DECEMBER 31, 1988+ TO ------------------------------------------------------------------------ DECEMBER 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 -------- -------- -------- -------- ------- ------ ------ ------ ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.... $ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82 $11.26 $11.74 $10.41 $10.00 -------- -------- -------- -------- ------- ------ ------ ------ ------ Investment income--net.. .53 .59 .48 .32 .31 .47 .47 .44 .29 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... .89 2.06 (1.06) 1.37 .37 1.76 (.35) 1.40 .12 -------- -------- -------- -------- ------- ------ ------ ------ ------ Total from investment operations............. 1.42 2.65 (.58) 1.69 .68 2.23 .12 1.84 -- -------- -------- -------- -------- ------- ------ ------ ------ ------ Less dividends and distributions: Investment income-- net................... (.56) (.56) (.37) (.34) (.37) (.49) (.46) (.50) -- Realized gain on investments--net...... (.02) -- -- (.12) (.28) (.18) (.14) (.01) -- In excess of realized gain on investments-- net................... -- -- (.05) -- -- -- -- -- -- -------- -------- -------- -------- ------- ------ ------ ------ ------ Total dividends and distributions.......... (.58) (.56) (.42) (.46) (.65) (.67) (.60) (.51) -- -------- -------- -------- -------- ------- ------ ------ ------ ------ Net asset value, end of period................. $ 16.01 $ 15.17 $ 13.08 $ 14.08 $ 12.85 $12.82 $11.26 $11.74 $10.41 ======== ======== ======== ======== ======= ====== ====== ====== ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 9.73% 20.81% (4.19%) 13.49% 5.72% 20.65% 1.22% 18.11% 4.10%# ======== ======== ======== ======== ======= ====== ====== ====== ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .60% .61% .63% .70% .97% 1.20% 1.25% 1.25% 1.25%* ======== ======== ======== ======== ======= ====== ====== ====== ====== Expenses................ .60% .61% .63% .70% .97% 1.20% 1.50% 2.29% 1.25%* ======== ======== ======== ======== ======= ====== ====== ====== ====== Investment income--net.. 3.39% 4.22% 3.95% 3.20% 3.71% 4.16% 4.71% 4.71% 5.13%* ======== ======== ======== ======== ======= ====== ====== ====== ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $212,047 $212,912 $158,951 $115,420 $24,918 $7,937 $5,675 $3,854 $2,276 ======== ======== ======== ======== ======= ====== ====== ====== ====== Portfolio turnover...... 236.50% 38.40% 35.36% 12.55% 36.34% 50.82% 23.52% 37.60% 2.04% ======== ======== ======== ======== ======= ====== ====== ====== ====== Average commission rate paid##................. $ .0610 -- -- -- -- -- -- -- -- ======== ======== ======== ======== ======= ====== ====== ====== ======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. 4 FINANCIAL HIGHLIGHTS (CONTINUED)
DEVELOPING CAPITAL MARKETS BASIC VALUE FOCUS FUND FOCUS FUND --------------------------------------------- --------------------------------- FOR THE YEAR FOR THE FOR THE YEAR ENDED FOR THE PERIOD ENDED PERIOD MAY 2, DECEMBER 31, JULY 1, 1993+ DECEMBER 31, 1994+ TO ---------------------------- TO DECEMBER 31, ------------------ DECEMBER 31, 1996 1995 1994 1993 1996 1995 1994 -------- -------- -------- --------------- ------- ------- ------------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 13.10 $ 11.10 $ 10.95 $ 10.00 $ 9.32 $ 9.51 $ 10.00 -------- -------- -------- ------- ------- ------- ------- Investment income--net.. .17 .18 .17 .04 .20 .20 .09 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... 2.37 2.49 .08 .91 .76 (.30) (.58) -------- -------- -------- ------- ------- ------- ------- Total from investment operations............. 2.54 2.67 .25 .95 .96 (.10) (.49) -------- -------- -------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net.. (.18) (.19) (.10) -- (.23) (.09) -- Realized gain on investments--net....... (.72) (.48) -- -- -- -- -- -------- -------- -------- ------- ------- ------- ------- Total dividends and distributions.......... (.90) (.67) (.10) -- (.23) (.09) -- -------- -------- -------- ------- ------- ------- ------- Net asset value, end of year................... $ 14.74 $ 13.10 $ 11.10 $ 10.95 $ 10.05 $ 9.32 $ 9.51 ======== ======== ======== ======= ======= ======= ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 20.69% 25.49% 2.36% 9.50%# 10.59% (1.08)% (4.90)%# ======== ======== ======== ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .66% .66% .72% .86%* 1.25% 1.25% 1.29%* ======== ======== ======== ======= ======= ======= ======= Expenses................ .66% .66% .72% .86%* 1.31% 1.36% 1.35%* ======== ======== ======== ======= ======= ======= ======= Investment income--net.. 1.37% 1.68% 2.08% 1.69%* 2.42% 2.73% 2.18%* ======== ======== ======== ======= ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $524,930 $306,463 $164,307 $47,207 $95,599 $55,209 $36,676 ======== ======== ======== ======= ======= ======= ======= Portfolio turnover...... 68.41% 74.10% 60.55% 30.86% 87.33% 62.53% 29.79% ======== ======== ======== ======= ======= ======= ======= Average commission rate paid##................. $ .0549 -- -- -- $ .0003### -- -- ======== ======== ======== ======= ======= ======= =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. ### The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. 5 FINANCIAL HIGHLIGHTS (CONTINUED)
DOMESTIC MONEY MARKET FUND ------------------------------------------------------- FOR THE PERIOD FEBRUARY 20, FOR THE YEAR ENDED DECEMBER 31, 1992+ -------------------------------------- TO DECEMBER 31, 1996 1995 1994 1993 1992 -------- -------- -------- -------- --------------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- ------- Investment income--net.. .0504 .0547 .0386 .0302 .0302 Realized and unrealized gain (loss) on investments--net....... (.0005) .0012 (.0007) .0005 .0013 -------- -------- -------- -------- ------- Total from investment operations............. .0499 .0559 .0379 .0307 .0315 -------- -------- -------- -------- ------- Less dividends and distributions: Investment income-- net.................. (.0504) (.0547) (.0386) (.0302) (.0302) Realized gain on investments--net..... (.0001) (.0002) -- (.0005) (.0010) -------- -------- -------- -------- ------- Total dividends and distributions.......... (.0505) (.0549) (.0386) (.0307) (.0312) -------- -------- -------- -------- ------- Net asset value, end of year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 5.13% 5.64% 3.93% 3.10% 3.65%* ======== ======== ======== ======== ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .54% .55% .50% .36% .32%* ======== ======== ======== ======== ======= Expenses................ .54% .55% .57% .63% .88%* ======== ======== ======== ======== ======= Investment income--net, and realized gain (loss) on investments-- net.................... 4.97% 5.50% 4.02% 3.03% 3.48%* ======== ======== ======== ======== ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $274,756 $303,912 $363,199 $170,531 $41,128 ======== ======== ======== ======== =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. 6 FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY GROWTH FUND ---------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988 1987 -------- -------- -------- ------- ------- ------- ------ ------- ------ ------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $13.70 $ 11.75 $11.47 $18.42 -------- -------- -------- ------- ------- ------- ------ ------- ------ ------ Investment income (loss)--net............ .13 .17 .05 (.01) .01 .09 .05 (.07) (.10) (.09) Realized and unrealized gain (loss) on investments--net....... 1.84 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01) -------- -------- -------- ------- ------- ------- ------ ------- ------ ------ Total from investment operations............. 1.97 8.81 (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50 (4.10) -------- -------- -------- ------- ------- ------- ------ ------- ------ ------ Less dividends and distributions: Investment income-- net................... (.14) (.09) -- --++ (.07) (.02) -- -- -- (.03) Realized gain on investments--net...... (3.59) -- (.19) -- -- -- -- -- (.22) (2.82) -------- -------- -------- ------- ------- ------- ------ ------- ------ ------ Total dividends and distributions.......... (3.73) (.09) (.19) -- (.07) (.02) -- -- (.22) (2.85) -------- -------- -------- ------- ------- ------- ------ ------- ------ ------ Net asset value, end of year................... $ 26.22 $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $11.98 $ 13.70 $11.75 $11.47 ======== ======== ======== ======= ======= ======= ====== ======= ====== ====== TOTAL INVESTMENT RETURN:* Based on net asset value per share.............. 8.11% 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55)% 16.60% 4.25% (22.29)% ======== ======== ======== ======= ======= ======= ====== ======= ====== ====== RATIOS TO AVERAGE NET ASSETS: Expenses................ .81% .81% .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25% 1.24% ======== ======== ======== ======= ======= ======= ====== ======= ====== ====== Investment income (loss)--net............ .50% .72% .27% (.05)% .04% .51% .14% (.68)% (.56)% (.60)% ======== ======== ======== ======= ======= ======= ====== ======= ====== ====== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $453,029 $339,921 $170,044 $98,976 $23,167 $11,318 $6,851 $ 6,811 $5,521 $6,707 ======== ======== ======== ======= ======= ======= ====== ======= ====== ====== Portfolio turnover...... 80.84% 96.79% 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73% 94.91% ======== ======== ======== ======= ======= ======= ====== ======= ====== ====== Average commission rate paid#.................. $ .0598 -- -- -- -- -- -- -- -- -- ======== ======== ======== ======= ======= ======= ====== ======= ====== ======
- -------- * Total investment returns exclude insurance-related fees and expenses. + Based on average shares outstanding during the year. ++ Amount is less than $.01 per share. # For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. 7 FINANCIAL HIGHLIGHTS (CONTINUED)
GLOBAL BOND FOCUS FUND# ---------------------------------------- FOR THE PERIOD FOR THE YEAR ENDED JULY 1, DECEMBER 31, 1993+ TO ------------------------- DECEMBER 31, 1996++ 1995++ 1994 1993 ------- ------- ------- ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year... $ 9.79 $ 9.17 $ 10.38 $ 10.00 ------- ------- ------- ------- Investment income--net............... .78 .85 .76 .25 Realized and unrealized gain (loss) on investments and foreign currency transactions--net................... (.03) .61 (1.19) .33 ------- ------- ------- ------- Total from investment operations..... .75 1.46 (.43) .58 ------- ------- ------- ------- Less dividends and distributions: Investment income--net............. (.78) (.84) (.76) (.20) In excess of realized gain on investments--net.................. -- -- (.02) -- ------- ------- ------- ------- Total dividends and distributions.... (.78) (.84) (.78) (.20) ------- ------- ------- ------- Net asset value, end of year......... $ 9.76 $ 9.79 $ 9.17 $ 10.38 ======= ======= ======= ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share... 8.02% 16.69% (4.21)% 5.90%## ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses............................. .69% .68% .75% .94%* ======= ======= ======= ======= Investment income--net............... 7.95% 8.99% 8.01% 6.20%* ======= ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands).......................... $93,790 $81,845 $75,150 $50,737 ======= ======= ======= ======= Portfolio turnover................... 267.13% 132.57% 117.58% 54.80% ======= ======= ======= =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of operations. ++ Based on average shares outstanding during the period. # In connection with its reorganization on December 6, 1996, the Global Bond Focus Fund (i) acquired substantially all of the assets and assumed substantially all the liabilities of the International Bond Fund, a separate Fund of the Company, (ii) implemented a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (iii) changed its name from the World Income Focus Fund to its current name. For the period from the commencement of the Fund's operations through its reorganization on December 6, 1996, the portfolio of the Fund included debt securities rated below investment grade (i.e., junk bonds). ## Aggregate total investment return. 8 FINANCIAL HIGHLIGHTS (CONTINUED)
GLOBAL STRATEGY FOCUS FUND# GLOBAL UTILITY FOCUS FUND ------------------------------------------------------ -------------------------------------------- FOR THE FOR THE PERIOD PERIOD FOR THE YEAR ENDED FEBRUARY 28, FOR THE YEAR ENDED JULY 1, DECEMBER 31, 1992+ TO DECEMBER 31, 1993+ TO ---------------------------------------- DECEMBER 31, ---------------------------- DECEMBER 31, 1996 1995 1994 1993 1992 1996 1995 1994 1993 -------- -------- -------- -------- ------------ -------- -------- -------- ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00 $ 11.30 $ 9.45 $ 10.66 $ 10.00 -------- -------- -------- -------- ------- -------- -------- -------- -------- Investment income--net.. .28 .39 .30 .16 .13 .46 .45 .35 .04 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... 1.33 .82 (.48) 1.96 .13 .95 1.79 (1.25) .64 -------- -------- -------- -------- ------- -------- -------- -------- -------- Total from investment operations............. 1.61 1.21 (.18) 2.12 .26 1.41 2.24 (.90) .68 -------- -------- -------- -------- ------- -------- -------- -------- -------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income--net.. (.29) (.39) (.21) (.17) (.04) (.52) (.39) (.29) (.02) Realized gain on investments-- net...... -- -- (.04) -- -- -- -- -- -- In excess of realized gain on investments-- net.................... -- --++ (.01) -- -- -- -- (.02) -- -------- -------- -------- -------- ------- -------- -------- -------- -------- Total dividends and distributions.......... (.29) (.39) (.26) (.17) (.04) (.52) (.39) (.31) (.02) -------- -------- -------- -------- ------- -------- -------- -------- -------- Net asset value, end of year................... $ 13.87 $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 12.19 $ 11.30 $ 9.45 $ 10.66 ======== ======== ======== ======== ======= ======== ======== ======== ======== TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 13.17% 10.60% (1.46)% 21.03% 2.62%## 12.96% 24.33% (8.51)% 6.85%## ======== ======== ======== ======== ======= ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .71% .72% .77% .88% 1.25%* .66% .66% .73% .89%* ======== ======== ======== ======== ======= ======== ======== ======== ======== Expenses................ .71% .72% .77% .88% 1.35%* .66% .66% .73% .89%* ======== ======== ======== ======== ======= ======== ======== ======== ======== Investment income--net.. 2.68% 3.33% 2.85% 2.41% 2.66%* 3.90% 4.44% 3.68% 2.84%* ======== ======== ======== ======== ======= ======== ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $870,203 $540,242 $515,407 $269,627 $15,527 $142,438 $148,225 $126,243 $104,517 ======== ======== ======== ======== ======= ======== ======== ======== ======== Portfolio turnover...... 173.44% 27.23% 21.03% 17.07% 14.47% 11.39% 11.05% 9.52% 1.72% ======== ======== ======== ======== ======= ======== ======== ======== ======== Average commission rate paid***................ $ .0143 -- -- -- -- $ .0522 -- -- -- ======== ======== ======== ======== ======= ======== ======== ======== ========
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. *** For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. + Commencement of Operations. ++ Amount is less than $.01 per share. # On December 6, 1996, the Global Strategy Focus Fund acquired substantially all of the assets and assumed substantially all the liabilities of the Flexible Strategy Fund, a separate Fund of the Company. ## Aggregate total investment return. 9 FINANCIAL HIGHLIGHTS (CONTINUED)
HIGH CURRENT INCOME FUND ------------------------------------------------------------------------------------------ FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1996+ 1995 1994 1993 1992 1991 1990 1989 1988 1987 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55 $ 11.42 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Investment income--net.. 1.08 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23 Realized and unrealized gain (loss) on investments--net....... .12 .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Total from investment operations............. 1.20 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Less dividends and distributions: Investment income-- net................... (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23) Realized gain on investments--net...... -- -- -- -- -- -- -- -- -- (.08) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Total dividends and distributions.......... (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Net asset value, end of year................... $ 11.39 $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= TOTAL INVESTMENT RE- TURN:* Based on net asset value per share.............. 11.27% 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87% 3.82% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses................ .54% .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= Investment income--net.. 9.50% 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $414,615 $356,352 $255,719 $163,428 $26,343 $9,649 $8,106 $12,942 $13,960 $13,075 ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= Portfolio turnover...... 48.92% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07% ======== ======== ======== ======== ======= ====== ====== ======= ======= =======
- -------- * Total investment returns exclude insurance-related fees and expenses. + Based on average shares outstanding during the year. 10 FINANCIAL HIGHLIGHTS (CONTINUED)
GOVERNMENT BOND FUND# ------------------------------- FOR THE FOR THE YEAR PERIOD ENDED MAY 2, DECEMBER 31, 1994+ TO ----------------- DECEMBER 31, 1996 1995 1994 ------- -------- ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period......... $ 10.79 $ 9.97 $ 10.00 ------- -------- -------- Investment income--net....................... .65 .62 .25 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........................... (.36) .81 (.07) ------- -------- -------- Total from investment operations............. .29 1.43 .18 ------- -------- -------- Less dividends and distributions: Investment income--net...................... (.64) (.61) (.21) Realized gain on investments--net........... (.04) -- -- In excess of realized gain on investments-- net........................................ -- -- -- ------- -------- -------- Total dividends and distributions............ (.68) (.61) (.21) ------- -------- -------- Net asset value, end of period............... $ 10.40 $ 10.79 $ 9.97 ======= ======== ======== TOTAL INVESTMENT RETURN:** Based on net asset value per share........... 2.86% 14.83% 1.79%## ======= ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............... .15% .00% .00%* ======= ======== ======== Expenses..................................... .59% .66% .80%* ======= ======== ======== Investment income--net....................... 6.39% 6.28% 4.66%* ======= ======== ======== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)..... $89,581 $ 40,996 $ 17,811 ======= ======== ======== Portfolio turnover........................... 21.23% 45.39% 103.03% ======= ======== ========
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # On December 6, 1996, the Government Bond Fund (i) implemented a change in its investment objective so that the Fund may invest in any debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities without regard to remaining maturity and (ii) changed its name from the Intermediate Government Bond Fund to its current name. For the period from the commencement of the Fund's operations through December 6, 1996, the portfolio of the Fund consisted primarily of intermediate-term debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities with a maximum maturity not to exceed fifteen years. ## Aggregate total investment return. 11 FINANCIAL HIGHLIGHTS (CONTINUED)
INDEX 500 FUND -------------------- FOR THE FOR THE PERIOD PERIOD JANUARY 1, DEC. 13, 1997 TO 1996+ TO MARCH 31, DEC. 31, 1997 1996 ----------- -------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period..................... $ 10.17 $ 10.00 ------- ------- Investment income--net................................... .05 .02 Realized and unrealized gain on investments--net......... .19 .15 ------- ------- Total from investment operations......................... .24 .17 ------- ------- Less dividends and distributions: Investment income--net.................................. (0.02) -- Realized gain on investments--net....................... -- ## -- ------- ------- Total dividends and distributions........................ (0.02) -- ------- ------- Net asset value, end of period........................... $ 10.39 $ 10.17 ======= ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share....................... 2.37%# 1.70%# ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........................... .08%* .00%* ======= ======= Expenses................................................. .39%* .60%* ======= ======= Investment income--net................................... 2.96%* 3.08%* ======= ======= SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................. $98,751 $10,752 ======= ======= Portfolio turnover....................................... .15% .04% ======= ======= Average commission rate paid............................. $ .0161 $ .0120 ======= =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## Amount is less than $.01 per share. 12 FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL EQUITY FOCUS FUND ------------------------------------------ FOR THE PERIOD FOR THE YEAR ENDED JULY 1, DECEMBER 31, 1993+ TO ---------------------------- DECEMBER 31, 1996++ 1995 1994 1993 -------- -------- -------- ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period............................. $ 11.06 $ 10.90 $ 11.03 $ 10.00 -------- -------- -------- -------- Investment income--net.............. .23 .20 .19 .01 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................. .49 .37 (.13) 1.02 -------- -------- -------- -------- Total from investment operations.... .72 .57 .06 1.03 -------- -------- -------- -------- Less dividends and distributions: Investment income--net............. (.15) (.01) (.18) -- Realized gain on investments--net.. -- (.17) (.01) -- In excess of realized gain on investments--net.................. -- (.23) -- -- -------- -------- -------- -------- Total dividends and distributions... (.15) (.41) (.19) -- -------- -------- -------- -------- Net asset value, end of period...... $ 11.63 $ 11.06 $ 10.90 $ 11.03 ======== ======== ======== ======== TOTAL INVESTMENT RETURN:** Based on net asset value per share.. 6.62% 5.48% .55% 10.30%# ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement...... .89% .89% .97% 1.14%* ======== ======== ======== ======== Expenses............................ .89% .89% .97% 1.14%* ======== ======== ======== ======== Investment income--net.............. 1.96% 1.95% 1.09% .30%* ======== ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)......................... $349,080 $265,602 $247,884 $ 76,906 ======== ======== ======== ======== Portfolio turnover.................. 49.87% 100.02% 58.84% 17.39% ======== ======== ======== ======== Average commission rate paid***..... $ .0004 -- -- -- ======== ======== ======== ========
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. *** For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. + Commencement of Operations. ++ Based on average shares outstanding during the period. # Aggregate total investment return. 13 FINANCIAL HIGHLIGHTS (CONTINUED)
NATURAL RESOURCES FOCUS FUND --------------------------------------------------------------------------------- FOR THE PERIOD JUNE 1, FOR THE YEAR ENDED DECEMBER 31, 1988+ TO ------------------------------------------------------------------- DECEMBER 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 ------- ------- ------- ------- ------ ------ ------ ------ ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.... $ 11.95 $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 $10.00 ------- ------- ------- ------- ------ ------ ------ ------ ------ Investment income--net.. .18 .20 .17 .11 .18 .25 .22 .24 .12 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... 1.40 1.15 (.02) .92 (.05) (.11) (.90) 1.49 (.54) ------- ------- ------- ------- ------ ------ ------ ------ ------ Total from investment operations............. 1.58 1.35 .15 1.03 .13 .14 (.68) 1.73 (.42) ------- ------- ------- ------- ------ ------ ------ ------ ------ Less dividends and distributions: Investment income-- net................... (.20) (.19) (.15) (.05) (.29) (.25) (.24) (.22) -- Realized gain on investments--net...... (.21) (.03) -- -- (.06) -- -- -- -- ------- ------- ------- ------- ------ ------ ------ ------ ------ Total dividends and distributions.......... (.41) (.22) (.15) (.05) (.35) (.25) (.24) (.22) -- ------- ------- ------- ------- ------ ------ ------ ------ ------ Net asset value, end of period................. $ 13.12 $ 11.95 $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 ======= ======= ======= ======= ====== ====== ====== ====== ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 13.52% 12.65% 1.44% 10.47% 1.36% 1.36% (6.21)% 18.23% (4.20)%# ======= ======= ======= ======= ====== ====== ====== ====== ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .78% .78% .87% 1.13% 1.25% 1.25% 1.25% 1.25% 1.24%* ======= ======= ======= ======= ====== ====== ====== ====== ====== Expenses................ .78% .78% .87% 1.13% 1.27% 1.30% 1.38% 1.74% 1.24%* ======= ======= ======= ======= ====== ====== ====== ====== ====== Investment income--net.. 1.43% 1.75% 1.91% 1.34% 2.00% 2.31% 2.26% 2.26% 2.59%* ======= ======= ======= ======= ====== ====== ====== ====== ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $45,197 $43,102 $39,715 $14,778 $4,144 $3,084 $3,247 $2,704 $2,371 ======= ======= ======= ======= ====== ====== ====== ====== ====== Portfolio turnover...... 31.11% 30.15% 10.94% 58.44% 22.88% 31.38% 27.61% 93.97% 16.31% ======= ======= ======= ======= ====== ====== ====== ====== ====== Average commission rate paid##................. $ .0225 -- -- -- -- -- -- -- -- ======= ======= ======= ======= ====== ====== ====== ====== ======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. 14 FINANCIAL HIGHLIGHTS (CONTINUED)
PRIME BOND FUND --------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Investment income--net.. .80 .82 .77 .70 .79 .90 .88 .90 .87 .87 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... (.55) 1.34 (1.36) .71 .04 .84 (.12) .48 (.15) (1.00) -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Total from investment operations............. .25 2.16 (.59) 1.41 .83 1.74 .76 1.38 .72 (.13) -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income-- net................... (.79) (.83) (.76) (.70) (.81) (.90) (.87) (.90) (.80) (.87) Realized gain on investments--net...... -- -- -- (.11) -- -- -- -- -- (.15) In excess of realized gain on investments-- net................... -- -- (.17) -- -- -- -- -- -- -- -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Total dividends and distributions.......... (.79) (.83) (.93) (.81) (.81) (.90) (.87) (.90) (.80) (1.02) -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Net asset value, end of year................... $ 11.91 $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= TOTAL INVESTMENT RETURN:* Based on net asset value per share.............. 2.21% 20.14% (4.80)% 12.02% 7.27% 16.41% 7.13% 13.29% 6.75% (1.10)% ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses................ .49% .50% .54% .63% .78% .78% 1.06% 1.16% 1.07% 1.07% ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= Investment income--net.. 6.67% 7.00% 6.74% 5.86% 6.76% 7.94% 8.01% 8.12% 8.05% 7.66% ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $538,394 $489,838 $391,234 $314,091 $84,810 $39,743 $34,655 $29,593 $22,499 $17,385 ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= Portfolio turnover...... 91.88% 90.12% 139.89% 115.26% 82.74% 152.18% 155.17% 144.52% 225.81% 129.46% ======== ======== ======== ======== ======= ======= ======= ======= ======= =======
- -------- *Total investment returns exclude insurance-related fees and expenses. 15 FINANCIAL HIGHLIGHTS (CONTINUED)
QUALITY EQUITY FUND --------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- 1996+ 1995+ 1994+ 1993 1992 1991 1990 1989 1988 1987 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Investment income--net.. .58 .58 .38 .24 .34 .43 .47 .50 .43 .42 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... 4.44 5.48 (.74) 3.46 .32 5.75 (.38) 4.96 1.73 (.35) -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Total from investment operations............. 5.02 6.06 (.36) 3.70 .66 6.18 .09 5.46 2.16 .07 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income-- net................... (.66) (.45) (.25) (.12) (.58) (.50) (.41) (.52) (.22) (.60) Realized gain on investments--net...... (4.29) (.59) (.67) (.04) (.95) (1.05) (.84) -- -- (3.62) -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Total dividends and distributions.......... (4.95) (1.04) (.92) (.16) (1.53) (1.55) (1.25) (.52) (.22) (4.22) -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Net asset value, end of year................... $ 32.83 $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= TOTAL INVESTMENT RETURN:* Based on net asset value per share.............. 17.90% 22.61% (1.20)% 14.57% 2.69% 30.18% .66% 30.77% 13.54% (.70)% ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses................ .49% .51% .54% .62% .74% .79% .94% 1.05% 1.02% .93% ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= Investment income--net.. 1.89% 1.94% 1.39% 1.07% 1.54% 1.87% 2.36% 2.58% 2.25% 2.31% ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $794,275 $644,551 $464,360 $309,420 $87,977 $55,005 $39,470 $31,467 $20,055 $23,986 ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= Portfolio turnover...... 88.30% 140.32% 60.57% 88.25% 62.54% 55.83% 69.05% 44.23% 32.53% 65.58% ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= Average commission rate paid#.................. $ .0615 -- -- -- -- -- -- -- -- -- ======== ======== ======== ======== ======= ======= ======= ======= ======= =======
- -------- + Based on average shares outstanding during the period. * Total investment returns exclude insurance-related fees and expenses. # For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. 16 FINANCIAL HIGHLIGHTS (CONCLUDED)
RESERVE ASSETS FUND -------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PER- FORMANCE: Net asset value, beginning of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Investment income--net.. .0501 .0543 .0371 .0268 .0320 .0546 .0730 .0822 .0661 .0574 Realized and unrealized gain (loss) on investments--net....... (.0005) .0018 (.0009) .0005 .0007 .0014 .0019 .0012 .0002 .0005 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total from investment operations............. .0496 .0561 .0362 .0273 .0327 .0560 .0749 .0834 .0663 .0579 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net.. (.0501) (.0543) (.0362) (.0268) (.0320) (.0546) (.0730) (.0822) (.0661) (.0574) Realized gain on investments--net....... (.0001) (.0004) -- (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+ (.0002)+ (.0005)+ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total dividends and distributions.......... (.0502) (.0547) (.0362) (.0273) (.0325) (.0560) (.0749) (.0834) (.0663) (.0579) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net asset value, end of year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= TOTAL INVESTMENT RE- TURN:* Based on net asset value per share.............. 5.13% 5.61% 3.79% 2.77% 3.29% 5.68% 7.65% 8.62% 6.85% 5.96% ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses................ .61% .61% .65% .70% .79% .79% .97% 1.03% 1.01% 1.04% ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Investment income--net, and realized gain (loss) on investments-- net.................... 4.96% 5.47% 3.75% 2.73% 3.36% 5.64% 7.46%+ 8.34%+ 6.65%+ 5.86%+ ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $22,885 $25,550 $32,196 $30,168 $26,767 $34,362 $35,871 $29,311 $24,951 $23,068 ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
- -------- *Total investment returns exclude insurance-related fees and expenses. +Includes unrealized gain (loss) 17 THE INSURANCE COMPANIES The Company was organized to fund benefits under Contracts issued by Family Life Insurance Company ("Family Life"), formerly a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). On June 12, 1991, Family Life was sold to a non-affiliated corporation and most (although not all) of its Contracts were transferred to Merrill Lynch Life Insurance Company ("MLLIC") and ML Life Insurance Company of New York ("ML of New York"). Shares of the Funds currently are sold to Separate Accounts of Family Life, MLLIC and ML of New York as well as other insurance companies not affiliated with Family Life, MLLIC or ML of New York (together with MLLIC, ML of New York and Family Life, "Insurance Companies") to fund certain variable life insurance contracts and/or variable annuities issued by such companies. The rights of the Insurance Companies as shareholders should be distinguished from the rights of a Contract owner, which are set forth in the Contract. A Contract owner has no interest in the shares of a Fund, but only in the Contract. The Contract is described in the Prospectus for each Contract. That Prospectus describes the relationship between increases or decreases in the net asset value of shares of a Fund, and any distributions on such shares, and the benefits provided under a Contract. The Prospectus for the Contracts also describes various fees payable to the Insurance Companies and charges to the Separate Accounts made by the Insurance Companies with respect to the Contracts. Since shares of the Funds will be sold only to the Insurance Companies for the Separate Accounts, the terms "shareholder" and "shareholders" in this Prospectus refer to the Insurance Companies. MLLIC and ML of New York are wholly owned subsidiaries of ML&Co., as is the Investment Adviser. RESERVE ASSETS FUND AND DOMESTIC MONEY MARKET FUND YIELD INFORMATION Set forth below is yield information for the Reserve Assets Fund and the Domestic Money Market Fund for the seven-day period ended December 31, 1996, computed to include and exclude realized and unrealized gains and losses, and information as to the compounded annualized yield, excluding gains and losses, for the same periods. The yield quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the separate account level which, if included, would decrease the yield.
RESERVE ASSETS DOMESTIC MONEY FUND MARKET FUND ------- -------------- Annualized Yield: Including gains and losses.............................. 5.01% 5.05% Excluding gains and losses.............................. 5.01% 5.05% Compounded Annualized Yield.............................. 5.14% 5.18% Average maturity of portfolio at end of period........... 70 days 73 days
18 INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS INVESTMENT OBJECTIVES Each Fund of the Company has a different investment objective, which it pursues through separate investment policies as described below. The differences in objectives and policies among the Funds can be expected to affect the return of each Fund and the degree of market and financial risk to which each Fund is subject. Each Fund is classified as "diversified," as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act" or the "Act") except for the Natural Resources Focus Fund, the Global Strategy Focus Fund, the Global Bond Focus Fund, the Index 500 Fund and the Developing Capital Markets Focus Fund, each of which is classified as "non-diversified." The investment objectives and classification of each Fund may not be changed without the approval of the holders of a majority of the outstanding shares of each Fund affected. The investment objectives and policies of each Fund are discussed below. There can be no assurance that any Fund will achieve its investment objective. Fixed Income Security Ratings. No Fund other than the High Current Income Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund invests in fixed-income securities which are rated below investment grade (i.e., securities rated Ba or below by Moody's or BB or below by Standard & Poor's). However, securities purchased by a Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgement of the Investment Adviser, it is advantageous to do so. Securities in the lowest category of investment grade debt securities may have speculative characteristics which may lead to weakened capacity to pay interest and principal during periods of adverse economic conditions. See Appendix A for a fuller description of corporate bond ratings. DOMESTIC MONEY MARKET FUND The investment objectives of the Domestic Money Market Fund are to preserve shareholder capital, to maintain liquidity and to achieve the highest possible current income consistent with the foregoing objectives by investing in short- term domestic money market securities. The Fund will invest in short-term U.S. Government securities, U.S. Government agency securities, domestic depository institution money instruments (including certificates of deposit, bankers' acceptances, time deposits and bank notes), short-term debt securities (such as commercial paper), variable amount master demand notes and insurance company funding agreements, repurchase and reverse repurchase agreements of U.S. issuers and other money market instruments. As a matter of fundamental policy, which may be changed only with the approval of a majority of the Domestic Money Market Fund's outstanding voting securities, as defined in the Investment Company Act of 1940, the Fund may not purchase securities of foreign issuers (including Eurodollar or Yankeedollar bank obligations). U.S. Government securities may be purchased on a forward commitment basis. The types of money market securities in which the Domestic Money Market Fund may invest are described more fully in Appendix A to this Prospectus. The Domestic Money Market Fund will be subject to portfolio maturity, quality and diversification restrictions discussed below under "Money Market Fund Portfolio Restrictions." RESERVE ASSETS FUND The investment objectives of the Reserve Assets Fund are to preserve shareholder capital, to maintain liquidity and to achieve the highest possible current income consistent with the foregoing objectives by investing in short- term money market securities. The Fund will invest in short-term U.S. Government securities, U.S. Government agency securities, depository institution money instruments (including certificates of deposit, bankers' acceptances, time deposits and bank notes), short-term debt securities (such as commercial paper), variable amount master demand notes and insurance company funding agreements, securities of foreign issuers (including Eurodollar, Yankeedollar and foreign bank obligations) and repurchase and reverse repurchase agreements. U.S. Government securities may be purchased on a forward commitment basis. The types of money market securities in which the Reserve Assets Fund may invest are described more fully in Appendix A to the Prospectus. The Reserve Assets Fund will be subject to the portfolio maturity, quality and diversification restrictions discussed below under "Money Market Fund Portfolio Restrictions." 19 PRIME BOND FUND The principal investment objective of the Prime Bond Fund is to provide shareholders with as high a level of current income as is consistent with the investment policies of the Fund and with prudent investment management. As a secondary objective, the Fund seeks capital appreciation when consistent with its principal objective. There can be no assurance that the Fund's investment objectives will be achieved. The Prime Bond Fund invests primarily in securities rated in the top three rating categories of either Standard & Poor's (AAA, AA and A) or Moody's (Aaa, Aa and A). Additional information regarding various bond ratings is set forth in Appendix A to the Prospectus. The financial risk of the Fund should be minimized by the credit quality of the bonds in which it will invest, but the long maturities that typically provide the best yield will subject the Fund to possible substantial price changes resulting from market yield fluctuations. The market prices of fixed-income securities such as those purchased by the Fund are affected by changes in interest rates generally. As interest rates rise, the market value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. Fund management strategy will attempt to mitigate adverse price changes and optimize favorable price changes through active trading that shifts the maturity and/or quality structure of the Fund within the overall investment guidelines. The Fund's investments will vary from time to time depending upon the judgement of management as to prevailing conditions in the economy and the securities markets and the prospects for interest rate changes among different categories of fixed-income securities. The Fund anticipates that under normal circumstances more than 90% of the assets of the Fund will be invested in fixed-income securities, including convertible and non-convertible debt securities and preferred stock. The Fund does not intend to invest in common stock, rights or other equity securities. Under unusual market or economic conditions, the Fund for defensive or other purposes may invest up to 100% of its assets in U.S. government or government agency securities, money market or other fixed-income securities deemed by the Investment Adviser to be consistent with the objectives of the Fund, or the Fund may hold its assets in cash. HIGH CURRENT INCOME FUND The primary investment objective of the High Current Income Fund, like the Prime Bond Fund, is to obtain the highest level of current income that is consistent with the investment policies of the Fund and with prudent investment management. As a secondary objective, the Fund seeks capital appreciation when consistent with its primary objective. There can be no assurance that the Fund's investment objectives will be achieved. The High Current Income Fund seeks high current income by investing principally in fixed-income securities that are rated in the lower rating categories of the established rating services (Baa or lower by Moody's and BBB or lower by Standard & Poor's), or in unrated securities of comparable quality. Securities rated below Baa by Moody's and below BBB by Standard & Poor's are commonly known as "junk bonds." Additional information regarding various bond ratings is set forth in Appendix A to the Prospectus. The market price of fixed-income securities such as those purchased by the Fund is affected by changes in interest rates generally. As interest rates rise, the market value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. Although they can be expected to provide higher yields, lower-rated securities such as those purchased by the Fund may be subject to greater market fluctuations and risks of loss of income and principal than lower- yielding, higher-rated fixed-income securities. Such securities are generally issued by corporations which are not as financially secure or as creditworthy as issuers of higher-rated securities. There is, accordingly, a greater risk that the issuers of higher-yielding securities will not be able to pay principal and interest on such securities, especially during periods of adverse economic conditions. Because investment in such high-yield securities entails relatively greater risk of loss of income or principal, an investment in the High Current Income Fund may not be appropriate as the exclusive investment to fund the Contracts for all Contract Owners. See "Risks of High Yield Securities." Selection and supervision by the management of the Company of investments in lower-rated fixed-income securities involves continuous analysis of individual issuers, general business conditions and other factors which 20 may be too time consuming or too costly for the average investor. The furnishing of these services does not, of course, guarantee successful results. The analysis of issuers may include, among other things, historic and current financial condition, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing, and current and anticipated results of operations. Analysis of general business conditions and other factors may include anticipated changes in economic activity and interest rates, the availability of new investment opportunities, and the economic outlook for specific industries. While the Investment Adviser considers as one factor in its credit analysis the ratings assigned by the rating services, the Investment Adviser performs its own independent credit analysis of issuers and consequently, the Fund may invest, without limit, in unrated securities if such securities offer, in the opinion of the Investment Adviser, a relatively high yield without undue risk. As a result, the High Current Income Fund's ability to achieve its investment objective may depend to a greater extent on the Investment Adviser's own credit analysis than the Funds which invest in higher-rated securities. Although the High Current Income Fund will invest primarily in lower-rated securities, it will not invest in securities rated Ca or lower by Moody's and CC or lower by Standard & Poor's unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded to the particular securities is stronger than would otherwise be indicated by such low ratings. However, securities purchased by the Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgement of the Investment Adviser, it is advantageous to do so. When changing economic conditions and other factors cause the yield difference between lower-rated and higher-rated securities to narrow, the Fund may purchase higher-rated securities if the Investment Adviser believes that the risk of loss of income and principal may be substantially reduced with only a relatively small reduction in yield. The securities in the Fund will be varied from time to time depending upon the judgement of management as to prevailing conditions in the economy and the securities markets and the prospects for interest rate changes among different categories of fixed-income securities. It is anticipated that under normal circumstances more than 90% of the Fund's assets will be invested in fixed- income securities, including convertible and non-convertible debt securities and preferred stock. Although it is expected that, in general, the Fund will not invest in common stocks, rights or other equity securities, it will acquire or hold such securities (if consistent with the objectives of the Fund) when such securities are acquired in unit offerings with fixed-income securities or in connection with an actual or proposed conversion or exchange of fixed-income securities. In addition, under unusual market or economic conditions, the High Current Income Fund for defensive purposes may invest up to 100% of its assets in U.S. Government or Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or may hold its assets in cash. The yield on such securities may be lower than the yield on lower-rated fixed-income securities. The table below shows the average monthly dollar-weighted market value, by Standard & Poor's rating category, of the securities held by the High Current Income Fund during the year ended December 31, 1996.
% MARKET % VALUE NET CORPORATE RATING* ASSETS BONDS ------- ------ --------- BBB................................................... 0.7% 0.8% BB.................................................... 29.2 33.8 B..................................................... 47.5 55.2 CCC................................................... 4.2 4.7 NR**.................................................. 5.0 5.5 ----- 100.0% =====
- -------- * A description of corporate bond ratings of Standard & Poor's is set forth in Appendix A to the Prospectus. ** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by nationally recognized statistical rating organizations other than Standard & Poor's, or may not be rated by any other organizations. 21 QUALITY EQUITY FUND The Quality Equity Fund seeks to achieve the highest total investment return, or the aggregate of income and capital value changes, consistent with prudent risk. To do this, management will shift the emphasis among investment alternatives for capital growth, capital stability and income as market trends change. This "fully managed" investment policy distinguishes the Fund from investment companies which seek either capital growth or income. The Fund's investment philosophy is based on management's belief that the structure of the United States economy and its securities markets will undergo continuous change. The flexibility of the Fund is designed to reduce overall exposure to risk by achieving below-average volatility in a falling market and above- average volatility in a rising market. There can be no assurance that the Fund's investment objective will be achieved. The Quality Equity Fund's fully managed investment approach will make use of equity, debt and convertible securities. The majority of the Fund's equity portfolio will be in the common stocks of large-capitalization, "quality" companies. For this purpose, "large capitalization" companies are considered to be those companies with market capitalizations in excess of $500 million. Management of the Company believes that a quality company is one which conforms closely to the following criteria: good financial resources, strong balance sheet, satisfactory rate of return on capital, good industry position and superior management skills. The earnings of quality companies generally tend to grow consistently. Whenever market or financial conditions warrant, the Fund may, in order to reduce risk and achieve the highest total investment return, invest in non-convertible, long-term debt securities, including "deep discount" corporate debt securities of investment grade or issues of fixed- income convertible securities which give the owner the option of a later exchange for common stock. Management expects that over longer periods the larger portion of the Fund's portfolio will consist of equity securities. During defensive periods, the Fund may invest in U.S. Government and Government agency, money-market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash. EQUITY GROWTH FUND The investment objective of the Equity Growth Fund is to seek long-term growth of capital by investing in a diversified portfolio of securities, primarily common stocks, of relatively small companies that management of the Company believes have special investment value, and of emerging growth companies regardless of size. There can be no assurance that the Fund's investment objective will be achieved. Companies are selected by management on the basis of their long-term potential for expanding their size and profitability or for gaining increased market recognition for their securities. Current income is not a factor in the selection of securities. The Fund is intended to provide an opportunity for Contract Owners who are not ordinarily in a position to perform the specialized type of research or analysis of small and emerging growth companies. Management seeks to identify those small emerging growth companies which can show significant and sustained increases in earnings over an extended period of time and are in sound financial condition. Management believes that, while these companies present above-average risks, properly selected companies of this type also have the potential to increase their earnings at a rate substantially in excess of the general growth of the economy. The Fund attempts to achieve its objective by focusing on the long-range view of a company's prospects through a fundamental analysis of its management, financial structure, product development, marketing ability and other relevant factors. Full development of these companies frequently takes time and, for this reason, the Fund should be considered as a long-term investment and not as a vehicle for seeking short-term profits. Small companies. Management seeks small companies that offer special investment value in terms of their product or service, research capability, or other unique attributes, and are relatively undervalued in the marketplace when compared with similar, but larger, enterprises. These companies typically have total market capitalizations in the $50-$300 million range and generally are little known to most individual investors, although some may be dominant in their respective industries. Underlying this strategy is management's belief that relatively small companies will continue to have the opportunity to develop into significant business enterprises. Some such companies may be in a relatively early stage of development; others may manufacture a new product or perform a new service. Such companies may not be counted upon to develop into major industrial companies, but management believes that eventual recognition of their special value characteristics by the investment community can provide above-average long-term growth to the portfolio. 22 Emerging growth companies. In selecting investments for the Equity Growth Fund, management also seeks emerging growth companies that either occupy a dominant position in an emerging industry or subindustry or have a significant and growing market share in a large, fragmented industry. Management believes that capable and flexible management is one of the most important criteria of emerging growth companies and that such companies should employ sound financial and accounting policies and also demonstrate effective research, successful product development and marketing, efficient service and pricing flexibility. Emphasis is given to companies with rapid historical growth rates, above-average returns on equity and strong current balance sheets, all of which should enable the company to finance its continued growth. Management of the Company also analyzes and weighs relevant factors beyond the company itself, such as the level of competition in the industry, the extent of governmental regulation, the nature of labor conditions and other related matters. The Equity Growth Fund emphasizes investments in companies that do most of their business in the United States and therefore are free of the currency exchange problems, foreign tax considerations and potential political and economic upheavals that many multinational corporations face. Moreover, the size and kinds of markets that they serve make these companies less susceptible than larger companies to intervention from the federal government by means of price controls, regulations or litigation. While the process of selection and continuous supervision by management does not, of course, guarantee successful investment results, it does provide ingredients not available to the average individual due to the time and cost involved. Careful initial selection is particularly important in this area as many new enterprises have promise but lack certain of the ingredients necessary to prosper. It should be apparent that an investment in a fund such as the Equity Growth Fund involves greater risk than is customarily associated with more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic market movements than larger, more established companies or the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent upon a limited management group. Because of these factors, management of the Company believes that shares in the Equity Growth Fund are suitable for Contract Owners who are in a financial position to assume above- average investment risk in search of above-average long-term reward. As indicated, the Fund is designed for Contract Owners whose investment objective is growth rather than income. It is definitely not intended for exclusive funding of Contracts but is designed for Contract Owners who are prepared to experience above-average fluctuations in net asset value. The securities in which the Equity Growth Fund invests will often be traded only in the over-the-counter market or on a regional securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by the Fund or portfolio securities to meet redemptions or otherwise may require the Fund to sell these securities at a discount from market prices or during periods when in management's judgement such disposition is not desirable or to make many small sales over a lengthy period of time. The investment emphasis of the Equity Growth Fund is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks and rights to subscribe for common stock, and the Fund will maintain at least 80% of its net assets invested in equity securities of small or emerging growth companies except during defensive periods. The Fund reserves the right as a defensive measure and to provide for redemptions to hold other types of securities, including non-convertible preferred stocks and debt securities, U.S. Government and Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. NATURAL RESOURCES FOCUS FUND The investment objectives of the Natural Resources Focus Fund are to achieve long-term growth of capital and to protect the purchasing power of shareholders' capital by investing primarily in a portfolio of equity securities (e.g., common stocks and securities convertible into common stocks) of domestic and foreign companies with substantial natural resource assets. This investment objective is a fundamental policy and may 23 not be changed without a vote of the majority of outstanding shares of the Fund. The Fund also may invest in debt, preferred or convertible securities, the value of which is related to the market value of some natural resource asset ("asset-based securities"). See "Asset-Based Securities" below. Management of the Company will seek to identify companies or asset-based securities it believes are attractively priced relative to the intrinsic value of the underlying natural resource assets or are especially well positioned to benefit during particular portions of inflationary cycles. There can be no assurance that the Fund's investment objectives will be achieved. IN SEEKING TO PROTECT THE PURCHASING POWER OF SHAREHOLDERS' CAPITAL, THE FUND HAS RESERVED THE RIGHT, WHEN MANAGEMENT OF THE COMPANY ANTICIPATES SIGNIFICANT ECONOMIC, POLITICAL OR FINANCIAL INSTABILITY, SUCH AS HIGH INFLATIONARY PRESSURES OR UPHEAVAL IN THE FOREIGN CURRENCY EXCHANGE MARKETS, TO INVEST A MAJORITY OF ITS ASSETS IN COMPANIES THAT EXPLORE FOR, EXTRACT, PROCESS OR DEAL IN GOLD OR IN ASSET-BASED SECURITIES INDEXED TO THE VALUE OF GOLD BULLION. Such a switch in investment strategies could require the Fund to liquidate portfolio securities and incur transaction costs. The Company has been advised by counsel that it is uncertain under the current federal tax law whether the Fund may concentrate its investments in gold and gold-related securities without adversely affecting the federal tax status of the Contracts. Accordingly, management of the Company has determined that the Fund will not concentrate its investments in such securities until counsel has advised the Company that such uncertainty has been resolved favorably. Management attempts to achieve the investment objectives of the Fund by seeking to identify securities of companies which, in its opinion, are undervalued relative to the value of natural resource holdings of such companies in light of current and anticipated economic or financial conditions. Natural resource assets are materials derived from natural sources which have economic value. Management will consider a company to have substantial natural resource assets when, in its opinion, the company's holdings of the assets are of such magnitude, when compared to the capitalization, revenues or operating profits of the company, that changes in the economic value of the assets are expected to affect the market price of the equity securities of such company. Generally, a company has substantial natural resource assets when at least 50% of the non-current assets, capitalization, gross revenues or operating profits of the company in the most recent or current fiscal year are involved in or result from directly or indirectly through subsidiaries, exploring, mining, refining, processing, fabricating, dealing in or owning natural resource assets. Examples of natural resource assets include precious metals (e.g., gold, silver and platinum), ferrous and nonferrous metals (e.g., iron, steel, aluminum and copper), strategic metals (e.g., uranium and titanium), hydrocarbons (e.g., coal, oil and natural gas), timber land, undeveloped real property and agricultural commodities. The Fund presently does not intend to invest directly in natural resource assets or contracts related thereto. Management of the Company believes that, based upon past performance, the securities of specific companies that hold different types of substantial natural resource assets may move relatively independently of one another during different stages of inflationary cycles due to different degrees of demand for, or market values of, their respective natural resource holdings during particular portions of such inflationary cycles. The Fund's fully managed investment approach enables it to switch its emphasis among various industry groups depending upon management's outlook with respect to prevailing trends and developments. The Natural Resources Focus Fund may use derivatives in connection with certain trading strategies. See Appendix B. The Fund at all times, except during defensive periods, will maintain at least 65% of its total assets invested in companies with substantial natural resource assets or in asset-based securities. Current income from dividends and interest will not be a primary consideration in selecting securities. The Fund reserves the right as a temporary defensive measure and to provide for redemptions, to hold short-term U.S. Government and Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. 24 Risk Factors. As indicated above, under certain circumstances, the Fund has reserved the right to invest a majority of its assets in gold-related companies or securities. Based on historic experience, during periods of economic or financial instability, the securities of such companies may be subject to extreme price fluctuations, reflecting the high volatility of gold prices during such periods. In addition, the instability of gold prices may result in volatile earnings of gold-related companies which, in turn, may affect adversely the financial condition of such companies. Gold mining companies also are subject to the risks generally associated with mining operations. The major producers of gold include the Republic of South Africa, Russia, the United States, Australia, Canada, the People's Republic of China and the Philippines. Sales of gold by Russia and the People's Republic of China are largely unpredictable and often relate to political and economic considerations rather than to market forces. Economic, social and political developments within Russia, the People's Republic of China and the Republic of South Africa may affect significantly gold production in those countries. See "Other Portfolio Strategies--Foreign Securities" for special considerations concerning investments in foreign securities. AMERICAN BALANCED FUND The investment objective of the American Balanced Fund is to seek a level of current income and a degree of stability of principal not normally available from an investment solely in equity securities and the opportunity for capital appreciation greater than is normally available from an investment solely in debt securities by investing in a balanced portfolio of fixed income and equity securities. This investment objective is a fundamental policy and may not be changed without a vote of the majority of the outstanding shares of the Fund. The Fund will seek current income by investing a portion of its assets in a portfolio of intermediate to long-term debt, convertible debt, non- convertible and convertible term preferred stock and money market securities. The Fund will seek capital appreciation primarily by investing a portion of its assets in equity securities, including perpetual preferred and convertible perpetual preferred stock. At all times the Fund will maintain at least 25% of its net assets in senior fixed income securities. As a non-fundamental policy, the Fund is not permitted to invest in securities of foreign issuers. There can be no assurance that the Fund's investment objective will be achieved. The Fund will normally seek to maintain the allocation of its assets between debt securities and equity securities at approximately equal percentages of the Fund's net asset value. However, the prices of debt and equity securities will not generally move in the same direction or to the same extent, and, consequently, the relative percentages of the Fund's debt and equity investments will vary. The Fund will seek to reduce such variations by investing its available cash in securities of the appropriate type. However, except as discussed below, the Fund is not obligated to sell portfolio securities, including money market securities, in order to reduce such discrepancies. The Fund will normally limit its allocation of assets to equity securities to no more than 50% of its net assets. To the extent its equity position exceeds this limitation, because of changes in the value of portfolio securities or otherwise, the Fund will seek to reduce its equity position to less than 50% of net assets by selling such securities at such times and in such amounts as management of the Company deems appropriate in light of market conditions and other pertinent factors. See "Dividends, Distributions and Taxes--Tax Treatment of the Company." The Fund will generally emphasize investment in common stocks of larger- capitalization issuers and in investment-grade debt obligations. The Fund may also seek to enhance the return on its common stock portfolio by writing covered call options listed on United States securities exchanges. Under unusual market or economic conditions, the Fund for defensive purposes may invest up to 100% of its assets in short-term U.S. Government or Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash. 25 GLOBAL STRATEGY FOCUS FUND The investment objective of the Global Strategy Focus Fund is to seek high total investment return by investing primarily in a portfolio of equity and fixed income securities, including convertible securities, of U.S. and foreign issuers. Total investment return consists of interest, dividends, discount accruals and capital changes, including changes in the value of non-dollar denominated securities and other assets and liabilities resulting from currency fluctuations. There can be no assurance that the Fund's investment objective will be achieved. Investing on an international basis involves special considerations. See "Other Portfolio Strategies--Foreign Securities." The Global Strategy Focus Fund seeks to achieve its objective by investing in the securities of issuers located in the United States, Canada, Western Europe, the Far East and Latin America. There are no prescribed limits on the geographical allocation of the Fund among these regions. Such allocation will be made primarily on the basis of the anticipated total return from investments in the securities of issuers wherever located, considering such factors as the condition and growth potential of the various economies and securities markets and the issuers domiciled therein, anticipated movements in interest rates in the various capital markets and in the value of foreign currencies relative to the U.S. dollar, tax considerations and economic, social, financial, national and political factors which may affect the climate for investing within such securities markets. When, in the judgement of the Investment Adviser, economic or market conditions warrant, the Fund reserves the right to concentrate its investments in one or more capital markets, including the United States. For additional information concerning the risks of investing in foreign securities, see "Other Portfolio Strategies--Foreign Securities." The corporate debt securities, including convertible debt securities, in which the Fund may invest will be rated BBB or better by Standard and Poor's or Baa or better by Moody's or, in the opinion of the Investment Adviser, of comparable quality. The Fund may also invest in debt obligations issued or guaranteed by sovereign governments, political subdivisions thereof (including states, provinces and municipalities) or their agencies or instrumentalities or issued or guaranteed by international organizations designated or supported by governmental entities to promote economic reconstruction or development ("supranational entities") such as the International Bank for Reconstruction and Development (the "World Bank") and the European Coal and Steel Community. Investments in securities of supranational entities are subject to the risk that member governments will fail to make required capital contributions and that a supranational entity will thus be unable to meet its obligations. When market or financial conditions warrant, the Global Strategy Focus Fund may invest as a temporary defensive measure up to 100% of its assets in U.S. Government or Government agency securities issued or guaranteed by the United States Government or its agencies or instrumentalities, money market securities or other fixed income securities deemed by the Investment Adviser to be consistent with a defensive posture, or may hold its assets in cash. The Global Strategy Focus Fund may use derivatives in connection with certain trading strategies. See "Appendix B." BASIC VALUE FOCUS FUND The investment objective of the Basic Value Focus Fund is to seek capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. There can be no assurance that the Fund's investment objectives will be achieved. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below- average price-earnings ratio. The investment policy of the Basic Value Focus Fund is based on the belief that the pricing mechanism of the securities market lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and depress prices of securities in unfavorable climates. Based on this premise, management believes that favorable changes in market prices are more likely to begin when securities are out of favor, earnings are depressed, price-earnings ratios are relatively low, investment expectations are limited, and there is no real general interest in the particular security or industry involved. On the other hand, management believes that negative developments are more likely to occur when investment expectations are generally high, stock prices are advancing or have advanced rapidly, price-earnings ratios have been inflated, and the industry or issue 26 continues to gain new investment acceptance on an accelerated basis. In other words, management believes that market prices of securities with relatively high price-earnings ratios are more susceptible to unexpected adverse developments while securities with relatively low price-earnings ratios are more favorably positioned to benefit from favorable, but generally unanticipated, events. This investment policy departs from traditional philosophy. Management of the Fund believes that the market risk involved in this policy is moderated somewhat by an emphasis on securities with above- average dividend returns. The current institutionally-dominated market tends to ignore, to some extent, the numerous secondary issues whose market capitalizations are below those of the relatively few larger size growth companies. It is expected that the Basic Value Focus Fund's portfolio generally will have significant representation in this secondary segment of the market. The basic orientation of the Fund's investment policies is such that at times a large portion of its common stock holdings may carry less than favorable research ratings from research analysts. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks. The Basic Value Focus Fund also may invest in preferred stocks and non-convertible debt securities rated investment grade and utilize covered call options with respect to portfolio securities as described in Appendix B. It reserves the right as a defensive measure to hold other types of securities, including U.S. Government and Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may invest up to 10% of its total assets, taken at market value at the time of acquisition, in the securities of foreign issuers. GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND) The investment objective of the Fund is to seek to provide shareholders a high total investment return by investing in a global portfolio of fixed income securities denominated in various currencies, including multi-national currency units. The Fund will, under normal conditions, invest at least 90% of its total assets in such fixed income securities. In pursuing its investment objective, the Fund will allocate its investments among different types of fixed income securities denominated in various currencies based upon the Investment Adviser's analysis of the yield, maturity, potential appreciation and currency considerations affecting such securities. There can be no assurance that the Fund's investment objective will be achieved. Investing on an international basis involves special considerations. See "Other Portfolio Strategies--Foreign Securities." The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The Fund may invest in United States and foreign government and corporate fixed income securities which have a credit rating of A or better by Standard & Poor's or by Moody's or commercial paper rated A-1 by Standard & Poor's or Prime-1 by Moody's or obligations that the Investment Adviser has determined to be of similar creditworthiness. The Fund may purchase fixed income securities issued by United States or foreign corporations or financial institutions, including debt securities of all types and maturities, convertible securities and preferred stocks. The Fund also may purchase securities issued or guaranteed by United States or foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ("governmental entities") or issued or guaranteed by international organizations designated or supported by multiple governmental entities to promote economic reconstruction or development ("supranational entities"). International Investing. The Fund may invest in fixed income securities denominated in any currency or multinational currency unit. An illustration of a multinational currency unit is the European Currency Unit ("ECU") which is a "basket" consisting of specified amounts of the currencies of certain of the twelve member states of the European Community, a Western European economic cooperative association including France, Germany, the Netherlands and the United Kingdom. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. The Investment Adviser does not believe that such adjustments will adversely affect holders of ECU-denominated obligations or the marketability of such securities. European supranational entities (described further below), in particular, issue ECU-denominated obligations. The Fund may invest in securities denominated in the currency of one nation although issued by a governmental entity, corporation or financial institution of another nation. For example, the Fund may invest in a British pound sterling-denominated 27 obligation issued by a United States corporation. Such investments involve credit risks associated with the issuer and currency risks associated with the currency in which the obligation is denominated. See "Other Portfolio Strategies--Foreign Securities". It is anticipated that under current conditions the Fund will invest primarily in marketable securities denominated in the currencies of the United States, Canada, Western European nations, New Zealand and Australia, as well as in ECUs. Further, it is anticipated that such securities will be issued primarily by entities located in such countries and by supranational entities. Under normal conditions, the Fund's investments will be denominated in at least three currencies or multinational currency units. Under certain adverse conditions, the Fund may restrict the financial markets or currencies in which its assets will be invested. The Fund presently intends to invest its assets solely in the United States financial markets or United States dollar- denominated obligations only for temporary defensive purposes. The obligations of foreign governmental entities have various kinds of government support and include obligations issued or guaranteed by foreign governmental entities with taxing power. These obligations may or may not be supported by the full faith and credit of a foreign government. The Fund will invest in foreign government securities of issuers considered stable by the Fund's Investment Adviser. The Investment Adviser does not believe that the credit risk inherent in the obligations of stable foreign governments is significantly greater than that of U.S. Government securities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The government members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. Allocation of Investments. In seeking to meet its investment objective, high current income will only be one of the factors that the Investment Adviser will consider in selecting portfolio securities for the Global Bond Focus Fund. As a general matter, in evaluating investments for the Fund, the Investment Adviser will consider, among other factors, the relative levels of interest rates prevailing in various countries, the potential appreciation of such investments in their denominated currencies and, for debt instruments not denominated in U.S. dollars, the potential movement in the value of such currencies compared to the U.S. dollar. Additionally, the Fund, in seeking capital appreciation, may invest in relatively low yielding instruments in expectation of favorable currency fluctuations or interest rate movements, thereby potentially reducing the Fund's current yield. In seeking income, the Fund may invest in short term instruments with relatively high yields (as compared to other debt securities) meeting the Fund's investment criteria, notwithstanding that the Fund may not anticipate that such instruments will experience substantial capital appreciation. The average maturity of the Global Bond Focus Fund's portfolio securities will vary based upon the Investment Adviser's assessment of economic and market conditions. As with all fixed income securities, changes in market yields will affect the Fund's asset value as the prices of portfolio securities generally increase when interest rates decline and decrease when interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. The Fund does not expect the average maturity of its portfolio to exceed ten years. The value of the Global Bond Focus Fund's holdings denominated in currencies other than the U.S. dollar will also be affected by changes in the value of such currencies relative to the U.S. dollar. Such currency fluctuations may have a substantial impact on the value of the Fund's holdings. The Fund may seek to limit the effect of currency fluctuations on the value of portfolio holdings through currency hedging, but there is no guarantee that such efforts, if undertaken, will be successful. See Appendix B. GLOBAL UTILITY FOCUS FUND The investment objective of the Global Utility Focus Fund is to seek both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and 28 foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk, as described in Appendix B. Investing on an international basis involves special considerations. See "Other Portfolio Strategies--Foreign Securities." The Global Utility Focus Fund at all times, except during temporary defensive periods, will maintain at least 65% of its total assets invested in equity and debt securities issued by domestic and foreign companies in the utilities industries. The Fund reserves the right to hold, as a temporary defensive measure or as a reserve for redemptions, short-term U.S. Government securities, money market securities, including repurchase agreements, or cash in such proportions as, in the opinion of the Investment Adviser, prevailing market or economic conditions warrant. Except during temporary defensive periods, such securities or cash will not exceed 20% of its total assets. Under normal circumstances, the Fund will invest at least 65% of its total assets in issuers domiciled in at least three countries, one of which may be the United States, although the Investment Adviser expects the Fund's portfolio to be more geographically diversified. Under normal conditions, it is anticipated that the percentage of assets invested in U.S. securities will be higher than that invested in securities of any other single country. It is possible that at times the Fund may have 65% or more of its total assets invested in foreign securities. The Fund will invest in common stocks (including preferred or debt securities convertible into common stocks), preferred stocks and debt securities. The relative weightings among common stocks, debt securities and preferred stocks will vary from time to time based upon the Investment Adviser's judgement of the extent to which investments in each category will contribute to meeting the Fund's investment objective. Fixed income securities in which the Fund will invest generally will be limited to those rated investment grade, that is, rated in one of the four highest rating categories by Standard & Poor's or Moody's (i.e., securities rated at least BBB by Standard & Poor's or Baa by Moody's), or deemed to be of equivalent quality in the judgement of the Investment Adviser. Securities rated Baa by Moody's are described by it as having speculative characteristics and, according to Standard & Poor's, fixed income securities rated BBB normally exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal. The Fund's commercial paper investments at the time of purchase will be rated "A-1" or "A-2" by Standard & Poor's or "Prime-1" or "Prime-2" by Moody's or, if not rated, will be of comparable quality as determined by the Investment Adviser. The Fund may also invest up to 5% of its total assets at the time of purchase in fixed income securities having a minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The Fund may, but need not, dispose of any security if it is subsequently downgraded. For a description of ratings of debt securities, see Appendix A to this Prospectus. The Fund may invest in the securities of foreign issuers in the form of American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designated for use in the United States securities markets, and EDRs, which are issued in bearer form, are designed for use in European securities markets. The Fund may invest in ADRs and EDRs through both sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement, the foreign issuer assumes the obligation to pay some or all of the depository's transaction fees, whereas in an unsponsored arrangement the foreign issuer assumes no obligations and the depository's transaction fees are paid by the ADR or EDR holders. Foreign issuers in respect of whose securities unsponsored ADRs or EDRs have been issued are not necessarily obligated to disclose material information in the markets in which the unsponsored ADRs or EDRs are traded and, therefore, there may not be a correlation between such information and the market value of such securities. 29 A change in prevailing interest rates is likely to affect the Fund's net asset value because prices of debt and equity securities of utility companies tend to increase when interest rates decline and decrease when interest rates rise. Utility Industries--Description and Risks. Under normal circumstances, the Fund will invest at least 65% of its total assets in common stocks (including preferred or debt securities convertible into common stocks), debt securities and preferred stocks of domestic and/or foreign companies in the utility industries. To meet its objective of current income, the Fund may invest in domestic utility companies that pay higher than average dividends, but have a lesser potential for capital appreciation. The average dividend yields of common stocks issued by domestic utility companies historically have significantly exceeded those of industrial companies' common stocks, while the prices of domestic utility stocks have tended to be less volatile than stocks of industrial companies. The Investment Adviser believes that the average dividend yields of common stocks issued by foreign utility companies have also historically exceeded those of foreign industrial companies' common stocks. To meet its objective of capital appreciation, the Fund may invest in foreign utility companies which pay lower than average dividends, but have a greater potential for capital appreciation. The utility companies in which the Fund will invest include companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. Investments in utility industries bear certain risks, including difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary period, restrictions on operations and increased cost and delays attributable to environmental considerations and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations which may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasionally reduced availability and high costs of natural gas for resale, the effects of energy conservation, the effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences between the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on common stocks. Additionally, existing and possible future regulatory legislation may make it even more difficult for these utilities to obtain adequate relief. Certain of the issuers of securities in the portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies, and impose additional requirements governing the licensing, construction and operation of nuclear power plants. Utility companies in the United States and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future. The nature of regulation of the utility industries is evolving both in the United States and in foreign countries. Changes in regulation in the United States increasingly allow utility companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of competition within the industries. In some instances, utility companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of telecommunications, non-regulated providers of utility services have become a significant part of their respective industries. The Investment Adviser believes that the emergence of competition and deregulation will result in certain utility companies being able to earn more than their traditional regulated rates of return, while 30 others may be forced to defend their core businesses from increased competition and may be less profitable. The Investment Adviser seeks to take advantage of favorable investment opportunities that are expected to arise from these structural changes. Of course, there can be no assurance that favorable developments will occur in the future. Foreign utility companies are also subject to regulation, although such regulations may or may not be comparable to that in the United States. Foreign utility companies may be more heavily regulated by their respective governments than utilities in the United States and, as in the U.S., generally are required to seek government approval for rate increases. In addition, many foreign utilities use fuels that cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different from regulation in the United States. The principal sectors of the global utility industries are discussed below. Electric. The electric utility industry consists of companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. Domestic electric utility companies, in general, recently have been favorably affected by lower fuel and financing costs and the full or near completion of major construction programs. In addition, certain of these companies generate cash flows in excess of current operating expenses and construction expenditures, permitting some degree of diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have historically been subject to the risks associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety regulations and changes in the regulatory climate. As interest rates have declined, many utilities have refinanced high cost debt and in doing so have improved their fixed charges coverage. Regulators, however, have lowered allowed rates of return as interest rates have declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In the United States, the construction and operation of nuclear power facilities is subject to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory Commission and state agencies having comparable jurisdiction. Increased scrutiny might result in higher operating costs and higher capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power plants may be subject to significant costs for disposal of nuclear fuel and for decommissioning of such plants. In October 1993, Standard & Poor's stiffened its debt-ratings formula for the electric utility industry, stating that the industry is in long-term decline. In addition, Moody's stated that it expected a drop in the next three years in its average credit ratings for the industry. Reasons set forth for these outlooks included slowing demand and increasing cost pressures as a result of competition from rival providers. Telecommunications. The telephone industry is large and highly concentrated. Companies that distribute telephone services and provide access to the telephone networks comprise the greatest portion of this segment. Telephone companies in the United States are still experiencing the effects of the breakup of American Telephone & Telegraph Company, which occurred in 1984. Since 1984, companies engaged in telephone communication services have expanded their non-regulated activities into other businesses, including cellular telephone services, data processing, equipment retailing, computer software and hardware services, and financial services. This expansion has provided significant opportunities for certain telephone companies to increase their earnings and dividends at faster rates than had been allowed in traditional regulated businesses. Increasing competition, technological innovations and other structural changes, however, could adversely affect the profitability of such utilities. Technological breakthroughs and the merger of telecommunications with video and entertainment is now associated with the expansion of the role of cable companies as providers of utility services in the telecommunications industry and the competitive response of traditional telephone companies. Given mergers and certain marketing tests currently underway, it is likely that both traditional telephone companies 31 and cable companies will soon provide a greatly expanded range of utility services, including two-way video and informational services. Gas. Gas transmission companies and gas distribution companies are also undergoing significant changes. In the United States, interstate transmission companies are regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and development, making returns more sensitive to energy prices. In the recent decades, gas utility companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. Water. Water supply utilities are companies that collect, purify, distribute and sell water. In the United States and around the world, the industry is highly fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little or no per capita volume growth. Investment Outside the Utility Industries. The Global Utility Focus Fund is permitted to invest up to 35% of its assets in securities of issuers that are outside the utility industries. Such investments may include common stocks, debt securities or preferred stocks and will be selected to meet the Fund's investment objective of both capital appreciation and current income. These securities may be issued by either U.S. or non-U.S. companies. Some of these issuers may be in industries related to utility industries and, therefore, may be subject to similar risks. Securities that are issued by foreign companies or are denominated in foreign currencies are subject to certain risks. See "Other Portfolio Strategies--Foreign Securities." The Global Utility Focus Fund is also permitted to invest in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and in securities issued or guaranteed by foreign governments. Foreign government securities are typically denominated in foreign currencies and are subject to the currency fluctuation and other risks of foreign securities investments. The foreign government securities in which the Fund intends to invest generally will consist of obligations supported by national, state or local governments or similar political subdivisions. Foreign government securities also include debt obligations of supranational entities, including international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Investment Bank, the Asian Development Bank and the Inter-American Development Bank. Foreign government securities also include debt securities of "quasi- governmental agencies" and debt securities denominated in multinational currency units. An example of a multinational currency unit is the European Currency Unit. A European Currency Unit represents specified amounts of the currencies of certain of the twelve member states of the European Economic Community. Debt securities of quasi-governmental agencies are issued by entities owned by either a national or local government or are obligations of a political unit that is not backed by the national government's full faith and credit and general taxing powers. Foreign government securities will not be considered government securities for purposes of determining the Fund's compliance with diversification and concentration policies. INTERNATIONAL EQUITY FOCUS FUND The investment objective of the International Equity Focus Fund is to seek capital appreciation and, secondarily, income by investing in a diversified portfolio of equity securities of issuers located in countries other than the United States. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities and at least 65% of the Fund's total assets will be invested in the securities of issuers from at least three different foreign countries. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objectives will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. See Appendix B. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See "Other Portfolio Strategies--Foreign Securities." The Fund is designed for investors seeking to 32 complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The International Equity Focus Fund will invest in an international portfolio of securities of foreign companies located throughout the world. While there are no prescribed limits on the geographic allocation of the Fund's investments, management of the Fund anticipates that a substantial portion of its assets will be invested in the developed countries of Europe and the Far East. For the reasons stated below, management of the Fund will give special attention to investment opportunities in the developing countries of the world, including, but not limited to Latin America, the Far East and Eastern Europe. It is anticipated that a significant portion of the Fund's assets may be invested in such developing countries. The allocation of the Fund's assets among the various foreign securities markets will be determined by the Investment Adviser based primarily on its assessment of the relative condition and growth potential of the various economies and securities markets, currency and taxation considerations and other pertinent financial, social, national and political factors. Within such allocations, the Investment Adviser will seek to identify equity investments in each market which are expected to provide a total return which equals or exceeds the return of such market as a whole. A significant portion of the Fund's assets may be invested in developing countries. This allocation of the Fund's assets reflects the belief that attractive investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain developing countries with smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called "emerging" countries (such as Malaysia, Mexico and Thailand), which may be in the process of developing more market-oriented economies, may experience relatively high rates of economic growth. Because of the general illiquidity of the capital markets in certain developing countries, the Fund may invest in a relatively small number of leading or relatively actively traded companies in the capital markets of such a country in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of that country's capital markets as a whole. While the Fund will primarily emphasize investments in common stock, the Fund may also invest in preferred stocks, convertible debt securities and other instruments the return on which is linked to the performance of a common stock or a basket or index of common stocks (collectively, "equity securities"). The Fund may also invest in non-equity securities, including debt securities, cash or cash equivalents denominated in U.S. dollars or foreign currencies and short-term securities, including money market instruments. Under certain adverse investment conditions, for defensive purposes, the Fund may restrict the markets in which its assets will be invested and may increase the proportion of assets invested in short-term obligations of U.S. issuers. Investments made for defensive purposes will be maintained only during periods in which the Investment Adviser determines that economic or financial conditions are adverse for holding or being fully invested in equity securities of foreign issuers. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts, typically issued by an American bank or trust company, that evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar ownership arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradeable both in the U.S. and Europe and are designed for use throughout the world. The Fund also may invest up to 35% of its net assets in longer-term, non- convertible debt securities emphasizing debt securities which offer the opportunity for capital appreciation. Capital appreciation in debt securities may arise as a result of a favorable change in relative foreign exchange rates, in relative interest rate 33 levels, or in the creditworthiness of issuers. In accordance with its investment objective, the Fund will not seek to benefit from anticipated short-term fluctuations in currency exchange rates. The Fund may, from time to time, invest in debt securities with relatively high yields (as compared to other debt securities meeting the Fund's investment criteria), notwithstanding that the Fund may not anticipate that such securities will experience substantial capital appreciation. Such income can be used, however, to offset the operating expenses of the Fund. The Fund may invest in debt securities issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ("governmental entities"), issued or guaranteed by international organizations designated or supported by multiple foreign governmental entities (which are not obligations of foreign governments) to promote economic reconstruction or development ("supranational entities"), or issued by foreign corporations or financial institutions. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. The Fund has established no rating criteria for the debt securities in which it may invest, and such securities may not be rated at all for creditworthiness. Securities rated in the medium to lower rating categories of nationally recognized statistical rating organizations and unrated securities of comparable quality are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser's judgement, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. See "Other Portfolio Strategies--Foreign Securities" and "Risks of High Yield Securities" below. DEVELOPING CAPITAL MARKETS FOCUS FUND The investment objective of the Developing Capital Markets Focus Fund is to seek long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. See Appendix B. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See "Other Portfolio Strategies--Foreign Securities." The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. For purposes of its investment objective, the Fund considers countries having smaller capital markets to be all countries other than the four countries having the largest equity market capitalizations. Currently, these four countries are Japan, the United Kingdom, the United States and Germany. At December 31, 1996, those countries' equity market capitalizations totalled approximately 69.84% of the world's equity market capitalization according to data provided by Morgan Stanley Capital International. The Fund will at all times, except during defensive periods, maintain investments in at least three countries having smaller capital markets. The Fund seeks to benefit from economic and other developments in smaller capital markets. The investment objective of the Fund reflects the belief that investment opportunities may result from an evolving 34 long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain countries having smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called "emerging" countries (such as Malaysia, Mexico and Thailand) which may be in the process of developing more market-oriented economies, may experience relatively high rates of economic growth. Other countries (such as France, the Netherlands and Spain), although having relatively mature smaller capital markets, may also be in a position to benefit from local or international developments encouraging greater market orientation and diminishing governmental intervention in economic affairs. Many investors, particularly individuals, lack the information, capability or inclination to invest in countries having smaller capital markets. It also may not be permissible for such investors to invest directly in certain such markets. Unlike many intermediary investment vehicles, such as closed-end investment companies that invest in a single country, the Fund intends to diversify investment risk among the capital markets of a number of countries. The Fund will not necessarily seek to diversify investments on a geographical basis or on the basis of the level of economic development of any particular country. In its investment decision-making, the Investment Adviser will emphasize the allocation of assets among certain countries' capital markets, rather than the selection of particular industries or issuers. Because of the general illiquidity of the capital markets in some countries, the Fund may invest in a relatively small number of leading or actively traded companies in a country's capital markets in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of the country's capital markets as a whole. The Fund also may invest in debt securities of issuers in countries having smaller capital markets. Capital appreciation in debt securities may arise as a result of a favorable change in relative foreign exchange rates, in relative interest rate levels, or in the creditworthiness of issuers. In accordance with its investment objective, the Fund will not seek to benefit from anticipated short-term fluctuations in currency exchange rates. The Fund may, from time to time, invest in debt securities with relatively high yields (as compared to other debt securities meeting the Fund's investment criteria), notwithstanding that the Fund may not anticipate that such securities will experience substantial capital appreciation. See "Risks of High Yield Securities" below. Such income can be used, however, to offset the operating expenses of the Fund. The Fund may invest in debt securities issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ("governmental entities"), issued or guaranteed by international organizations designated or supported by multiple foreign governmental entities (which are not obligations of foreign governments) to promote economic reconstruction or development ("supranational entities"), or issued by foreign corporations or financial institutions. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the World Bank, the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. The Fund has established no rating criteria for the debt securities in which it may invest, and such securities may not be rated at all for creditworthiness. Securities rated in the medium to lower rating categories of nationally recognized statistical rating organizations and unrated securities of comparable quality are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser's judgement, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. See "Other Portfolio Strategies--Foreign Securities" and "Risks of High Yield Securities" below. 35 For purposes of the Fund's investment objective, an issuer ordinarily will be considered to be located in the country where the primary trading market of its securities is located. The Fund, however, may consider a company to be located in countries having smaller capital markets, without reference to its domicile or to the primary trading market of its securities, when at least 50% of its non-current assets, capitalization, gross revenues or profits in any one of the two most recent fiscal years represents (directly or indirectly through subsidiaries) assets or activities located in such countries. The Fund also may consider closed-end investment companies to be located in the country or countries in which they primarily make their portfolio investments. Foreign investments in smaller capital markets involve risks not involved in domestic investment, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. These risks are often heightened for investments in small capital markets. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. In addition, certain foreign investments may be subject to foreign withholding taxes. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. The Fund reserves the right, as a temporary defensive measure or to provide for redemptions or in anticipation of investment in countries having smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term securities, including money market securities. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities convertible into securities of foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose material information in the United States, and therefore, there may not be a correlation between such information and the market value of such ADRs. GOVERNMENT BOND FUND The investment objective of the Government Bond Fund is to seek the highest possible current income consistent with the protection of capital afforded by investing in debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Under normal circumstances, all or substantially all of the Fund's assets will be invested in such securities. Depending on market conditions, an average maturity of six to fifteen years is anticipated. When, in the opinion of management, prevailing market or economic conditions warrant, a portion of the Fund may be invested in money market securities or a liquid asset fund to effectively utilize cash reserves. There can be no assurance that the Fund's investment objective will be achieved. Certain of the securities in which the Fund invests are supported by the full faith and credit of the U.S. Government, such as U.S. Treasury obligations. Other of the securities in which the Fund invests are not supported by the full faith and credit of the U.S. Government but are issued by U.S. Government agencies, instrumentalities or government-sponsored enterprises. Such securities are generally supported only by the credit of the agency, instrumentality or enterprise issuing the security and are generally considered to have a low principal risk. However, because of the longer-term maturities of the securities in which the Fund will invest, interest rate fluctuations may adversely affect the market value of such securities. As interest rates rise, the value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. The U.S. Treasury Department has enacted regulations prescribing diversification standards to be met by investment company portfolios to which the investment base for any variable annuity policy has been allocated as a condition to such policies being treated as variable annuity contracts under the Internal Revenue Code of 1986, as amended (the "Code"). The regulations limit the percentage of the total assets of any investment 36 company portfolio which may be invested in securities of any five or fewer issuers, including a requirement that no more than 55% of a portfolio's total assets be invested in the securities of any one issuer. Direct obligations of the U.S. Treasury are not excepted from the diversification requirements. Each government agency or instrumentality issuing, guaranteeing or insuring securities will be treated as a separate issuer for purposes of the diversification standards. INDEX 500 FUND The investment objective of the Index 500 Fund is to seek to provide investment results that, before expenses, correspond to the aggregate price and yield performance of the S&P 500 Index. There can be no assurance that the Fund's investment objective will be achieved. The S&P 500 Index is a market-weighted index composed of 500 common stocks issued by companies in a wide range of businesses and which collectively represent a substantial portion of all common stocks publicly traded in the U.S. The composition of the S&P 500 Index is determined by Standard & Poor's, a division of the McGraw-Hill Companies, Inc. Standard & Poor's criteria for selecting common stocks to include in the S&P 500 Index is based on factors such as market capitalization, trading activity and the adequacy of representation of particular industries, and favors U.S.-traded stocks of large companies that are among the most dominant in their industries. The S&P 500 Index is generally considered broadly representative of the performance of large-capitalization publicly traded common stocks in the U.S. The inclusion of a stock in the S&P 500 Index does not imply that Standard & Poor's believes the stock to be an attractive investment. The Index 500 Fund will not attempt to buy or sell securities based on the Investment Adviser's economic, financial or market analysis, but will instead employ a "passive" approach that attempts to remain invested at all times in a portfolio of assets the performance of which is expected to be strongly correlated with that of the S&P 500 Index. The Index 500 Fund may invest in all 500 stocks in the S&P 500 Index in approximately the same proportions as their weightings in the S&P 500 Index, or may invest in a statistically selected sample of the 500 stocks which comprise the S&P 500 Index designed, based on market capitalizations, industry weightings and financial attributes, to have aggregate investment characteristics similar to those of the S&P 500 Index as a whole. The Index 500 Fund may also (i) purchase common stocks not included in the S&P 500 Index as a proxy for certain common stocks included in the S&P 500 Index when the Investment Adviser believes it is an efficient means of replicating the performance of that index to do so, and (ii) invest in options and future contracts linked to the performance of the S&P 500 Index or of common stocks represented in the index. Under normal circumstances, it is expected that the Index 500 Fund will invest at least 90% (65% if the Index 500 Fund's assets are below $20 million) of its assets in common stocks represented in the S&P 500 Index and related options and futures contracts. The Index 500 Fund may invest a substantial portion of its assets in options and futures contracts in order to gain market exposure efficiently in the event of subscriptions, to maintain liquidity in the event of redemptions and to minimize trading costs. The Index 500 Fund may also invest in short-term fixed income instruments as cash reserves. The Index 500 Fund will not invest in short-term fixed income instruments, options or futures contracts for the purpose of implementing a defensive market strategy by lowering the Fund's exposure to common stocks to protect against a potential stock market decline, but instead will attempt to remain fully invested without regard to the Investment Adviser's market analysis. The Fund may, however, hold short-term fixed income instruments for temporary cash management purposes. The foregoing investment techniques are expected to be an effective means of substantially duplicating the aggregate price and yield performance of the S&P 500 Index at such times when the Fund is not fully invested in all 500 stocks in the S&P 500 Index in approximately the same proportions as their weightings in that index. To the extent the Index 500 Fund utilizes the foregoing investment techniques, the Fund may not track the S&P 500 Index with the same degree of accuracy as the Fund would if it were fully invested in all 500 stocks in the S&P 500 Index in approximately the same proportions as their weightings in that index. However, the principal advantage of the foregoing investment techniques is to provide an efficient means to invest in the universe of stocks of the S&P 500 Index. The Fund is expected to provide broad diversification, and will seek to operate at low costs due to its "passive" approach to portfolio management and anticipated low portfolio turnover rate. 37 NON-DIVERSIFIED FUNDS The Natural Resources Focus, Global Strategy Focus, Global Bond Focus, Index 500 and Developing Capital Markets Focus Funds are classified as non- diversified investment companies under the Investment Company Act. However, each Fund will have to limit its investments to the extent required by the diversification requirements applicable to regulated investment companies under the Internal Revenue Code. To qualify as a regulated investment company, a Fund, at the close of each fiscal quarter, may not have more than 25% of its total assets invested in the securities (except obligations of the U.S. Government, its agencies or instrumentalities) of any one issuer and with respect to 50% of its assets, (i) may not have more than 5% of its total assets invested in the securities of any one issuer and (ii) may not own more than 10% of the outstanding voting securities of any one issuer. INVESTMENT RESTRICTIONS The Company has adopted a number of restrictions and policies relating to the investment of its assets and its activities which are fundamental policies and may not be changed without the approval of the holders of the Company's outstanding voting securities (including a majority of the shares of each Fund). Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. MONEY MARKET FUND PORTFOLIO RESTRICTIONS For purposes of the investment policies of the Domestic Money Market and Reserve Assets Funds, the Company defines short-term money market securities as securities having a maturity of no more than 762 days (25 months) in the case of U.S. Government and agency securities and no more than 397 days (13 months) in the case of all other securities. Management of the Company expects that substantially all the assets of the Domestic Money Market and Reserve Assets Funds will be invested in securities maturing in less than one year, but at times some portion may have maturities of up to 25 months. For these purposes, the maturity of a variable rate security is deemed to be the next coupon date on which the interest rate is adjusted. The dollar-weighted average maturity of each Fund's portfolio assets will not exceed 90 days. The Domestic Money Market and Reserve Asset Funds' investments in short-term debt and depository institution money instruments will be rated, or will be issued by issuers who have been rated, in one of the two highest rating categories for short-term debt obligations by a nationally recognized statistical rating organization (an "NRSRO") or, if not rated, will be of comparable quality as determined by the Directors of the Company. Each Fund's investments in corporate bonds and debentures (which must have maturities at the date of purchase of 397 days (13 months) or less) will be in issuers which have received from an NRSRO a rating, with respect to a class of short-term debt obligations that is comparable in priority and security with the investment, in one of the two highest rating categories for short-term obligations or, if not rated, are of comparable quality as determined by the Directors of the Company. Currently, there are six NRSROs: Duff & Phelps Inc., Fitch Investors Services, Inc., IBCA Limited and its affiliate IBCA Inc., Moody's, Standard & Poor's and Thomson BankWatch. A regulation of the Securities and Exchange Commission limits investments by the Domestic Money Market and Reserve Assets Funds in securities issued by any one issuer (other than the U.S. Government, its agencies or instrumentalities) ordinarily to not more than 5% of its total assets, or in the event that such securities do not have the highest rating, not more than 1% of its total assets. In addition, this regulation requires that not more than 5% of each Fund's total assets be invested in securities that have a rating lower than the highest rating. OTHER PORTFOLIO STRATEGIES Restricted Securities. Each of the Funds is subject to limitations on the amount of illiquid securities it may purchase; however, each Fund may purchase without regard to that limitation certain securities that are not registered under the Securities Act of 1933, as amended (the "Securities Act"), including (a) commercial paper exempt from registration under Section 4(2) of the Securities Act, and (b) securities that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, 38 that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities sold under Rule 144A which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Funds' investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Foreign Securities. The Reserve Assets, Prime Bond, High Current Income, Quality Equity, Equity Growth, Natural Resources Focus, Global Strategy Focus, Basic Value Focus, Global Bond Focus, Global Utility Focus, International Equity Focus and Developing Capital Markets Focus Funds may invest in securities of foreign issuers. The Index 500 Fund may also invest in securities of foreign issuers to the extent such issuers are included in the S&P 500 Index. Investments in foreign securities, particularly those of non- governmental issuers, involve considerations and risks which are not ordinarily associated with investing in domestic issuers. These considerations and risks include changes in currency rates, currency exchange control regulations, the possibility of expropriation, the unavailability of financial information or the difficulty of interpreting financial information prepared under foreign accounting standards, less liquidity and more volatility in foreign securities markets, the impact of political, social or diplomatic developments, and the difficulty of assessing economic trends in foreign countries. If it should become necessary, a Fund could encounter greater difficulties in invoking legal processes abroad than would be the case in the United States. Transaction costs in foreign securities may be higher. The operating expense ratio of a Fund investing in foreign securities can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial costs, are higher. In addition, net investment income earned by a Fund on a foreign security may be subject to withholding and other taxes imposed by foreign governments which will reduce a Fund's net investment income. The Investment Adviser will consider these and other factors before investing in foreign securities, and will not make such investments unless, in its opinion, such investments will meet the standards and objectives of a particular Fund. No Fund which may invest in foreign securities, other than the Natural Resources Focus and Global Strategy Focus Funds, will concentrate its investments in any particular country. The Natural Resources Focus, Global Strategy Focus, Global Bond Focus, Global Utility Focus, International Equity Focus and Developing Capital Markets Focus Funds may from time to time be substantially invested in non-dollar-denominated securities of foreign issuers. For a Fund that invests in foreign securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of securities in the portfolio and the unrealized appreciation or depreciation of investments insofar as United States investors are concerned, and a Fund's return on investments in non- dollar-denominated securities may be reduced or enhanced as a result of changes in foreign currency rates during the period in which the Fund holds such investments. Foreign currency exchange rates are determined by forces of supply and demand in the foreign exchange markets. These forces are, in turn, affected by international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. Each Fund of the Company other than the Natural Resources Focus, Global Strategy Focus, Basic Value Focus, Global Bond Focus, Global Utility Focus, International Equity Focus and Developing Capital Markets Focus Funds will purchase only securities issued in dollar denominations. Each of the International Equity Focus Fund and Developing Capital Markets Focus Fund may invest a significant portion of its assets in securities of foreign issuers in smaller capital markets, while each of the other Funds which is permitted to invest in foreign securities may from time to time invest in securities of such foreign issuers. Foreign investments involve risks, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems, the existence or possible imposition of exchange controls, or other foreign or United States governmental laws or restrictions, which are often heightened for investments in smaller capital markets. 39 There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. Smaller capital markets, while often growing in trading volume, have substantially less volume than United States markets, and securities in many smaller capital markets are less liquid and their prices may be more volatile than securities of comparable United States companies. Brokerage commissions, custodial services, and other costs relating to investment in smaller capital markets are generally more expensive than in the United States. Such markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, satisfactory custodial services for investment securities may not be available in some countries having smaller capital markets, which may result in a Fund which invests in these markets incurring additional costs and delays in transporting and custodying such securities outside such countries. Delays in settlement could result in temporary periods when assets of such a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. There is generally less government supervision and regulation of exchanges, brokers and issuers in countries having smaller capital markets than there is in the United States. As a result, management of a Fund which invests in foreign securities may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience. Due to its emphasis on securities of issuers located in smaller capital markets, each of the Developing Capital Markets Focus Fund and the International Equity Focus Fund should be considered as a vehicle for diversification and not as a balanced investment program. Certain of the Funds may invest in debt securities issued by foreign governments. Investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging market country's debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. Holders of government debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors. As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. Government obligors in developing and emerging market countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. The issuers of the government debt securities in which a Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain 40 indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements. The Developing Capital Markets Focus and International Equity Focus Funds intend to invest in securities of foreign issuers in smaller capital markets. Some countries with smaller capital markets prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Fund. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms than securities of the company available for purchase by nationals. A number of countries, such as South Korea, Taiwan and Thailand, have authorized the formation of closed-end investment companies to facilitate indirect foreign investment in their capital markets. In accordance with the Investment Company Act, the Developing Capital Markets Focus and International Equity Focus Funds each may invest up to 10% of its total assets in securities of such closed-end investment companies. This restriction on investments in securities of closed-end investment companies may limit opportunities for the Fund to invest indirectly in certain smaller capital markets. Shares of certain closed-end investment companies may at times be acquired only at market prices representing premiums to their net asset values. If a Fund acquires shares in closed-end investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies. A Fund also may seek, at its own cost, to create its own investment entities under the laws of certain countries. In some countries, banks or other financial institutions may constitute a substantial number of the leading companies or the companies with the most actively traded securities. Also, the Investment Company Act restricts a Fund's investments in any equity security of an issuer which, in its most recent fiscal year, derived more than 15% of its revenues from "securities related activities," as defined by the rules thereunder. These provisions may also restrict a Fund's investments in certain foreign banks and other financial institutions. Lending of Portfolio Securities. Each Fund of the Company may from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government which, while the loan is outstanding, will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities plus accrued interest. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. Forward Commitments. Each of the Funds may purchase securities on a when- issued basis, and they may purchase or sell such securities for delayed delivery. These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. The value of the security on the delivery date may be more or less than its purchase price. A Fund entering into such transactions will maintain a segregated account with its custodian of cash or liquid securities in an aggregate amount equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Standby Commitment Agreements. The High Current Income, Global Utility Focus and Developing Capital Markets Focus Funds may from time to time enter into standby commitment agreements. Such agreements commit the respective Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will at all times maintain a segregated account with its custodian of cash or liquid securities in an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. 41 Portfolio Strategies Involving Indexed and Inverse Securities, Options, Futures and Foreign Exchange Transactions. Certain Funds may use derivative instruments, including indexed and inverse securities, options and futures and purchase and sell foreign exchange. Transactions involving such instruments expose these Funds to certain risks. Each Fund's use of these instruments and the associated risks are described in detail in Appendix B attached to this Prospectus. RISKS OF HIGH YIELD SECURITIES The High Current Income Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund may invest a substantial portion of their assets in high yield, high risk securities or junk bonds, which are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During recessionary periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. While the high yield securities in which the High Current Income Fund, International Equity Focus Fund or Developing Capital Markets Focus Fund may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after a Fund purchases a particular security, in which case a Fund may experience losses and incur costs. In an effort to minimize the risk of issuer default or bankruptcy, the High Current Income Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund each will diversify its holdings among many issuers. However, there can be no assurance that diversification will protect a Fund from widespread defaults brought about by a sustained economic downturn. High yield securities tend to be more volatile than higher-rated fixed- income securities, so that adverse economic events may have a greater impact on their prices and yields than on higher-rated fixed-income securities. Zero coupon bonds and bonds which pay interest and/or principal in additional bonds rather than in cash are especially volatile. Like higher-rated fixed-income securities, junk bonds are generally purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in this market, which may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for such bonds by various dealers. Adverse economic conditions or investor perceptions (whether or not based on economic fundamentals) may impair the liquidity of this market, and may cause the prices the High Current Income Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund receive for their junk bonds to be reduced, or a Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Under such conditions, judgement may play a greater role in valuing certain of each Fund's portfolio securities than in the case of securities trading in a more liquid market. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the net asset value of the High Current Income Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund. In addition, each Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. Sovereign Debt. The junk bonds in which the High Current Income Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund may invest include junk bonds issued by sovereign entities. 42 Investment in such sovereign debt involves a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt. Holders of sovereign debt, including the High Current Income Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies available to a Fund and there can be no assurance a Fund will be able to collect on defaulted sovereign debt in whole or in part. INSURANCE LAW RESTRICTIONS In order for shares of the Company's Funds to remain eligible investments for the Separate Accounts, it may be necessary, from time to time, for a Fund to limit its investments in certain types of securities in accordance with the insurance laws or regulations of the various states in which the Contracts are sold. The New York insurance law requires that investments of each Fund be made with the degree of care of an "ordinarily prudent person." The Investment Adviser believes that compliance with this standard will not have any negative impact on the performance of any of the Funds. OTHER CONSIDERATIONS The Investment Adviser will use its best efforts to assure that each Fund of the Company complies with certain investment limitations of the Internal Revenue Service to assure favorable income tax treatment for the Contracts. It is not expected that such investment limitations will materially affect the ability of any Fund to achieve its investment objective. DIRECTORS The Directors of the Company consist of six individuals, five of whom are not "interested persons" of the Company as defined in the Investment Company Act of 1940. The Directors of the Company are responsible for the overall supervision of the operations of the Company and perform the various duties imposed on the directors of the investment companies by the Investment Company Act of 1940. The Board of Directors elects officers of the Company annually. The Directors of the Company and their principal employment are as follows: Arthur Zeikel*--President of the Investment Adviser and its affiliate, Fund Asset Management, L.P. ("FAM"); President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of ML&Co.; and Director of the Merrill Lynch Funds Distributor, Inc. (the "Distributor"). 43 Joe Grills--Member of the Committee on Investment of Employee Benefit Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive Committee; and Member of the Investment Advisory Committee of the State of New York Common Retirement Fund and the Howard Hughes Medical Institute; Director, Duke Management Company, LaSalle Street Fund and Kimco Realty Corporation. Walter Mintz--Special Limited Partner of Cumberland Partners (investment partnership). Robert S. Salomon, Jr.--Principal of STI Management (investment adviser). Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate, consulting and investments). Stephen R. Swensrud--Chairman of Fernwood Associates (financial consultants). - -------- * Interested person, as defined in the Investment Company Act of 1940, of the Company. 44 INVESTMENT ADVISER Merrill Lynch Asset Management L.P. ("MLAM"), an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc., is the investment adviser (the "Investment Adviser") for the Fund. The general partner of the Investment Adviser is Princeton Services, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc. The principal address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset Management, L.P. ("FAM"), acts as the investment adviser for over 130 other registered investment companies. The Investment Adviser also offers portfolio management and portfolio analysis services to individuals and institutions. In the aggregate, as of March 31, 1997, MLAM and FAM had a total of approximately $247.2 billion in investment company and other portfolio assets under management including assets of certain affiliates. While the Investment Adviser is at all times subject to the direction of the Board of Directors of the Company, the Investment Advisory Agreements provide that the Investment Adviser, subject to review by the Board of Directors, is responsible for the actual management of the Funds and has responsibility for making decisions to buy, sell or hold any particular security. The Investment Adviser provides the portfolio managers for the Funds, who consider information from various sources, make the necessary investment decisions and effect transactions accordingly. The Investment Adviser is also obligated to perform certain administrative and management services for the Company (certain of which it may delegate to third parties) and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreements. The Investment Adviser has access to the full range of the securities and economic research facilities of Merrill Lynch. During the Company's fiscal year ended December 31, 1996, the advisory fees expense incurred by the Company totaled $24,131,430 of which $118,827 related to the Reserve Assets Fund (representing .50% of its average net assets), $2,160,063 related to the Prime Bond Fund (representing .44% of its average net assets), $1,881,541 related to the High Current Income Fund (representing .49% of its average net assets), $3,136,852 related to the Quality Equity Fund (representing .44% of its average net assets), $3,010,613 related to the Equity Growth Fund (representing .75% of its average net assets), $1,638 related to the Index 500 Fund (representing .30% of its average net assets) all of which was voluntarily waived by MLAM, $297,742 related to the Natural Resources Focus Fund (representing .65% of its average net assets), $1,186,936 related to the American Balanced Fund (representing .55% of its average net assets), $1,386,726 related to the Domestic Money Market Fund (representing .50% of its average net assets), $3,715,122 related to the Global Strategy Focus Fund (representing .65% of its average net assets), $2,414,605 related to the Basic Value Focus Fund (representing .60% of its average net assets), $518,022 related to the Global Bond Focus Fund (representing .60% of its average net assets), $880,959 related to the Global Utility Focus Fund (representing .60% of its average net assets), $2,358,140 related to the International Equity Focus Fund (representing .75% of its average net assets), $765,718 related to the Developing Capital Markets Focus Fund (representing 1.00% of its average net assets) of which $52,388 was voluntarily waived by MLAM, $297,926 related to the Government Bond Focus Fund (representing .50% of its average net assets) of which $264,214 was voluntarily waived by MLAM. During the Company's fiscal year ended December 31, 1996, the total operating expenses of the Company's Funds (including the advisory fees paid to the Investment Adviser), before any fee waiver or reimbursement of a portion of such expenses were as follows: $144,685 related to the Reserve Assets Fund (representing .61% of its average net assets), $2,418,846 related to the Prime Bond Fund (representing .49% of its average net assets), $2,096,102 related to the High Current Income Fund (representing .54% of its average net assets), $3,495,231 related to Quality Equity Fund (representing .49% of its average net assets), $3,240,858 related to the Equity Growth Fund (representing .81% of its average net assets), $3,289 related to the Index 500 Fund (representing .60% of its average net assets), $358,882 related to the Natural Resources Focus Fund (representing .78% of its average net assets), $1,300,476 related to the American Balanced Fund (representing .60% of its average net assets), $1,507,384 related to the Domestic Money Market Fund (representing .54% of its average net assets), $4,077,255 related to the Global Strategy Focus Fund (representing .71% of its average net assets), $2,657,872 related to the Basic Value Focus Fund (representing .66% of its average net assets), $593,766 related to the Global Bond Focus Fund (representing .69% of its average net assets), $970,696 related to the Global Utility Focus Fund (representing .66% of its average net assets), $2,802,938 related to the International Equity Focus 45 Fund (representing .89% of its average net assets), $1,009,535 related to the Developing Capital Markets Focus Fund (representing 1.31% of its average net assets), $353,780 related to the Government Bond Fund (representing .59% of its average net assets). The Investment Adviser has entered into a sub-advisory agreement (the "Sub- Advisory Agreement") with MLAM U.K., an indirect wholly owned subsidiary of ML & Co., and an affiliate of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing investment advisory services to the Investment Adviser with respect to the Funds in an amount to be determined from time to time by the Investment Adviser and MLAM U.K. but in no event in excess of the amount that the Investment Adviser actually receives for providing services to the Funds pursuant to the Investment Advisory Agreement. The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into two agreements which limit the operating expenses paid by each Fund in a given year to 1.25% of its average daily net assets (the "Reimbursement Agreements"). The reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide that any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. The Investment Adviser has entered into administrative services agreements with certain Insurance Companies, including MLLIC and ML of New York, pursuant to which the Investment Adviser compensates such companies for administrative responsibilities relating to the Company which are performed by such Insurance Companies. CODE OF ETHICS The Board of Directors of the Company has adopted a Code of Ethics under Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment Adviser (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Investment Adviser and, as described below, impose additional, more onerous, restrictions on fund investment personnel. The Codes require that all employees of the Investment Adviser preclear any personal securities investment (with limited exceptions, such as government securities). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Investment Adviser include a ban on acquiring any securities in a "hot" initial public offering and a prohibition from profiting on short- term trading in securities. In addition, no employee may purchase or sell any security which at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Investment Adviser. Furthermore, the Codes provide for trading "blackout periods" which prohibit trading by investment personnel of the Company within periods of trading by the Company in the same (or equivalent) security (15 or 30 days depending upon the transaction). PORTFOLIO MANAGERS The following is information with respect to the Portfolio Managers for each of the Company's Funds. Thomas R. Robinson has served as the Portfolio Manager of the American Balanced Fund, Global Strategy Focus Fund and Quality Equity Fund since November 1995, and is primarily responsible for each such Fund's day-to-day management. He has served as a Senior Portfolio Manager of MLAM since November 1995. From 1989 to 1995, he served as Manager of International Strategy for Merrill Lynch & Co. Global Securities Research & Economics Group. Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since December 1993; Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990. Thomas D'Auria has served as the Portfolio Manager of the Equity Growth Fund since March 1997 and will be responsible for the day-to-day management of the Equity Growth Fund. Mr. D'Auria was previously the principal analyst for the Equity Growth Fund; Senior Securities Analyst for Midlantic Bank from 1992 to 1994; Securities Analyst for Dreman Value Management from 1986 to 1992. 46 Walter Rogers has served as the Global Utility Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to- day management. He has served as Vice President of MLAM since 1987. Aldona Schwartz has served as the High Current Income Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to- day management. She has served as Vice President of MLAM since 1991 and employee of the Investment Adviser since 1986. Andrew Bascand has served as the International Equity Focus Fund's Co- Portfolio Manager since July 1993 and became sole Portfolio Manager in March 1997. He is primarily responsible for the Fund's day-to-day management. He has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P. Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior Research Officer of the Bank of England's International Department from 1986 to 1987. Peter Lehman has served as the Natural Resources Focus Fund's Portfolio Manager since January 1994, and is primarily responsible for the Fund's day- to-day management. He has served as Vice President of MLAM since 1994; Senior Fund Analyst for an international fund managed by the Investment Adviser from 1992 to 1994; Director and Senior Portfolio Manager for Prudential Insurance Company of America from 1989 to 1991. Jay Harbeck has served as the Prime Bond Fund's and the Government Bond Fund's Portfolio Manager since July 1992 and May 1994 respectively, and is primarily responsible for the Funds day-to-day management. He has served as Vice President of MLAM since 1986. Jacqueline Rogers has served as the Portfolio Manager of the Domestic Money Market Fund and the Reserve Assets Fund since October 1996, and is primarily responsible for each such Fund's day-to-day management. She has served as Vice President of MLAM since January 1986. Robert Parish has served as the Co-Portfolio Manager of Global Bond Focus Fund (formerly, the World Income Focus Fund) since July 1993 and, together with Sean Casey, is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1991 and was the Vice President and Senior Portfolio Manager for Templeton International from 1987 to 1991. Grace Pineda has served as the Developing Capital Markets Focus Fund's Portfolio Manager since May 1994, and is primarily responsible for the Fund's day-to-day management. She has served as Vice President of MLAM since 1989. Eric Mitofsky has served as the Index 500 Fund's Portfolio Manager since the Fund commenced operations in December 1996. He has served as a Vice President of MLAM since 1992, and was an employee of Merrill Lynch's Equity Trading Group from 1983 to 1992. Sean Casey has served as the Co-Portfolio Manager of the Global Bond Focus Fund (formerly, the World Income Focus Fund) since July 1993 and, together with Robert Parish, is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1995. PORTFOLIO TRANSACTIONS AND BROKERAGE None of the Company's Funds has any obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Board of Directors of the Company, the Investment Adviser is primarily responsible for the Company's portfolio decisions and the placing of the Company's portfolio transactions. In placing orders, it is the policy of each Fund to obtain the most favorable net results, taking into account various factors, including price, dealer spread or commission, if any, size of the transactions and difficulty of execution. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Company will not necessarily be paying the lowest spread or commission available. 47 Under the Investment Company Act of 1940, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Affiliated persons of the Company may serve as its broker in over- the-counter transactions conducted on an agency basis. The Securities and Exchange Commission has issued an order permitting the Company to conduct certain principal transactions with respect to the Domestic Money Market and Reserve Assets Funds with Merrill Lynch Government Securities Inc. and Merrill Lynch Money Markets Inc. in U.S. Government and government agency securities, and certain other money market securities, subject to certain terms and conditions. During the year ended December 31, 1996, the Company engaged in 16 transactions pursuant to such order involving approximately $64.9 million of securities. For the year ended December 31, 1996, the Company paid brokerage commissions of $6,656,814, of which $266,405 was paid to Merrill Lynch. PURCHASE OF SHARES The Company continuously offers shares of Class A Common Stock in each of its Funds to the Insurance Companies at prices equal to the respective per share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly owned subsidiary of the Investment Adviser, acts as the distributor of the shares. Net asset value is determined in the manner set forth below under "Additional Information--Determination of Net Asset Value." The Company and the Distributor reserve the right to suspend the sale of shares of each Fund in response to conditions in the securities markets or otherwise. REDEMPTION OF SHARES The Company is required to redeem all full and fractional shares of the Funds for cash. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. DIVIDENDS, DISTRIBUTIONS AND TAXES It is the Company's intention to distribute substantially all of the net investment income, if any, of each Fund. For dividend purposes, net investment income of each Fund, other than the Domestic Money Market and Reserve Assets Funds, will consist of all payments of dividends or interest received by such Fund less the estimated expenses of such Fund (including fees payable to the Investment Adviser). Net investment income of the Domestic Money Market and Reserve Assets Funds (from the time of the immediate preceding determination thereof) consists of (i) interest accrued and/or discount earned (including both original issue and market discount), (ii) plus or minus all realized and unrealized gains (other than realized long-term capital gains) and losses on its portfolio securities, (iii) less the estimated expenses of the respective Fund (including the fees payable to the Investment Adviser) applicable to that dividend period. Dividends on the Domestic Money Market and Reserve Assets Funds are declared daily and reinvested monthly in additional full and fractional shares of such Fund. Dividends from net investment income of the Prime Bond, High Current Income, Global Bond Focus and Government Bond Funds are declared and reinvested monthly in additional full and fractional shares of the respective Funds at net asset value. Dividends from net investment income of the Global Utility Focus Fund are declared and reinvested quarterly in additional full and fractional shares of the Fund. Dividends from net investment income of the Quality Equity, Equity Growth, Index 500, National Resources Focus, American Balanced, Global Strategy Focus, International Equity Focus, Basic Value Focus and Developing Capital Markets Focus Funds are declared and reinvested at least annually in additional full and fractional shares of the respective Funds. All net realized long-term or short-term capital gains of the Company, if any, other than short-term capital gains of the Domestic Money Market and Reserve Assets Funds, are declared and distributed annually after the close of the Company's fiscal year to the shareholders of the Fund or Funds to which such gains are attributable. Short-term capital gains are taxable as ordinary income. 48 TAX TREATMENT OF THE COMPANY Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Under such provisions, a Fund will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. One of the requirements to qualify for treatment as a regulated investment company under the Code is that a Fund, among other things, derive less than 30% of its gross income in each taxable year from gains (without deduction of losses) from the sale or other disposition of stocks, securities and certain options, futures or forward contracts held for less than three months. This requirement may limit the ability of certain Funds to dispose of certain securities at times when management of the Company might otherwise deem such disposition appropriate or desirable. If a Fund earns original issue discount income in a taxable year which is not represented by correlative cash income, or if a Fund receives property rather than cash in payment of interest, shareholders will be allocated income greater than the amount of cash distributed to them. In addition, the Fund may have to dispose of securities and use the proceeds thereof to make distributions in amounts necessary to satisfy its distribution requirements under the Code. TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS Dividends paid by the Company from its ordinary income and distributions of the Company's net realized capital gains are includable in the respective Insurance Company's gross income. Distributions of the Company's net realized long-term capital gains retain their character as long-term capital gains in the hands of the Insurance Companies if certain requirements are met. The tax treatment of such dividends and distributions depends on the respective Insurance Company's tax status. To the extent that income of the Company represents dividends on common or preferred stock, rather than interest income, its distributions to the Insurance Companies will be eligible for the present 70% dividends received deduction applicable in the case of a life insurance company as provided in the Code. See the Prospectus for the Contracts for a description of the respective Insurance Company's tax status and the charges which may be made to cover any taxes attributable to the Separate Account. Not later than 60 days after the end of each calendar year, the Company will send to the Insurance Companies a written notice required by the Code designating the amount and character of any distributions made during such year. PERFORMANCE DATA From time to time the average annual total return and yield of one or more of the Company's Funds for various specified time periods may be included in advertisements or information furnished by the Insurance Companies to present or prospective Contract owners. Average annual total return and yield are computed in accordance with formulas specified by the Securities and Exchange Commission. In connection with its reorganization on December 6, 1996, the Global Bond Focus Fund (i) acquired substantially all of the assets and assumed substantially all the liabilities of the International Bond Fund, a separate Fund of the Company, (ii) implemented a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (iii) changed its name from the World Income Focus Fund to its current name. For the period from the commencement of the World Income Focus Fund's operations through its reorganization on December 6, 1996, the portfolio of the Fund included debt securities rated below investment grade (i.e., junk bonds). On December 6, 1996, the Government Bond Fund (i) implemented a change in its investment objective so that the Fund may invest in any debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities without regard to remaining maturity and (ii) changed its name from the Intermediate Government Bond Fund to its current name. For the period from the commencement of the Fund's operations through December 6, 1996, the portfolio of the Intermediate Government Bond Fund consisted primarily of intermediate-term debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities with a maximum maturity not to exceed fifteen years. As a result of the foregoing changes in the investment objective of each of the Global Bond Focus 49 Fund and the Government Bond Fund, the performance information set forth herein and in the Statement of Additional Information for the fiscal year ended December 31, 1996 may not be indicative of such Fund's future performance. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield to maturity of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the offering price per share on the last day of the period. The yield for the 30-day period ending December 31, 1996 was 6.23% for the Prime Bond Fund, 9.30% for the High Current Income Fund, 6.42% for the Global Bond Focus Fund and 5.88% for the Government Bond Fund. Total return and yield figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return and yield will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The yield and total return quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease the yield. On occasion, one or more of the Company's Funds may compare its performance to that of the S&P 500 Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service or contained in publications such as Morningstar Publications, Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and Ibbotson Associates. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. ADDITIONAL INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each Fund is determined once daily by the Investment Adviser immediately after the declaration of dividends, if any, and is determined as of fifteen minutes following the close of trading on each day the New York Stock Exchange is open for business. The New York Stock Exchange is open on business days other than national holidays (except for Martin Luther King Day, when it is open) and Good Friday. The net asset value per share of each Fund other than the Domestic Money Market and Reserve Assets Funds is computed by dividing the sum of the value of the securities held by that Fund plus any cash or other assets (including interest and dividends accrued) minus all liabilities (including accrued expenses) by the total number of shares outstanding of that Fund at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment Adviser, are accrued daily. Since the net investment income of the Domestic Money Market and Reserve Assets Funds (including realized and unrealized gains and losses on their portfolio securities) are declared as a dividend each time the net income of the Funds are determined (see "Dividends, Distributions and Taxes"), the net asset value per share of the Funds normally remains at $1.00 per share immediately after each such determination and dividend declaration. Except with respect to securities held by the Domestic Money Market and Reserve Assets Funds having a remaining maturity of 60 days or less, securities held by each Fund will be valued as follows: Portfolio securities 50 that are traded on stock exchanges are valued at the last sale price (regular way) as of the close of business on the day the securities are being valued, or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter ("OTC") market are valued at the last available bid price in the OTC market prior to the time of valuation, provided however that the Index 500 Fund will value its portfolio holdings which trade on the NASDAQ national market system at the last sale price prior to the time of valuation. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the OTC market. When a Portfolio writes an option, the amount of the premium received is recorded on the books as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange- traded options or, in the case of options being traded in the OTC market, the last asked price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. Any assets or liabilities initially expressed in terms of non- U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. Securities held by the Domestic Money Market and Reserve Assets Funds with a remaining maturity of 60 days or less are valued on an amortized cost basis, unless particular circumstances dictate otherwise. The Company has used pricing services, including Merrill Lynch Securities Pricing(TM) Service ("MLSPS"), to value securities held by the High Current Income and Prime Bond Funds and to value bonds held by other of the Company's Funds. The Board of Directors of the Company has examined the methods used by the pricing services in estimating the value of securities held by the Funds and believes that such methods will reasonably and fairly approximate the price at which those securities may be sold and result in a good faith determination of the fair value of such securities; however, there is no assurance that securities can be sold at the prices at which they are valued. During the fiscal year ended December 31, 1996, American Balanced Fund, Global Strategy Focus Fund, Global Utility Focus Fund, High Current Income Fund, Government Bond Fund, Prime Bond Fund and Global Bond Focus Fund paid MLSPS $278, $175, $77, $7,269, $822, $5,884 and $3,020, respectively. ORGANIZATION OF THE COMPANY The Company was incorporated on October 16, 1981, and operations of its Reserve Assets Fund commenced on November 12, 1981. Operations of the Prime Bond, High Current Income, Quality Equity and Equity Growth Funds commenced on April 20, 1982. The Natural Resources Focus Fund and the American Balanced Fund commenced operations on June 1, 1988 and June 1, 1988, respectively. The Domestic Money Market Fund and the Global Strategy Focus Fund commenced operations on February 20 and February 28, 1992, respectively. The Basic Value Focus, Global Bond Focus, Global Utility Focus and International Equity Focus Funds commenced operations on July 1, 1993. The Developing Capital Markets Focus Fund and Government Bond Fund commenced operations on May 2, 1994. The Index 500 Fund commenced operations on December 13, 1996. The authorized capital stock of the Company consists of 3,400,000,000 shares of Class A Common Stock, par value $0.10 per share, and 3,400,000,000 shares of Class B Common Stock, par value $0.10 per share. The shares of Class A and Class B Common Stock are each divided into sixteen classes designated Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch Global Bond Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch Government Bond Fund Common Stock and Merrill Lynch Index 500 Common Stock, respectively. The Company may, from time to time, at the sole discretion of its Board of Directors and without the need to obtain the approval of its shareholders or of Contract Owners, offer and sell shares of one or more of such classes. Each class consists of 100,000,000 Class A shares and 100,000,000 51 Class B shares except for Domestic Money Market Fund Common Stock which consists of 1,300,000,000 Class A shares and 1,300,000,000 Class B shares, Reserve Assets Fund Common Stock which consists of 500,000,000 Class A shares and 500,000,000 Class B shares and Global Bond Focus Fund Common Stock and Global Strategy Focus Fund Common Stock, each of which consists of 200,000,000 Class A shares and 200,000,000 Class B shares. All shares of Common Stock have equal voting rights, except that only shares of the respective classes are entitled to vote on matters concerning only that class. Pursuant to the Investment Company Act of 1940 and the rules and regulations thereunder, certain matters approved by a vote of all shareholders of the Company may not be binding on a class whose shareholders have not approved such matter. Each issued and outstanding share of a class is entitled to one vote and to participate equally in dividends and distributions declared with respect to such class and in net assets of such class upon liquidation or dissolution remaining after satisfaction of outstanding liabilities. The shares of each class, when issued, will be fully paid and nonassessable, have no preference, preemptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any class are entitled to redeem their shares as set forth under "Redemption of Shares." Shares do not have cumulative voting rights and the holders of more than 50% of the shares of the Company voting for the election of directors can elect all of the directors of the Company if they choose to do so and in such event the holders of the remaining shares would not be able to elect any directors. The Company does not intend to hold meetings of shareholders unless under the Investment Company Act of 1940 shareholders are required to act on any of the following matters: (i) election of directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of the selection of independent accountants. The Board of Directors of the Company has authorized the issuance of shares of Class B Common Stock with respect to each of the Company's Funds, with the existing shares of Common Stock of each Fund to be designated Class A Common Stock of such Fund. The Board of Directors have also authorized the Company to enter into a Distribution Plan with Merrill Lynch Funds Distributor, Inc. under which the Company would pay distribution fees in respect of the shares of its Class B Common Stock. No shares of Class B Common Stock have been issued; however, the Company may commence issuing shares of Class B Common Stock later in 1997 pursuant to a separate or amended Prospectus. Family Life purchased $1,000 worth of shares of each of the Natural Resources Focus Fund and the American Balanced Fund on April 29, 1988 and $1,999,000 worth of shares of each such Fund on May 27, 1988. Family Life also provided the initial capitalization for each of the Company's other Funds other than the Funds named below for which MLLIC provided the initial capitalization. MLLIC purchased $100 worth of shares of each of the Domestic Money Market and Global Strategy Focus Funds on February 6, 1992, $2,000,000 worth of shares of the Domestic Money Market Fund on February 20, 1992, $2,000,000 worth of shares of the Global Strategy Focus Fund on February 28, 1992 and $100 worth of shares of each of the Basic Value Focus, Global Bond Focus, Global Utility Focus and International Equity Focus Funds on June 28, 1993. MLLIC purchased, on July 1, 1993, $8,000,000 worth of shares of each of the Global Bond Focus Fund and International Equity Focus Fund and $2,000,000 worth of shares of each of the Basic Value Focus Fund and the Global Utility Focus Fund. MLLIC purchased, on May 2, 1994, $8,000,000 worth of shares of the Developing Capital Markets Focus Fund and, on May 16, 1994, $2,000,000 worth of shares of the Government Bond Fund. On December 13, 1996, MLLIC purchased $10,000,000 worth of shares of the Index 500 Fund. The organizational expenses of each of the Company's Funds are paid by the Investment Adviser. The Investment Adviser is reimbursed by MLLIC for all such expenses over a five- year period. In connection with a reorganization on December 6, 1996 conducted by the Company with respect to certain of its Funds, the Company, with the approval of the affected shareholders of the Funds, caused (i) Global Bond Focus Fund (a) to acquire substantially all of the assets and assume substantially all the liabilities of the International Bond Fund, a separate Fund of the Company, (b) to implement a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (c) to change its name from the World Income Focus Fund to its current name; (ii) the Government Bond Fund (x) to implement a change in its investment objective so that the Fund may invest in any debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities without regard to remaining maturity and (y) to change its name from the Intermediate 52 Government Bond Fund to its current name; and (iii) the Global Strategy Focus Fund to acquire substantially all of the assets and assume substantially all the liabilities of the Flexible Strategy Fund, a separate Fund of the Company. INDEPENDENT AUDITORS Deloitte & Touche llp, 117 Campus Drive, Princeton, New Jersey 08540, has been selected as the independent auditors of the Company. The selection of independent auditors is subject to annual ratification by the Company's shareholders. CUSTODIAN The Bank of New York ("BONY"), 110 Washington Street, New York, New York 10286, acts as Custodian of the Company's assets, except that Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, acts as Custodian for assets of the Company's Developing Capital Markets Focus Fund. TRANSFER AND DIVIDEND DISBURSING AGENT Merrill Lynch Financial Data Services, Inc. ("MLFDS"), which is a wholly owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's Transfer Agent and is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. MLFDS will receive an annual fee of $5,000 per Fund and will be entitled to reimbursement of out-of- pocket expenses. LEGAL COUNSEL Rogers & Wells, New York, New York, is counsel for the Company. REPORTS TO SHAREHOLDERS The fiscal year of the Company ends on December 31 of each year. The Company will send to its shareholders at least semi-annually reports showing the Funds' portfolio securities and other information. An annual report containing financial statements, audited by independent auditors, will be sent to shareholders each year. ADDITIONAL INFORMATION This Prospectus does not contain all of the information included in the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940, with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Statement of Additional Information, dated April 25, 1997, which forms a part of the Registration Statement, is incorporated by reference into this Prospectus. The Statement of Additional Information may be obtained without charge as provided on the cover page of this Prospectus. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the Securities and Exchange Commission in Washington, D.C. 53 APPENDIX A U.S. GOVERNMENT SECURITIES The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in the various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in government agency securities, which are debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Funds may invest in all types of government agency securities currently outstanding or to be issued in the future. DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in depositary institutions money instruments, such as certificates of deposit, including variable rate certificates of deposit, bankers' acceptances, time deposits and bank notes. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks, savings banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market rate. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Often, dealers selling variable rate certificates of deposit to the Funds agree to repurchase such instruments, at the Funds' option, at par on the coupon dates. The dealers' obligations to repurchase these instruments are subject to conditions imposed by the various dealers; such conditions typically are the continued credit standing of the issuer and the existence of reasonably orderly market conditions. The Funds are also able to sell variable rate certificates of deposit in the secondary market. Variable rate certificates of deposit normally carry a higher interest rate than comparable fixed rate certificates of deposit because variable rate certificates of deposit generally have a longer stated maturity than comparable fixed rate certificates of deposit. As a matter of policy, the Domestic Money Market Fund will invest only in these types of instruments issued by U.S. issuers. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. The Reserve Assets Fund (and, for temporary or defensive purposes, the Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, and Developing Capital Markets Focus Fund) may invest in certificates of deposit and bankers' acceptances issued by foreign branches or subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign banks ("Yankeedollar" obligations). The Fund may invest only in Eurodollar obligations which by their terms are general obligations of the U.S. parent bank and meet the other criteria discussed below. Yankeedollar obligations in which the Fund may invest must be issued by U.S. branches or subsidiaries of foreign banks which are subject to state or federal banking regulations in the U.S. and by their terms must be general obligations of the foreign parent. In addition, the Fund will limit its investments in Yankeedollar obligations to obligations issued by banking institutions with more than $1 billion in assets. The Reserve Assets Fund (and, for temporary or defensive purposes, the Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus Fund, Global Utility Focus Fund, International Equity Focus A-1 Fund and Developing Capital Markets Focus Fund) may also invest in U.S. dollar-denominated obligations of foreign depository institutions and their foreign branches and subsidiaries, such as certificates of deposit, bankers' acceptances, time deposits and deposit notes. The obligations of such foreign branches and subsidiaries may be the general obligation of the parent bank or may be limited to the issuing branch or subsidiary by the terms of the specific obligation or by government regulation. Such investments will only be made if determined to be of comparable quality to other investments permissible for the Reserve Assets Fund. The Reserve Assets Fund will not invest more than 25% of its total assets (taken at market value at the time of each investment) in these obligations. Except as otherwise provided above with respect to investment in Yankeedollar and other foreign bank obligations no Fund may invest in any bank money instrument issued by a commercial bank or a savings and loan association unless the bank or association is organized and operating in the United States, has total assets of at least $1 billion and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this limitation shall not prohibit the investment of up to 10% of the total assets of a Fund (taken at market value at the time of each investment) in certificates of deposit issued by banks and savings and loan associations with assets of less than $1 billion if the principal amount of each such certificate of deposit is fully insured by the FDIC. SHORT-TERM DEBT INSTRUMENTS The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in commercial paper (including variable amount master demand notes and insurance company funding agreements), which refers to short-term, unsecured promissory notes issued by corporations, partnerships, trusts and other entities to finance short-term credit needs and by trusts issuing asset-backed commercial paper. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable amount master notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis, in accordance with a stated short-term interest rate benchmark. Because the interest rate of a variable amount master note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Investment Adviser values such a note in accordance with the amortized cost basis described under "Determination of Net Asset Value" in the Statement of Additional Information. The Domestic Money Market Fund and Reserve Assets Fund may also invest in nonconvertible debt securities issued by entities or asset-backed nonconvertible debt securities issued by trusts (e.g., bonds and debentures) with no more than 397 days (13 months) remaining to maturity at date of settlement. Short-term debt securities with a remaining maturity of less than one year tend to become extremely liquid and are traded as money market securities. For a discussion of the ratings requirements of the Funds' portfolio securities, see "Investment Objectives and Policies of the Funds-- Money Market Fund Portfolio Restrictions" and "Investment Objectives and Policies of the Funds--Domestic Money Market Fund" in the Prospectus. The Reserve Assets Fund (and, for temporary or defensive purposes, the Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund) may also invest in U.S. dollar- denominated commercial paper and other short-term obligations issued by foreign entities. Such investments are subject to quality standards similar to those applicable to investments in comparable obligations of domestic issuers. Investments in foreign entities in general involve the same risks as those described in the Statement of Additional Information in connection with investments in Eurodollar, Yankeedollar and foreign bank obligations. 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. If the seller were to default on its obligation to repurchase a security under a repurchase agreement or purchase and sale contract and the market value of the underlying security at such time was less than the Fund had paid to the seller, the Fund would realize a loss. Repurchase agreements maturing in more than seven days will be considered "illiquid securities." The Domestic Money Markets and Reserve Assets Funds will not enter into repurchase agreements maturing in more than 30 days. Reverse Repurchase Agreements. The Domestic Money Market and Reserve Assets Funds may enter into reverse repurchase agreements, which involve the sale of money market securities held by the Funds, with an agreement to repurchase the securities at an agreed upon price, date, and interest payment. The Funds will use the proceeds of the reverse repurchase agreements to purchase other money market securities either maturing, or under an agreement to resell, at a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Funds will utilize reverse repurchase agreements when the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the reverse repurchase transaction. A separate account of the applicable Fund will be established with the Custodian consisting of cash or liquid securities having a market value at all times at least equal in value to the proceeds received on any sale subject to repurchase plus accrued interest. DESCRIPTION OF CORPORATE BOND RATINGS Moody's Investors Service, Inc.: Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate A-3 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. A-4 APPENDIX B Certain Funds of the Company are authorized to use derivative instruments, including indexed and inverse securities, options, and futures, and to purchase and sell foreign exchange, as described below. Such instruments are referred to collectively herein as "Strategic Instruments." INDEXED AND INVERSE SECURITIES The Domestic Money Market Fund, the Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus Fund, the Government Bond Fund, the Index 500 Fund, the International Equity Focus Fund, the Natural Resources Focus Fund, the Prime Bond Fund and the Reserve Assets Fund may invest in securities the potential return of which is based on the change in particular measurements of value or rate (an "index"). As an illustration, a Fund may invest in a debt security that pays interest and returns principal based on the change in the value of an interest rate index (such as the prime rate or federal funds rate), a securities index (such as the S&P 500 or a more narrowly-focused index such as the AMEX Oil & Gas Index) or a basket of securities, or based on the relative changes of two indices. In addition, the Developing Capital Markets Focus Fund, the Global Strategy Focus Fund, the International Equity Focus Fund and the Natural Resources Focus Fund may invest in securities the potential return of which is based inversely on the change in an index. For example, these Funds may invest in securities that pay a higher rate of interest when a particular index decreases and pay a lower rate of interest (or do not fully return principal) when the value of the index increases. If the Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the event of an adverse movement in the relevant index or indices. Certain indexed and inverse securities may have the effect of providing investment leverage because the rate of interest or amount of principal payable increases or decreases at a rate that is a multiple of the changes in the relevant index. As a consequence, the market value of such securities may be substantially more volatile than the market values of other debt securities. The Company believes that indexed and inverse securities may provide portfolio management flexibility that permits Funds to seek enhanced returns, hedge other portfolio positions or vary the degree of portfolio leverage with greater efficiency than would otherwise be possible under certain market conditions. OPTIONS ON SECURITIES AND SECURITIES INDICES Purchasing Options. The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus Fund, the Index 500 Fund, the International Equity Focus Fund and the Natural Resources Focus Fund are each authorized to purchase put options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When a Fund purchases a put option, in consideration for an upfront payment (the "option premium") the Fund acquires a right to sell to another party specified securities owned by the Fund at a specified price (the "exercise price") on or before a specified date (the "expiration date"), in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index declines below a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a put option limits the Fund's risk of loss in the event of a decline in the market value of the portfolio holdings underlying the put option prior to the option's expiration date. If the market value of the portfolio holdings associated with the put option increases rather than decreases, however, the Fund will lose the option premium and will consequently realize a lower return on the portfolio holdings than would have been realized without the purchase of the put. The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Strategy Focus Fund, the Index 500 Fund, the International Equity Focus Fund and the Natural Resources Focus Fund are each authorized to purchase call options on securities it intends to purchase or securities indices the performance of which are substantially correlated with the performance of the types of securities it intends to purchase. When a Fund purchases a call option, in consideration for the option premium the Fund acquires a right to purchase from another party specified securities at the exercise price on or before the expiration date, in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index increases beyond a specified level on or before the expiration date, in the case of an option on a securities index. B-1 The purchase of a call option may protect the Fund from having to pay more for a security as a consequence of increases in the market value for the security during a period when the Fund is contemplating its purchase, in the case of an option on a security, or attempting to identify specific securities in which to invest in a market the Fund believes to be attractive, in the case of an option on an index (an "anticipatory hedge"). In the event the Fund determines not to purchase a security underlying a call option, however, the Fund may lose the entire option premium. Each Fund is also authorized to purchase put or call options in connection with closing out put or call options it has previously sold. Writing Options. The American Balanced Fund, the Basic Value Focus Fund, the Developing Capital Markets Focus Fund, the Equity Growth Fund, the Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus Fund, the Index 500 Fund, the International Equity Focus Fund, the Natural Resources Focus Fund and the Quality Equity Fund are each authorized to write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When a Fund writes a call option, in return for an option premium the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write call options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is less than the exercise price, the Fund will partially offset any decline in the value of the underlying securities through the receipt of the option premium. By writing a call option, however, the Fund limits its ability to sell the underlying securities, and gives up the opportunity to profit from any increase in the value of the underlying securities beyond the exercise price, while the option remains outstanding. The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus Fund, the Index 500 Fund, the International Equity Focus Fund and the Natural Resources Focus Fund each may also write put options on securities or securities indices. When the Fund writes a put option, in return for an option premium the Fund gives another party the right to sell to the Fund a specified security at the exercise price on or before the expiration date, in the case of an option on a security, or agrees to pay to another party an amount based on any decline in a specified securities index below a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write put options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is greater than the exercise price, the Fund will profit by the amount of the option premium. By writing a put option, however, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of the security at the time of exercise as long as the put option is outstanding, in the case of an option on a security, or make a cash payment reflecting any decline in the index, in the case of an option on an index. Accordingly, when the Fund writes a put option it is exposed to a risk of loss in the event the value of the underlying securities falls below the exercise price, which loss potentially may substantially exceed the amount of option premium received by the Fund for writing the put option. The Fund will write a put option on a security or a securities index only if the Fund would be willing to purchase the security at the exercise price for investment purposes (in the case of an option on a security) or is writing the put in connection with trading strategies involving combinations of options--for example, the sale and purchase of options with identical expiration dates on the same security or index but different exercise prices (a technique called a "spread"). Each Fund is also authorized to sell call or put options in connection with closing out call or put options it has previously purchased. Other than with respect to closing transactions, a Fund will only write call or put options that are "covered." A call or put option will be considered covered if the Fund has segregated assets with respect to such option in the manner described in "Risk Factors in Options, Futures, and Currency Instruments" below. A call option will also be considered covered if a Fund owns the securities it would be required to deliver upon exercise of the option (or, in the case of option on a securities index, securities which are substantially correlated B-2 with the performance of such index) or owns a call option, warrant or convertible instrument which is immediately exercisable for, or convertible into, such security. Types of Options. A Fund may engage in transactions in options on securities or securities indices on exchanges and in the over-the-counter ("OTC") markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties' obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater risk of counterparty default. See "Additional Risk Factors of OTC Transactions" below. FUTURES The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus Fund, the Index 500 Fund, the International Equity Focus Fund and the Natural Resources Focus Fund may each engage in transactions in futures and options thereon. Futures are standardized, exchange-traded contracts which obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of a commodity at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral ("margin") equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. The sale of a futures contract limits a Fund's risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract's expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract. The purchase of a futures contract may protect a Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position. A Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying commodity is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). Each Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a "commodity pool" under regulations of the Commodity Futures Trading Commission. FOREIGN EXCHANGE TRANSACTIONS The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus Fund, the International Equity Focus Fund and the Natural Resources Focus Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, "Currency Instruments") for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the US dollar. Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. A Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio B-3 position. A Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. A Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. A Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. The Funds authorized to engage in Currency Instrument transactions may also hedge against the decline in the value of a currency against the US dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized exchange-traded contracts. See "Futures" above. The Funds authorized to engage in Currency Instrument transactions may also hedge against the decline in the value of a currency against the US dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See "Types of Options" above and "Additional Risk Factors of OTC Transactions" below. No Fund will speculate in Currency Instruments. Accordingly, a Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. A Fund may, however, hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the Investment Adviser believes that (i) there is a demonstrable high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged. Risk Factors in Hedging Foreign Currency Risks. While a Fund's use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund's shares, the net asset value of the Fund's shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund's hedging strategies will be ineffective. To the extent that a Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses, and decrease its total return, as the result of its hedging transactions. Furthermore, a Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur. It may not be possible for a Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available (such as certain developing markets) and it is not possible to engage in effective foreign currency hedging. RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS Use of Strategic Instruments for hedging purposes involves the risk of imperfect correlation in movements in the value of the Strategic Instruments and the value of the instruments being hedged. If the value of the Strategic Instruments moves more or less than the value of the hedged instruments a Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments. B-4 Each Fund intends to enter into transactions involving Strategic Instruments only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under "Additional Risk Factors of OTC Transactions." However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Strategic Instrument or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Strategic Instrument without incurring substantial losses, if at all. Certain transactions in Strategic Instruments (e.g., forward foreign exchange transactions, futures transactions, sales of put options) may expose a Fund to potential losses which exceed the amount originally invested by the Fund in such instruments. When a Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund's exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Securities and Exchange Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund's exposure to loss. ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC STRATEGIC INSTRUMENTS Certain Strategic Instruments traded in OTC markets, including indexed securities and OTC options, may be substantially less liquid than other instruments in which a Fund may invest. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. A Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Investment Adviser anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer's quotation may be used. The staff of the Securities and Exchange Commission has taken the position that purchased OTC options and the assets underlying written OTC options are illiquid securities. Each Fund has therefore adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the securities underlying OTC call options currently outstanding which have been sold by the Fund and margin deposits on the Fund's outstanding OTC options exceeds 15% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are deemed to be illiquid or are otherwise not readily marketable. However, if an OTC option is sold by the Fund to a dealer in U.S. government securities recognized as a "primary dealer" by the Federal Reserve Bank of New York and the Fund has the unconditional contractual right to repurchase such OTC option at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying security minus the option's exercise price). Because Strategic Instruments traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin to the extent that a Fund has unrealized gains in such instruments or has deposited collateral with its counterparty, the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. A Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Strategic Instruments traded in OTC markets only with financial institutions which have substantial capital or which have provided the Fund with a third-party guaranty or other credit enhancement. ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS No Fund may use any Strategic Instrument to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly, except that the Natural Resources Focus Fund may acquire securities indexed to a precious metal or other natural resource index. B-5 PROSPECTUS APRIL 25, 1997 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800 ---------------- Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end management investment company which has a wide range of investment objectives among its sixteen separate funds (hereinafter referred to as the "Funds" or individually as a "Fund"). A separate class of common stock ("Common Stock") is issued for each Fund. The Company is offering shares of its Class A Common Stock pursuant to this Prospectus. The shares of the Funds are sold to separate accounts ("Separate Accounts") of certain insurance companies (the "Insurance Companies") to fund benefits under variable annuity contracts ("Variable Annuity Contracts") and/or variable life insurance contracts (together with the Variable Annuity Contracts, the "Contracts") issued by such companies. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. Certain insurance companies are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). The investment objectives of the Funds and certain investment policies, each of whose name is preceded by "Merrill Lynch," are as follows: BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. EQUITY GROWTH FUND. Long-term capital growth by investing primarily in common shares of small companies and of emerging growth companies regardless of size. GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND). High total investment return by investing in a global portfolio of fixed income securities denominated in various currencies, including multinational currency units. GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. INDEX 500 FUND. Investment results that, before expenses, correspond to the aggregate price and yield performance of the Standard & Poor's Composite Stock Price Index (the "S&P Index"). INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation and, secondarily, income, through investment in securities, principally equities, of issuers in countries other than the United States. THE DEVELOPING CAPITAL MARKETS FOCUS FUND MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES." ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. ---------------- MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY BE MADE. ---------------- TABLE OF CONTENTS
PAGE ---- Financial Highlights....................................................... 3 The Insurance Companies.................................................... 9 Investment Objectives and Policies of the Funds............................ 9 Directors.................................................................. 27 Investment Adviser......................................................... 28 Portfolio Transactions and Brokerage....................................... 30 Purchase of Shares......................................................... 30 Redemption of Shares....................................................... 30 Dividends, Distributions and Taxes......................................... 30 Performance Data........................................................... 31 Additional Information..................................................... 32 Appendix A................................................................. A-1 Appendix B................................................................. B-1
2 FINANCIAL HIGHLIGHTS The financial information in the tables below with the exception of the three month period ending March 31, 1997 for the Index 500 Fund, has been audited in conjunction with annual audits of the financial statements of each of the Company's Funds by Deloitte & Touche llp, independent auditors. Financial Statements and the independent auditors' report thereon for the fiscal year ended December 31, 1996 are included in the Statement of Additional Information. The following per share data and ratios with the exception of the three month period ending March 31, 1997 for the Index 500 Fund, have been derived from information provided in the Company's audited financial statements. Further information about the performance of the Company is contained in the Company's most recent annual report to shareholders which may be obtained, without charge, by calling or by writing the Company at the telephone number or address on the front cover of this prospectus.
DEVELOPING CAPITAL MARKETS BASIC VALUE FOCUS FUND FOCUS FUND -------------------------------------------- ------------------------------------ FOR THE FOR THE YEAR FOR THE FOR THE YEAR ENDED PERIOD JULY 1, ENDED PERIOD MAY 2, DECEMBER 31, 1993+ TO DECEMBER 31, 1994+ TO ---------------------------- DECEMBER 31, -------------------- DECEMBER 31, 1996 1995 1994 1993 1996 1995 1994 -------- -------- -------- -------------- -------- -------- ------------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PER- FORMANCE: Net asset value, beginning of year...... $ 13.10 $ 11.10 $ 10.95 $ 10.00 $ 9.32 $ 9.51 $ 10.00 -------- -------- -------- -------- -------- -------- ------- Investment income--net.. .17 .18 .17 .04 .20 .20 .09 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... 2.37 2.49 .08 .91 .76 (.30) (.58) -------- -------- -------- -------- -------- -------- ------- Total from investment operations............. 2.54 2.67 .25 .95 .96 (.10) (.49) -------- -------- -------- -------- -------- -------- ------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income-- net................... (.18) (.19) (.10) -- (.23) (.09) -- Realized gain on investments--net...... (.72) (.48) -- -- -- -- -- -------- -------- -------- -------- -------- -------- ------- Total dividends and distributions.......... (.90) (.67) (.10) -- (.23) (.09) -- -------- -------- -------- -------- -------- -------- ------- Net asset value, end of year................... $ 14.74 $ 13.10 $ 11.10 $ 10.95 $ 10.05 $ 9.32 $ 9.51 ======== ======== ======== ======== ======== ======== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 20.69% 25.49% 2.36% 9.50%# 10.59% (1.08)% (4.90)%# ======== ======== ======== ======== ======== ======== ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .66% .66% .72% .86%* 1.25% 1.25% 1.29%* ======== ======== ======== ======== ======== ======== ======= Expenses................ .66% .66% .72% .86%* 1.31% 1.36% 1.35%* ======== ======== ======== ======== ======== ======== ======= Investment income--net.. 1.37% 1.68% 2.08% 1.69%* 2.42% 2.73% 2.18%* ======== ======== ======== ======== ======== ======== ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $524,930 $306,463 $164,307 $ 47,207 $ 95,599 $ 55,209 $36,676 ======== ======== ======== ======== ======== ======== ======= Portfolio turnover...... 68.41% 74.10% 60.55% 30.86% 87.33% 62.53% 29.79% ======== ======== ======== ======== ======== ======== ======= === Average commission rate paid##................. $ .0549 -- -- -- $ 0.0003### -- -- ======== ======== ======== ======== ======== ======== ======= ===
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. ### The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. 3 FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY GROWTH FUND ------------------------------------------------------------------------------------------ FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988 1987 -------- -------- -------- ------- ------- ------- ------- ------ ------ ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $11.75 $11.47 $ 18.42 -------- -------- -------- ------- ------- ------- ------- ------ ------ ------- Investment income (loss)--net............ .13 .17 .05 (.01) .01 .09 .05 (.07) (.10) (.09) Realized and unrealized gain (loss) on investments--net....... 1.84 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01) -------- -------- -------- ------- ------- ------- ------- ------ ------ ------- Total from investment operations............. 1.97 8.81 (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50 (4.10) -------- -------- -------- ------- ------- ------- ------- ------ ------ ------- Less dividends and distributions: Investment income--net.. (.14) (.09) -- --++ (.07) (.02) -- -- -- (.03) Realized gain on investments--net....... (3.59) -- (.19) -- -- -- -- -- (.22) (2.82) -------- -------- -------- ------- ------- ------- ------- ------ ------ ------- Total dividends and distributions.......... (3.73) (.09) (.19) -- (.07) (.02) -- -- (.22) (2.85) -------- -------- -------- ------- ------- ------- ------- ------ ------ ------- Net asset value, end of year................... $ 26.22 $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $13.70 $11.75 $ 11.47 ======== ======== ======== ======= ======= ======= ======= ====== ====== ======= TOTAL INVESTMENT RETURN:* Based on net asset value per share.............. 8.11% 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55)% 16.60% 4.25% (22.29)% ======== ======== ======== ======= ======= ======= ======= ====== ====== ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .81% .81% .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25% 1.24% ======== ======== ======== ======= ======= ======= ======= ====== ====== ======= Expenses................ .81% .81% .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25% 1.24% ======== ======== ======== ======= ======= ======= ======= ====== ====== ======= Investment income (loss)--net............ .50% .72% .27% (.05)% .04% .51% .14% (.68)% (.56)% (.60)% ======== ======== ======== ======= ======= ======= ======= ====== ====== ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $453,029 $339,921 $170,044 $98,976 $23,167 $11,318 $ 6,851 $6,811 $5,521 $ 6,707 ======== ======== ======== ======= ======= ======= ======= ====== ====== ======= Portfolio turnover...... 80.84% 96.79% 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73% 94.91% ======== ======== ======== ======= ======= ======= ======= ====== ====== ======= Average commission rate paid#.................. $ .0598 -- -- -- -- -- -- -- -- -- ======== ======== ======== ======= ======= ======= ======= ====== ====== =======
- -------- * Total investment returns exclude insurance-related fees and expenses. + Based on average number of shares outstanding during the period. ++ Amount is less than $.01 per share. # For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. 4 FINANCIAL HIGHLIGHTS (CONTINUED)
GLOBAL BOND FOCUS FUND# ---------------------------------------- FOR THE PERIOD FOR THE YEAR ENDED JULY 1, DECEMBER 31, 1993+ TO ------------------------- DECEMBER 31, 1996++ 1995++ 1994 1993 ------- ------- ------- ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year.. $ 9.79 $ 9.17 $ 10.38 $ 10.00 ------- ------- ------- -------- Investment income--net.............. .78 .85 .76 .25 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................. (.03) .61 (1.19) .33 ------- ------- ------- -------- Total from investment operations.... .75 1.46 (.43) .58 ------- ------- ------- -------- Less dividends and distributions: Investment income--net............ (.78) (.84) (.76) (.20) In excess of realized gain on in- vestments--net................... -- -- (.02) -- ------- ------- ------- -------- Total dividends and distributions... (.78) (.84) (.78) (.20) ------- ------- ------- -------- Net asset value, end of year........ $ 9.76 $ 9.79 $ 9.17 $ 10.38 ======= ======= ======= ======== TOTAL INVESTMENT RETURN:** Based on net asset value per share.. 8.02% 16.69% (4.21)% 5.90%## ======= ======= ======= ======== RATIOS TO AVERAGE NET ASSETS: Expenses............................ .69% .68% .75% .94%* ======= ======= ======= ======== Investment income--net.............. 7.95% 8.99% 8.01% 6.20%* ======= ======= ======= ======== SUPPLEMENTAL DATA: Net assets, end of year (in thou- sands)............................. $93,790 $81,845 $75,150 $ 50,737 ======= ======= ======= ======== Portfolio turnover.................. 267.13% 132.57% 117.58% 54.80% ======= ======= ======= ========
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of operations. ++ Based on average shares outstanding during the period. # In connection with its reorganization on December 6, 1996, the Global Bond Focus Fund (i) acquired substantially all of the assets and assumed substantially all the liabilities of the International Bond Fund, a separate Fund of the Company, (ii) implemented a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (iii) changed its name from the World Income Focus Fund to its current name. For the period from the commencement of the Fund's operations through its reorganization on December 6, 1996, the portfolio of the Fund included debt securities rated below investment grade (i.e., junk bonds). As a result, the financial information in the financial highlights table for operations of the Fund prior to its reorganization may not be indicative of its performance following its reorganization. ## Aggregate total investment return. 5 FINANCIAL HIGHLIGHTS (CONTINUED)
GLOBAL UTILITY FOCUS FUND ------------------------------------------------ FOR THE YEAR ENDED DECEMBER 31, FOR THE PERIOD ---------------------------- JULY 1, 1993+ TO 1996 1995 1994 DECEMBER 31, 1993 -------- -------- -------- ----------------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 11.30 $ 9.45 $ 10.66 $ 10.00 -------- -------- -------- -------- Investment income--net........ .46 .45 .35 .04 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ .95 1.79 (1.25) .64 -------- -------- -------- -------- Total from investment operations................... 1.41 2.24 (.90) .68 -------- -------- -------- -------- Less dividends and distributions: Investment income--net....... (.52) (.39) (.29) (.02) Realized gain on investments--net............ -- -- -- In excess of realized gain on investments--net............ -- -- (.02) -- -------- -------- -------- -------- Total dividends and distributions................ (.52) (.39) (.31) (.02) -------- -------- -------- -------- Net asset value, end of year.. $ 12.19 $ 11.30 $ 9.45 $ 10.66 ======== ======== ======== ======== TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 12.96% 24.33% (8.51)% 6.85%# ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses...................... .66% .66% .73% .89%* ======== ======== ======== ======== Investment income--net........ 3.90% 4.44% 3.68% 2.84%* ======== ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $142,438 $148,225 $126,243 $104,517 ======== ======== ======== ======== Portfolio turnover............ 11.39% 11.05% 9.52% 1.72% ======== ======== ======== ======== Average commission rate paid##....................... $ .0522 -- -- -- ======== ======== ======== ========
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. 6 FINANCIAL HIGHLIGHTS (CONTINUED)
INDEX 500 FUND ------------------------------------ FOR THE PERIOD JANUARY 1, 1997 TO FOR THE PERIOD MARCH 31, 1997 DEC. 13, 1996+ TO (UNAUDITED) DEC. 31, 1996 ------------------ ----------------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period..... $ 10.17 $ 10.00 ------- ------- Investment income--net................... .05 .02 Realized and unrealized gain on invest- ments--net.............................. .19 .15 ------- ------- Total from investment operations......... .24 .17 ------- ------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income--net.................. (0.02) -- Realized gain on investments--net....... -- # -- ------- ------- Total dividends and distributions........ (0.02) -- ------- ------- Net asset value, end of period........... $ 10.39 $ 10.17 ======= ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share....... 2.37%++ 1.70%++ ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........... .08%* .00%* ======= ======= Expenses................................. .39%* .60%* ======= ======= Investment income--net................... 2.96%* 3.08%* ======= ======= SUPPLEMENTAL DATA: Net asset, end of period (in thousands).. $98,751 $10,752 ======= ======= Portfolio turnover....................... .15% .04% ======= ======= Average commission rate paid............. $ .0161 $ .0120 ======= =======
- -------- *Annualized **Total investment returns exclude insurance-related fees and expenses. +Commencement of Operations. ++Aggregate total investment return. #Amount is less than $.01 per share. 7 FINANCIAL HIGHLIGHTS (CONCLUDED)
INTERNATIONAL EQUITY FOCUS FUND ------------------------------------------ FOR THE PERIOD FOR THE YEAR ENDED JULY 1, DECEMBER 31, 1993+ TO ---------------------------- DECEMBER 31, 1996++ 1995 1994 1993 -------- -------- -------- ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year.. $ 11.06 $ 10.90 $ 11.03 $ 10.00 -------- -------- -------- ------- Investment income--net.............. .23 .20 .19 .01 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................. .49 .37 (.13) 1.02 -------- -------- -------- ------- Total from investment operations.... .72 .57 .06 1.03 -------- -------- -------- ------- Less dividends and distributions: Investment income--net............ (.15) (.01) (.18) -- Realized gain on investments-- net.............................. -- (.17) (.01) -- In excess of realized gain on investments--net................. -- (.23) -- -- -------- -------- -------- ------- Total dividends and distributions... (.15) (.41) (.19) -- -------- -------- -------- ------- Net asset value, end of year........ $ 11.63 $ 11.06 $ 10.90 $ 11.03 ======== ======== ======== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share.. 6.62% 5.48% .55% 10.30%# ======== ======== ======== ======= RATIOS TO AVERAGE NET ASSETS: Expenses............................ .89% .89% .97% 1.14%* ======== ======== ======== ======= Investment income net............... 1.96% 1.95% 1.09% .30%* ======== ======== ======== ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......................... $349,080 $265,602 $247,884 $76,906 ======== ======== ======== ======= Portfolio turnover.................. 49.87% 100.02% 58.84% 17.39% ======== ======== ======== ======= Average commission rate paid##...... $ .0004 -- -- -- ======== ======== ======== =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Based on average shares outstanding during the period. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. 8 THE INSURANCE COMPANIES The Company was organized to fund benefits under variable annuity and variable life Contracts issued by the Insurance Companies. Through this Prospectus, the Company is offering shares in seven Funds to certain separate accounts (the "Separate Accounts") to fund benefits under Variable Life Contracts. Those seven Funds are: the Basic Value Focus Fund, Global Bond Focus Fund, Global Utility Focus Fund, Index 500 Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and the Equity Growth Fund. Through a separate Prospectus, the Company offers shares in all of its funds to certain other separate accounts of the Insurance Companies to fund benefits under variable annuity contracts issued by them. The rights of the Insurance Companies as shareholders should be distinguished from the rights of a Contract owner, which are set forth in the Contract. A Contract owner has no interest in the shares of a Fund, but only in the Contract. The Contract is described in the Prospectus for each Contract. That Prospectus describes the relationship between increases or decreases in the net asset value of shares of a Fund, and any distributions on such shares, and the benefits provided under a Contract. The Prospectus for the Contracts also describes various fees payable to the Insurance Companies and charges to the Separate Accounts made by the Insurance Companies with respect to the Contracts. Since shares of the Funds will be sold only to the Insurance Companies for the Separate Accounts, the terms "shareholder" and "shareholders" in this Prospectus refer to the Insurance Companies. MLLIC and ML of New York are wholly owned subsidiaries of ML&Co., as is the Investment Adviser. INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS INVESTMENT OBJECTIVES Each Fund of the Company has a different investment objective, which it pursues through separate investment policies as described below. The differences in objectives and policies among the Funds can be expected to affect the return of each Fund and the degree of market and financial risk to which each Fund is subject. Each Fund is classified as "diversified," as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act" or the "Act") except for the Global Bond Focus Fund, the Index 500 Fund and the Developing Capital Markets Focus Fund, each of which is classified as "non-diversified." The investment objectives and classification of each Fund may not be changed without the approval of the holders of a majority of the outstanding shares of each Fund affected. The investment objectives and policies of each Fund are discussed below. There can be no assurance that any Fund will achieve its investment objective. Fixed Income Security Ratings. No Fund other than the International Equity Focus Fund and Developing Capital Markets Focus Fund invests in fixed-income securities which are rated below investment grade (i.e., securities rated Ba or below by Moody's Investors Service, Inc. ("Moody's") or BB or below by Standard & Poor's Rating Group ("Standard & Poor's"). However, securities purchased by a Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgement of the Investment Adviser, it is advantageous to do so. Securities in the lowest category of investment grade debt securities may have speculative characteristics which may lead to weakened capacity to pay interest and principal during periods of adverse economic conditions. See Appendix A for a fuller description of corporate bond ratings. BASIC VALUE FOCUS FUND The investment objective of the Basic Value Focus Fund is to seek capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. There can be no assurance that the Fund's investment objectives will be achieved. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above average dividend return and sell at a below- average price-earnings ratio. The investment policy of the Basic Value Focus Fund is based on the belief that the pricing mechanism of the securities market lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and depress prices of securities in unfavorable climates. Based on this premise, management believes 9 that favorable changes in market prices are more likely to begin when securities are out of favor, earnings are depressed, price-earnings ratios are relatively low, investment expectations are limited, and there is no real general interest in the particular security or industry involved. On the other hand, management believes that negative developments are more likely to occur when investment expectations are generally high, stock prices are advancing or have advanced rapidly, price-earnings ratios have been inflated, and the industry or issue continues to gain new investment acceptance on an accelerated basis. In other words, management believes that market prices of securities with relatively high price-earnings ratios are more susceptible to unexpected adverse developments while securities with relatively low price- earnings ratios are more favorably positioned to benefit from favorable, but generally unanticipated, events. This investment policy departs from traditional philosophy. Management of the Fund believes that the market risk involved in this policy is moderated somewhat by an emphasis on securities with above-average dividend returns. The current institutionally-dominated market tends to ignore, to some extent, the numerous secondary issues whose market capitalizations are below those of the relatively few larger size growth companies. It is expected that the Basic Value Focus Fund's portfolio generally will have significant representation in this secondary segment of the market. The basic orientation of the Fund's investment policies is such that at times a large portion of its common stock holdings may carry less than favorable research ratings from research analysts. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks. The Basic Value Focus Fund also may invest in preferred stocks and non-convertible debt securities rated investment grade and utilize covered call options with respect to portfolio securities as described in Appendix B. It reserves the right as a defensive measure to hold other types of securities, including U.S. Government and Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may invest up to 10% of its total assets, taken at market value at the time of acquisition, in the securities of foreign issuers. GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND) The investment objective of the Global Bond Focus Fund is to seek to provide shareholders a high total investment return by investing in a global portfolio of fixed income securities denominated in various currencies, including multinational currency units. The Fund will, under normal conditions, invest at least 90% of its total assets in such fixed income securities. In pursuing its investment objective, the Fund will allocate its investments among different types of fixed income securities denominated in various currencies based upon the Investment Adviser's analysis of the yield, maturity, potential appreciation and currency considerations affecting such securities. There can be no assurance that the Fund's investment objective will be achieved. Investing on an international basis involves special considerations. See "Other Portfolio Strategies--Foreign Securities." The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The Fund may invest in United States and foreign government and corporate fixed income securities which have a credit rating of A or better by Standard & Poor's or by Moody's or commercial paper rated A-1 by Standard & Poor's or Prime-1 by Moody's or obligations that the Advisor has determined to be of similar creditworthiness. The Fund may purchase fixed income securities issued by United States or foreign corporations or financial institutions, including debt securities of all types and maturities, convertible securities and preferred stocks. The Fund also may purchase securities issued or guaranteed by United States or foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ("governmental entities") or issued or guaranteed by international organizations designated or supported by multiple governmental entities to promote economic reconstruction or development ("supranational entities"). International Investing. The Fund may invest in fixed income securities denominated in any currency or multinational currency unit. An illustration of a multinational currency unit is the European Currency Unit ("ECU") which is a "basket" consisting of specified amounts of the currencies of certain of the twelve member states of the European Community, a Western European economic cooperative association including France, Germany, the Netherlands and the United Kingdom. The specific amounts of currencies comprising the ECU 10 may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. The Investment Adviser does not believe that such adjustments will adversely affect holders of ECU-denominated obligations or the marketability of such securities. European supranational entities (described further below), in particular, issue ECU-denominated obligations. The Fund may invest in securities denominated in the currency of one nation although issued by a governmental entity, corporation or financial institution of another nation. For example, the Fund may invest in a British pound sterling-denominated obligation issued by a United States corporation. Such investments involve credit risks associated with the issuer and currency risks associated with the currency in which the obligation is denominated. See "Other Portfolio Strategies--Foreign Securities." It is anticipated that under current conditions the Fund will invest primarily in marketable securities denominated in the currencies of the United States, Canada, Western European nations, New Zealand and Australia, as well as in ECUs. Further, it is anticipated that such securities will be issued primarily by entities located in such countries and by supranational entities. Under normal conditions, the Fund's investments will be denominated in at least three currencies or multinational currency units. Under certain adverse conditions, the Fund may restrict the financial markets or currencies in which its assets will be invested. The Fund presently intends to invest its assets solely in the United States financial markets or United States dollar- denominated obligations only for temporary defensive purposes. The obligations of foreign governmental entities have various kinds of government support and include obligations issued or guaranteed by foreign governmental entities with taxing power. These obligations may or may not be supported by the full faith and credit of a foreign government. The Fund will invest in foreign government securities of issuers considered stable by the Fund's Investment Adviser. The Investment Adviser does not believe that the credit risk inherent in the obligations of stable foreign governments is significantly greater than that of U.S. Government securities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The government members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. Allocation of Investments. In seeking to meet its investment objective, high current income will only be one of the factors that the Investment Adviser will consider in selecting portfolio securities for the Global Bond Focus Fund. As a general matter, in evaluating investments for the Fund, the Investment Advisor will consider, among other factors, the relative levels of interest rates prevailing in various countries, the potential appreciation of such investments in their denominated currencies and, for debt instruments not denominated in U.S. dollars, the potential movement in the value of such currencies compared to the U.S. dollar. Additionally, the Fund, in seeking capital appreciation, may invest in relatively low yielding instruments in expectation of favorable currency fluctuations or interest rate movements, thereby potentially reducing the Fund's current yield. In seeking income, the Fund may invest in short term instruments with relatively high yields (as compared to other debt securities) meeting the Fund's investment criteria, notwithstanding that the Fund may not anticipate that such instruments will experience substantial capital appreciation. The average maturity of the Global Bond Focus Fund's portfolio securities will vary based upon the Investment Adviser's assessment of economic and market conditions. As with all fixed income securities, changes in market yields will affect the Fund's asset value as the prices of portfolio securities generally increase when interest rates decline and decrease when interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. The Fund does not expect the average maturity of its portfolio to exceed ten years. The value of the Global Bond Focus Fund's holdings denominated in currencies other than the U.S. Dollar will also be affected by changes in the value of such currencies relative to the U.S. dollar. Such currency fluctuations may have a substantial impact on the value of the Fund's holdings. The Fund may seek to limit the 11 effect of currency fluctuations on the value of portfolio holdings through currency hedging but there is no guarantee that such efforts, if undertaken, will be successful. See Appendix B. GLOBAL UTILITY FOCUS FUND The investment objective of the Global Utility Focus Fund is to seek both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk, as described in Appendix B. Investing on an international basis involves special considerations. See "Other Portfolio Strategies--Foreign Securities." The Global Utility Focus Fund at all times, except during temporary defensive periods, will maintain at least 65% of its total assets invested in equity and debt securities issued by domestic and foreign companies in the utilities industries. The Fund reserves the right to hold, as a temporary defensive measure or as a reserve for redemptions, short-term U.S. Government securities, money market securities, including repurchase agreements, or cash in such proportions as, in the opinion of the Investment Adviser, prevailing market or economic conditions warrant. Except during temporary defensive periods, such securities or cash will not exceed 20% of its total assets. Under normal circumstances, the Fund will invest at least 65% of its total assets in issuers domiciled in at least three countries, one of which may be the United States, although the Investment Adviser expects the Fund's portfolio to be more geographically diversified. Under normal conditions, it is anticipated that the percentage of assets invested in U.S. securities will be higher than that invested in securities of any other single country. It is possible that at times the Fund may have 65% or more of its total assets invested in foreign securities. The Fund will invest in common stocks (including preferred or debt securities convertible into common stocks), preferred stocks and debt securities. The relative weightings among common stocks, debt securities and preferred stocks will vary from time to time based upon the Investment Adviser's judgement of the extent to which investments in each category will contribute to meeting the Fund's investment objective. Fixed income securities in which the Fund will invest generally will be limited to those rated investment grade, that is, rated in one of the four highest rating categories by Standard & Poor's or Moody's (i.e., securities rated at least BBB by Standard & Poor's or Baa by Moody's), or deemed to be of equivalent quality in the judgement of the Investment Adviser. Securities rated Baa by Moody's are described by it as having speculative characteristics and, according to Standard & Poor's, fixed income securities rated BBB normally exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal. The Fund's commercial paper investments at the time of purchase will be rated "A-1" or "A-2" by Standard & Poor's or "Prime-1" or "Prime-2" by Moody's or, if not rated, will be of comparable quality as determined by the Investment Adviser. The Fund may also invest up to 5% of its total assets at the time of purchase in fixed income securities having a minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The Fund may, but need not, dispose of any security if it is subsequently downgraded. For a description of ratings of debt securities, see Appendix A to this Prospectus. The Fund may invest in the securities of foreign issuers in the form of American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designated for use in the United States securities markets, and EDRs, which are issued in bearer form, are designed for use in European securities markets. The Fund may invest in ADRs and EDRs through both sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement, the foreign issuer assumes the obligation to pay some or all of the depository's transaction fees, whereas in an unsponsored arrangement the foreign issuer assumes no obligations and the depository's transaction fees are paid by the ADR or EDR holders. Foreign issuers in respect of whose securities unsponsored ADRs or EDRs have been issued are not 12 necessarily obligated to disclose material information in the markets in which the unsponsored ADRs or EDRs are traded and, therefore, there may not be a correlation between such information and the market value of such securities. A change in prevailing interest rates is likely to affect the Fund's net asset value because prices of debt and equity securities of utility companies tend to increase when interest rates decline and decrease when interest rates rise. Utility Industries--Description and Risks. Under normal circumstances, the Fund will invest at least 65% of its total assets in common stocks (including preferred or debt securities convertible into common stocks), debt securities and preferred stocks of domestic and/or foreign companies in the utility industries. To meet its objective of current income, the Fund may invest in domestic utility companies that pay higher than average dividends, but have a lesser potential for capital appreciation. The average dividend yields of common stocks issued by domestic utility companies historically have significantly exceeded those of industrial companies' common stocks, while the prices of domestic utility stocks have tended to be less volatile than stocks of industrial companies. The Investment Adviser believes that the average dividend yields of common stocks issued by foreign utility companies have also historically exceeded those of foreign industrial companies' common stocks. To meet its objective of capital appreciation, the Fund may invest in foreign utility companies which pay lower than average dividends, but have a greater potential for capital appreciation. The utility companies in which the Fund will invest include companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. Investments in utility industries bear certain risks including difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary period, restrictions on operations and increased cost and delays attributable to environmental considerations and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations which may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasionally reduced availability and high costs of natural gas for resale, the effects of energy conservation, the effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences between the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on common stocks. Additionally, existing and possible future regulatory legislation may make it even more difficult for these utilities to obtain adequate relief. Certain of the issuers of securities in the portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies, and impose additional requirements governing the licensing, construction and operation of nuclear power plants. Utility companies in the United States and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future. The nature of regulation of the utility industries is evolving both in the United States and in foreign countries. Changes in regulation in the United States increasingly allow utility companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of competition within the industries. In some instances, utility companies are operating on an unregulated basis. Because of trends toward 13 deregulation and the evolution of independent power producers as well as new entrants to the field of telecommunications, non-regulated providers of utility services have become a significant part of their respective industries. The Investment Adviser believes that the emergence of competition and deregulation will result in certain utility companies being able to earn more than their traditional regulated rates of return, while others may be forced to defend their core businesses from increased competition and may be less profitable. The Investment Adviser seeks to take advantage of favorable investment opportunities that are expected to arise from these structural changes. Of course, there can be no assurance that favorable developments will occur in the future. Foreign utility companies are also subject to regulation, although such regulations may or may not be comparable to that in the United States. Foreign utility companies may be more heavily regulated by their respective governments than utilities in the United States and, as in the U.S., generally are required to seek government approval for rate increases. In addition, many foreign utilities use fuels that cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different from regulation in the United States. The principal sectors of the global utility industries are discussed below. Electric. The electric utility industry consists of companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. Domestic electric utility companies, in general, recently have been favorably affected by lower fuel and financing costs and the full or near completion of major construction programs. In addition, certain of these companies generate cash flows in excess of current operating expenses and construction expenditures, permitting some degree of diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have historically been subject to the risks associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety regulations and changes in the regulatory climate. As interest rates have declined, many utilities have refinanced high cost debt and in doing so have improved their fixed charges coverage. Regulators, however, have lowered allowed rates of return as interest rates have declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In the United States, the construction and operation of nuclear power facilities is subject to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory Commission and state agencies having comparable jurisdiction. Increased scrutiny might result in higher operating costs and higher capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power plants may be subject to significant costs for disposal of nuclear fuel and for decommissioning of such plants. In October 1993, Standard & Poor's stiffened its debt-ratings formula for the electric utility industry, stating that the industry is in long-term decline. In addition, Moody's stated that it expected a drop in the next three years in its average credit ratings for the industry. Reasons set forth for these outlooks included slowing demand and increasing cost pressures as a result of competition from rival providers. Telecommunications. The telephone industry is large and highly concentrated. Companies that distribute telephone services and provide access to the telephone networks comprise the greatest portion of this segment. Telephone companies in the United States are still experiencing the effects of the breakup of American Telephone & Telegraph Company, which occurred in 1984. Since 1984, companies engaged in telephone communication services have expanded their non-regulated activities into other businesses, including cellular telephone services, data processing, equipment retailing, computer software and hardware services, and financial services. This expansion has provided significant opportunities for certain telephone companies to increase their earnings and dividends at faster rates than had been allowed in traditional regulated businesses. Increasing competition, technological innovations and other structural changes, however, could adversely affect the profitability of such utilities. Technological breakthroughs and the merger of telecommunications with video and 14 entertainment is now associated with the expansion of the role of cable companies as providers of utility services in the telecommunications industry and the competitive response of traditional telephone companies. Given mergers and certain marketing tests currently underway, it is likely that both traditional telephone companies and cable companies will soon provide a greatly expanded range of utility services, including two-way video and informational services. Gas. Gas transmission companies and gas distribution companies are also undergoing significant changes. In the United States, interstate transmission companies are regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and development, making returns more sensitive to energy prices. In the recent decades, gas utility companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. Water. Water supply utilities are companies that collect, purify, distribute and sell water. In the United States and around the world, the industry is highly fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little or no per capita volume growth. Investment Outside the Utility Industries. The Global Utility Focus Fund is permitted to invest up to 35% of its assets in securities of issuers that are outside the utility industries. Such investments may include common stocks, debt securities or preferred stocks and will be selected to meet the Fund's investment objective of both capital appreciation and current income. These securities may be issued by either U.S. or non-U.S. companies. Some of these issuers may be in industries related to utility industries and, therefore, may be subject to similar risks. Securities that are issued by foreign companies or are denominated in foreign currencies are subject to certain risks. See "Other Portfolio Strategies--Foreign Securities." The Global Utility Focus Fund is also permitted to invest in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and in securities issued or guaranteed by foreign governments. Foreign government securities are typically denominated in foreign currencies and are subject to the currency fluctuation and other risks of foreign securities investments. The foreign government securities in which the Fund intends to invest generally will consist of obligations supported by national, state or local governments or similar political subdivisions. Foreign government securities also include debt obligations of supranational entities, including international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Investment Bank, the Asian Development Bank and the Inter-American Development Bank. Foreign government securities also include debt securities of "quasi- governmental agencies" and debt securities denominated in multinational currency units. An example of a multinational currency unit is the European Currency Unit. A European Currency Unit represents specified amounts of the currencies of certain of the twelve member states of the European Economic Community. Debt securities of quasi-governmental agencies are issued by entities owned by either a national or local government or are obligations of a political unit that is not backed by the national government's full faith and credit and general taxing powers. Foreign government securities will not be considered government securities for purposes of determining the Fund's compliance with diversification and concentration policies. INTERNATIONAL EQUITY FOCUS FUND The investment objective of the International Equity Focus Fund is to seek capital appreciation and, secondarily, income by investing in a diversified portfolio of equity securities of issuers located in countries other than the United States. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities and at least 65% of the Fund's total assets will be invested in the securities of issuers from at least three different foreign countries. The investment objective of the Fund is a fundamental policy and may not 15 be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. See Appendix B. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See "Other Portfolio Strategies--Foreign Securities." The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The International Equity Focus Fund will invest in an international portfolio of securities of foreign companies located throughout the world. While there are no prescribed limits on the geographic allocation of the Fund's investments, management of the Fund anticipates that a substantial portion of its assets will be invested in the developed countries of Europe and the Far East. For the reasons stated below, management of the Fund will give special attention to investment opportunities in the developing countries of the world, including, but not limited to Latin America, the Far East and Eastern Europe. It is anticipated that a significant portion of the Fund's assets may be invested in such developing countries. The allocation of the Fund's assets among the various foreign securities markets will be determined by the Investment Adviser based primarily on its assessment of the relative condition and growth potential of the various economies and securities markets, currency and taxation considerations and other pertinent financial, social, national and political factors. Within such allocations, the Investment Adviser will seek to identify equity investments in each market which are expected to provide a total return which equals or exceeds the return of such market as a whole. A significant portion of the Fund's assets may be invested in developing countries. This allocation of the Fund's assets reflects the belief that attractive investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain developing countries with smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called "emerging" countries (such as Malaysia, Mexico and Thailand), which may be in the process of developing more market-oriented economies, may experience relatively high rates of economic growth. Because of the general illiquidity of the capital markets in certain developing countries, the Fund may invest in a relatively small number of leading or relatively actively traded companies in the capital markets of such a country in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of that country's capital markets as a whole. While the Fund will primarily emphasize investments in common stock, the Fund may also invest in preferred stocks, convertible debt securities and other instruments the return on which is linked to the performance of a common stock or a basket or index of common stocks (collectively, "equity securities"). The Fund may also invest in non-equity securities, including debt securities, cash or cash equivalents denominated in U.S. dollars or foreign currencies and short-term securities, including money market instruments. Under certain adverse investment conditions, for defensive purposes, the Fund may restrict the markets in which its assets will be invested and may increase the proportion of assets invested in short-term obligations of U.S. issuers. Investments made for defensive purposes will be maintained only during periods in which the Investment Adviser determines that economic or financial conditions are adverse for holding or being fully, invested in equity securities of foreign issuers. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts, typically issued by an American bank or trust company, that evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar ownership arrangement. Generally, ADRs, in registered form, are 16 designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradeable both in the U.S. and Europe and are designed for use throughout the world. The Fund also may invest up to 35% of its net assets in longer-term, non- convertible debt securities emphasizing debt securities which offer the opportunity for capital appreciation. Capital appreciation in debt securities may arise as a result of a favorable change in relative foreign exchange rates, in relative interest rate levels, or in the creditworthiness of issuers. In accordance with its investment objective, the Fund will not seek to benefit from anticipated short-term fluctuations in currency exchange rates. The Fund may, from time to time, invest in debt securities with relatively high yields (as compared to other debt securities meeting the Fund's investment criteria), notwithstanding that the Fund may not anticipate that such securities will experience substantial capital appreciation. Such income can be used, however, to offset the operating expenses of the Fund. The Fund may invest in debt securities issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ("governmental entities"), issued or guaranteed by international organizations designated or supported by multiple foreign governmental entities (which are not obligations of foreign governments) to promote economic reconstruction or development ("supranational entities"), or issued by foreign corporations or financial institutions. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. The Fund has established no rating criteria for the debt securities in which it may invest, and such securities may not be rated at all for creditworthiness. Securities rated in the medium to lower rating categories of nationally recognized statistical rating organizations and unrated securities of comparable quality are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser's judgement, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. See "Other Portfolio Strategies--Foreign Securities" and "Risk of High Yield Securities" below. DEVELOPING CAPITAL MARKETS FOCUS FUND The investment objective of the Developing Capital Markets Focus Fund is to seek long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. See Appendix B. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See "Other Portfolio Strategies--Foreign Securities." The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. For purposes of its investment objective, the Fund considers countries having smaller capital markets to be all countries other than the four countries having the largest equity market capitalizations. Currently, these four 17 countries are Japan, the United Kingdom, the United States and Germany. At September 30, 1996, those countries' equity market capitalizations totalled approximately 69.84% of the world's equity market capitalization according to data provided by Morgan Stanley Capital International. The Fund will at all times, except during defensive periods, maintain investments in at least three countries having smaller capital markets. The Fund seeks to benefit from economic and other developments in smaller capital markets. The investment objective of the Fund reflects the belief that investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain countries having smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called "emerging" countries (such as Malaysia, Mexico and Thailand) which may be in the process of developing more market- oriented economies, may experience relatively high rates of economic growth. Other countries (such as France, the Netherlands and Spain), although having relatively mature smaller capital markets, may also be in a position to benefit from local or international developments encouraging greater market orientation and diminishing governmental intervention in economic affairs. Many investors, particularly individuals, lack the information, capability or inclination to invest in countries having smaller capital markets. It also may not be permissible for such investors to invest directly in certain such markets. Unlike many intermediary investment vehicles, such as closed-end investment companies that invest in a single country, the Fund intends to diversify investment risk among the capital markets of a number of countries. The Fund will not necessarily seek to diversify investments on a geographical basis or on the basis of the level of economic development of any particular country. In its investment decision-making, the Investment Adviser will emphasize the allocation of assets among certain countries' capital markets, rather than the selection of particular industries or issuers. Because of the general illiquidity of the capital markets in some countries, the Fund may invest in a relatively small number of leading or actively traded companies in a country's capital markets in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of the country's capital markets as a whole. The Fund also may invest in debt securities of issuers in countries having smaller capital markets. Capital appreciation in debt securities may arise as a result of a favorable change in relative foreign exchange rates, in relative interest rate levels, or in the creditworthiness of issuers. In accordance with its investment objective, the Fund will not seek to benefit from anticipated short-term fluctuations in currency exchange rates. The Fund may, from time to time, invest in debt securities with relatively high yields (as compared to other debt securities meeting the Fund's investment criteria), notwithstanding that the Fund may not anticipate that such securities will experience substantial capital appreciation. See "Risks of High Yield Securities" below. Such income can be used, however, to offset the operating expenses of the Fund. The Fund may invest in debt securities issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ("governmental entities"), issued or guaranteed by international organizations designated or supported by multiple foreign governmental entities (which are not obligations of foreign governments) to promote economic reconstruction or development ("supranational entities"), or issued by foreign corporations or financial institutions. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the World Bank, the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. The Fund has established no rating criteria for the debt securities in which it may invest, and such securities may not be rated at all for creditworthiness. Securities rated in the medium to lower rating categories of 18 nationally recognized statistical rating organizations and unrated securities of comparable quality are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser's judgement, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. See "Other Portfolio Strategies--Foreign Securities" and "Risks of High Yield Securities" below. For purposes of the Fund's investment objective, an issuer ordinarily will be considered to be located in the country where the primary trading market of its securities is located. The Fund, however, may consider a company to be located in countries having smaller capital markets, without reference to its domicile or to the primary trading market of its securities, when at least 50% of its non-current assets, capitalization, gross revenues or profits in any one of the two most recent fiscal years represents (directly or indirectly through subsidiaries) assets or activities located in such countries. The Fund also may consider closed-end investment companies to be located in the country or countries in which they primarily make their portfolio investments. Foreign investments in smaller capital markets involve risks not involved in domestic investment, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. These risks are often heightened for investments in small capital markets. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. In addition, certain foreign investments may be subject to foreign withholding taxes. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. The Fund reserves the right, as a temporary defensive measure or to provide for redemptions or in anticipation of investment in countries having smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term securities, including money market securities. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities convertible into securities of foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose material information in the United States, and therefore, there may not be a correlation between such information and the market value of such ADRs. EQUITY GROWTH FUND The investment objective of the Equity Growth Fund is to seek long-term growth of capital by investing in a diversified portfolio of securities, primarily common stocks, of relatively small companies that management of the Company believes have special investment value, and of emerging growth companies regardless of size. There can be no assurance that the Fund's investment objective will be achieved. Companies are selected by management on the basis of their long-term potential for expanding their size and profitability or for gaining increased market recognition for their securities. Current income is not a factor in the selection of securities. The Fund is intended to provide an opportunity for Contract Owners who are not ordinarily in a position to perform the specialized type of research or analysis of small and emerging growth companies. Management seeks to identify those small emerging growth companies which can show significant and sustained increases in earnings over an extended period of time and are in sound financial condition. Management 19 believes that, while these companies present above-average risks, properly selected companies of this type also have the potential to increase their earnings at a rate substantially in excess of the general growth of the economy. The Fund attempts to achieve its objective by focusing on the long- range view of a company's prospects through a fundamental analysis of its management, financial structure, product development, marketing ability and other relevant factors. Full development of these companies frequently takes time and, for this reason, the Fund should be considered as a long-term investment and not as a vehicle for seeking short-term profits. Small companies. Management seeks small companies that offer special investment value in terms of their product or service, research capability, or other unique attributes, and are relatively undervalued in the marketplace when compared with similar, but larger, enterprises. These companies typically have total market capitalizations in the $50-$300 million range and generally are little known to most individual investors, although some may be dominant in their respective industries. Underlying this strategy is management's belief that relatively small companies will continue to have the opportunity to develop into significant business enterprises. Some such companies may be in a relatively early stage of development; others may manufacture a new product or perform a new service. Such companies may not be counted upon to develop into major industrial companies, but management believes that eventual recognition of their special value characteristics by the investment community can provide above-average long-term growth to the portfolio. Emerging growth companies. In selecting investments for the Equity Growth Fund, management also seeks emerging growth companies that either occupy a dominant position in an emerging industry or subindustry or have a significant and growing market share in a large, fragmented industry. Management believes that capable and flexible management is one of the most important criteria of emerging growth companies and that such companies should employ sound financial and accounting policies and also demonstrate effective research, successful product development and marketing, efficient service and pricing flexibility. Emphasis is given to companies with rapid historical growth rates, above- average returns on equity and strong current balance sheets, all of which should enable the company to finance its continued growth. Management of the Company also analyzes and weighs relevant factors beyond the company itself, such as the level of competition in the industry, the extent of governmental regulation, the nature of labor conditions and other related matters. The Equity Growth Fund emphasizes investments in companies that do most of their business in the United States and therefore are free of the currency exchange problems, foreign tax considerations and potential political and economic upheavals that many multinational corporations face. Moreover, the size and kinds of markets that they serve make these companies less susceptible than larger companies to intervention from the federal government by means of price controls, regulations or litigation. While the process of selection and continuous supervision by management does not, of course, guarantee successful investment results, it does provide ingredients not available to the average individual due to the time and cost involved. Careful initial selection is particularly important in this area as many new enterprises have promise but lack certain of the ingredients necessary to prosper. It should be apparent that an investment in a fund such as the Equity Growth Fund involves greater risk than is customarily associated with more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic market movements than larger, more established companies or the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent upon a limited management group. Because of these factors, management of the Company believes that shares in the Equity Growth Fund are suitable for Contract Owners who are in a financial position to assume above-average investment risk in search of above-average long-term reward. As indicated, the Fund is designed for Contract Owners whose investment objective is growth rather than income. It is definitely not intended for exclusive funding of Contracts but is designed for Contract Owners who are prepared to experience above-average fluctuations in net asset value. The securities in which the Equity Growth Fund invests will often be traded only in the over-the-counter market or on a regional securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by the Fund or portfolio securities to meet 20 redemptions or otherwise may require the Fund to sell these securities at a discount from market prices or during periods when in management's judgement such disposition is not desirable or to make many small sales over a lengthy period of time. The investment emphasis of the Equity Growth Fund is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks and rights to subscribe for common stock, and the Fund will maintain at least 80% of its net assets invested in equity securities of small or emerging growth companies except during defensive periods. The Fund reserves the right as a defensive measure and to provide for redemptions to hold other types of securities, including non-convertible preferred stocks and debt securities, U.S. Government and Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. INDEX 500 FUND The investment objective of the Index 500 Fund is to seek to provide investment results that, before expenses, correspond to the aggregate price and yield performance of the S&P 500 Index. There can be no assurance that the Fund's investment objective can be achieved. The S&P 500 Index is a market-weighted index composed of 500 common stocks issued by companies in a wide range of businesses and which collectively represent a substantial portion of all common stocks publicly traded in the U.S. The composition of the S&P 500 Index is determined by Standard & Poor's, a division of the McGraw-Hill Companies, Inc. Standard & Poor's criteria for selecting common stocks to include in the S&P 500 Index is based on factors such as market capitalization, trading activity and the adequacy of representation of particular industries, and favors U.S.-traded stocks of large companies that are among the most dominant in their industries. The S&P 500 Index is generally considered broadly representative of the performance of large-capitalization publicly traded common stocks in the U.S. The inclusion of a stock in the S&P 500 Index does not imply that Standard & Poor's believes the stock to be an attractive investment. The Index 500 Fund will not attempt to buy or sell securities based on the Investment Adviser's economic, financial or market analysis, but will instead employ a "passive" approach that attempts to remain invested at all times in a portfolio of assets the performance of which is expected to be strongly correlated with that of the S&P 500 Index. The Index 500 Fund may invest in all 500 stocks in the S&P 500 Index in approximately the same proportions as their weightings in the S&P Index, or may invest in a statistically selected sample of the 500 stocks which comprise the S&P 500 Index designed, based on market capitalizations, industry weightings and financial attributes, to have aggregate investment characteristics similar to those of the S&P 500 Index as a whole. The Index 500 Fund may also (i) purchase common stocks not included in the S&P 500 Index as a proxy for certain common stocks included in the S&P 500 Index when the Investment Adviser believes it is an efficient means of replicating the performance of that index to do so, and (ii) invest in options and future contracts linked to the performance of the S&P 500 Index or of common stocks represented in the index. Under normal circumstances, it is expected that the Index 500 Fund will invest at least 90% (65% if the Index 500 Fund's assets are below $20 million) of its assets in common stocks represented in the S&P 500 Index and related options and futures contracts. The Index 500 Fund may invest a substantial portion of its assets in options and futures contracts in order to gain market exposure efficiently in the event of subscriptions, to maintain liquidity in the event of redemptions and to minimize trading costs. The Index 500 Fund may also invest in short-term fixed income instruments as cash reserves. The Index 500 Fund will not invest in short-term fixed income instruments, options or futures contracts for the purpose of implementing a defensive market strategy by lowering the Fund's exposure to common stocks to protect against a potential stock market decline, but instead will attempt to remain fully invested without regard to the Investment Adviser's market analysis. The Fund may, however, hold short-term fixed income instruments for temporary cash management purposes. The foregoing investment techniques are expected to be an effective means of substantially duplicating the aggregate price and yield performance of the S&P Index at such times when the Fund is not fully invested in all 21 500 stocks in the S&P 500 Index in approximately the same proportions as their weightings in that index. To the extent the Index 500 Fund utilizes the foregoing investment techniques, the Fund may not track the S&P 500 Index with the same degree of accuracy as the Fund would if it were fully invested in all 500 stocks in the S&P 500 Index in approximately the same proportions as their weightings in that index. However, the principal advantage of the foregoing investment techniques is to provide an efficient means to invest in the universe of stocks of the S&P 500 Index. The Fund is expected to provide broad diversification, and will seek to operate at low costs due to its "passive" approach to portfolio management and anticipated low portfolio turnover rate. NON-DIVERSIFIED FUNDS The Global Bond Focus, Developing Capital Markets Focus and the Index 500 Funds are classified as non-diversified investment companies under the Investment Company Act. However, each Fund will have to limit its investments to the extent required by the diversification requirements applicable to regulated investment companies under the Internal Revenue Code. To qualify as a regulated investment company, a Fund, at the close of each fiscal quarter, may not have more than 25% of its total assets invested in the securities (except obligations of the U.S. Government, its agencies or instrumentalities) of any one issuer and with respect to 50% of its assets, (i) may not have more than 5% of its total assets invested in the securities of any one issuer and (ii) may not own more than 10% of the outstanding voting securities of any one issuer. INVESTMENT RESTRICTIONS The Company has adopted a number of restrictions and policies relating to the investment of its assets and its activities which are fundamental policies and may not be changed without the approval of the holders of the Company's outstanding voting securities (including a majority of the shares of each Fund). Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. OTHER PORTFOLIO STRATEGIES Restricted Securities. Each of the Funds is subject to limitations on the amount of illiquid securities it may purchase; however, each Fund may purchase without regard to that limitation certain securities that are not registered under the Securities Act of 1933, as amended (the "Securities Act"), including (a) commercial paper exempt from registration under Section 4(2) of the Securities Act, and (b) securities that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities sold under Rule 144A which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Funds' investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Certain indexed and inverse securities may have the effect of providing investment leverage because the rate of interest or amount of principal payable increases or decreases at a rate that is a multiple of the changes in the relevant index. As a consequence, the market value of such securities may be substantially more volatile than the market values of other debt securities. The Company believes that indexed and inverse securities may provide portfolio management flexibility that permits a Fund to seek enhanced returns, hedge other portfolio positions or vary the degree of portfolio leverage with greater efficiency than would otherwise be possible under certain market conditions. Foreign Securities. The Basic Value Focus, Global Bond Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and Equity Growth Funds may invest in securities of foreign issuers. 22 The Index 500 Fund may also invest in securities of foreign issuers to the extent such issuers are included in the S&P 500 Index. Investments in foreign securities, particularly those of non-governmental issuers, involve considerations and risks which are not ordinarily associated with investing in domestic issuers. These considerations and risks include changes in currency rates, currency exchange control regulations, the possibility of expropriation, the unavailability of financial information or the difficulty of interpreting financial information prepared under foreign accounting standards, less liquidity and more volatility in foreign securities markets, the impact of political, social or diplomatic developments, and the difficulty of assessing economic trends in foreign countries. If it should become necessary, a Fund could encounter greater difficulties in invoking legal processes abroad than would be the case in the United States. Transaction costs in foreign securities may be higher. The operating expense ratio of a Fund investing in foreign securities can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial costs, are higher. In addition, net investment income earned by a Fund on a foreign security may be subject to withholding and other taxes imposed by foreign governments which will reduce a Fund's net investment income. The Investment Adviser will consider these and other factors before investing in foreign securities, and will not make such investments unless, in its opinion, such investments will meet the standards and objectives of a particular Fund. No Fund which may invest in foreign securities will concentrate its investments in any particular country. The Global Bond Focus, Global Utility Focus, International Equity Focus and Developing Capital Markets Focus Funds may from time to time be substantially invested in non-dollar- denominated securities of foreign issuers. For a Fund that invests in foreign securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of securities in the portfolio and the unrealized appreciation or depreciation of investments insofar as United States investors are concerned, and a Fund's return on investments in non-dollar-denominated securities may be reduced or enhanced as a result of changes in foreign currency rates during the period in which the Fund holds such investments. Foreign currency exchange rates are determined by forces of supply and demand in the foreign exchange markets. These forces are, in turn, affected by international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. Each of the International Equity Focus Fund and Developing Capital Markets Focus Fund may invest a significant portion of its assets in securities of foreign issuers in smaller capital markets, while each of the other Funds which is permitted to invest in foreign securities may from time to time invest in securities of such foreign issuers. Foreign investments involve risks, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems, the existence or possible imposition of exchange controls, or other foreign or United States governmental laws or restrictions, which are often heightened for investments in smaller capital markets. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. Smaller capital markets, while often growing in trading volume, have substantially less volume than United States markets, and securities in many smaller capital markets are less liquid and their prices may be more volatile than securities of comparable United States companies. Brokerage commissions, custodial services, and other costs relating to investment in smaller capital markets are generally more expensive than in the United States. Such markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, satisfactory custodial services for investment securities may not be available in some countries having smaller capital markets, which may result in a Fund which invests in these markets incurring additional costs and delays in transporting and custodying such securities outside such countries. Delays in settlement could result in temporary periods when assets of such a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement 23 problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. There is generally less government supervision and regulation of exchanges, brokers and issuers in countries having smaller capital markets than there is in the United States. As a result, management of a Fund which invests in foreign securities may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience. Due to its emphasis on securities of issuers located in smaller capital markets, each of the Developing Capital Markets Focus Fund and the International Equity Focus Fund should be considered as a vehicle for diversification and not as a balanced investment program. Certain of the Funds may invest in debt securities issued by foreign governments. Investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging market country's debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. Holders of government debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors. As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. Government obligors in developing and emerging market countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. The issuers of the government debt securities in which a Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements. The Developing Capital Markets Focus and International Equity Focus Funds intend to invest in securities of foreign issuers in smaller capital markets. Some countries with smaller capital markets prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Fund. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms than securities of the company available for purchase by nationals. A number of countries, such as South Korea, Taiwan and Thailand, have authorized the formation of closed-end investment companies to facilitate indirect foreign investment in their capital markets. In accordance with the Investment Company Act, the Developing Capital Markets Focus and International Equity Focus Funds each may invest up to 10% of its total assets in securities of such closed-end investment companies. This restriction on investments in securities of closed-end investment companies may limit opportunities for the Fund to invest indirectly in certain smaller capital markets. Shares of certain closed-end investment companies may at times be 24 acquired only at market prices representing premiums to their net asset values. If a Fund acquires shares in closed-end investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies. A Fund also may seek, at its own cost, to create its own investment entities under the laws of certain countries. In some countries, banks or other financial institutions may constitute a substantial number of the leading companies or the companies with the most actively traded securities. Also, the Investment Company Act restricts a Fund's investments in any equity security of an issuer which, in its most recent fiscal year, derived more than 15% of its revenues from 'securities related activities,' as defined by the rules thereunder. These provisions may also restrict a Fund's investments in certain foreign banks and other financial institutions. Lending of Portfolio Securities. Each Fund of the Company may from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government which, while the loan is outstanding, will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities plus accrued interest. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. Forward Commitments. Each of the Funds may purchase securities on a when- issued basis, and they may purchase or sell such securities for delayed delivery. These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. The value of the security on the delivery date may be more or less than its purchase price. A Fund entering into such transactions will maintain a segregated account with its custodian of cash or liquid, securities in an aggregate amount equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Standby Commitment Agreements. The Global Utility Focus and Developing Capital Markets Focus Funds may from time to time enter into standby commitment agreements. Such agreements commit the respective Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will at all times maintain a segregated account with its custodian of cash or liquid securities an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Portfolio Strategies Involving Indexed and Inverse Securities, Options, Futures and Foreign Exchange Transactions. Certain Funds may use derivative instruments, including indexed and inverse securities, options and futures and purchase and sell foreign exchange. Transactions involving such instruments expose these Funds to certain risks. Each Fund's use of these instruments and the associated risks are described in detail in Appendix B attached to this Prospectus. RISKS OF HIGH YIELD SECURITIES The International Equity Focus Fund and Developing Capital Markets Focus Fund may invest a substantial portion of their assets in high yield, high risk securities or junk bonds, which are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher- rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During recessionary periods, such issuers may 25 not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. While the high yield securities in which the International Equity Focus Fund or Developing Capital Markets Focus Fund may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after a Fund purchases a particular security, in which case a Fund may experience losses and incur costs. In an effort to minimize the risk of issuer default or bankruptcy, the International Equity Focus Fund and Developing Capital Markets Focus Fund each will diversify its holdings among many issuers. However, there can be no assurance that diversification will protect a Fund from widespread defaults brought about by a sustained economic downturn. High yield securities tend to be more volatile than higher-rated fixed-income securities, so that adverse economic events may have a greater impact on their prices and yields than on higher-rated fixed-income securities. Zero coupon bonds and bonds which pay interest and/or principal in additional bonds rather than in cash are especially volatile. Like higher-rated fixed-income securities, junk bonds are generally purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in this market, which may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for such bonds by various dealers. Adverse economic conditions or investor perceptions (whether or not based on economic fundamentals) may impair the liquidity of this market, and may cause the prices the International Equity Focus Fund and Developing Capital Markets Focus Fund receive for their junk bonds to be reduced, or a Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Under such conditions, judgement may play a greater role in valuing certain of each Fund's portfolio securities than in the case of securities trading in a more liquid market. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the net asset value of the International Equity Focus Fund and Developing Capital Markets Focus Fund. In addition, each Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. Sovereign Debt. The junk bonds in which the International Equity Focus Fund and Developing Capital Markets Focus Fund may invest include junk bonds issued by sovereign entities. Investment in such sovereign debt involves a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt. 26 Holders of sovereign debt, including the International Equity Focus Fund and Developing Capital Markets Focus Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies available to a Fund and there can be no assurance a Fund will be able to collect on defaulted sovereign debt in whole or in part. INSURANCE LAW RESTRICTIONS In order for shares of the Company's Funds to remain eligible investments for the Separate Accounts, it may be necessary, from time to time, for a Fund to limit its investments in certain types of securities in accordance with the insurance laws or regulations of the various states in which the Contracts are sold. The New York insurance law requires that investments of each Fund be made with the degree of care of an "ordinarily prudent person." The Investment Adviser believes that compliance with this standard will not have any negative impact on the performance of any of the Funds. OTHER CONSIDERATIONS The Investment Adviser will use its best efforts to assure that each Fund of the Company complies with certain investment limitations of the Internal Revenue Service to assure favorable income tax treatment for the Contracts. It is not expected that such investment limitations will materially affect the ability of any Fund to achieve its investment objective. DIRECTORS The Directors of the Company consist of six individuals, five of whom are not "interested persons" of the Company as defined in the Investment Company Act of 1940. The Directors of the Company are responsible for the overall supervision of the operations of the Company and perform the various duties imposed on the directors of the investment companies by the Investment Company Act of 1940. The Board of Directors elects officers of the Company annually. The Directors of the Company and their principal employment are as follows: Arthur Zeikel*--President of the Investment Adviser and its affiliate, Fund Asset Management, L.P. ("FAM"); President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of ML&Co.; and Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor") Joe Grills--Member of the Committee on Investment of Employee Benefit Assets of the Financial Executives Institute ("CIEBA"); member of CIEBA's Executive Committee; and Member of the Investment Advisory Committee of the State of New York Common Retirement Fund and the Howard Hughes Medical Institute; Director, Duke Management Company, LaSalle Street Fund and Kimco Realty Corporation. Walter Mintz--Special Limited Partner of Cumberland Partners (investment partnership). Robert S. Salomon, Jr.--Principal of STI Management (investment adviser). Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate, consulting and investments). Stephen B. Swensrud--Chairman of Fernwood Associates (financial consultants). - -------- * Interested person, as defined in the Investment Company Act of 1940, of the Company. 27 INVESTMENT ADVISER Merrill Lynch Asset Management L.P. ("MLAM"), an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc., is the investment adviser (the "Investment Adviser") for the Fund. The general partner of the Investment Adviser is Princeton Services, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc. The principal address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset Management, L.P. ("FAM"), acts as the investment adviser for over 130 other registered investment companies. The Investment Adviser also offers portfolio management and portfolio analysis services to individuals and institutions. In the aggregate, as of March 31, 1997, the Investment Adviser and FAM had a total of approximately $247.2 billion in investment company and other portfolio assets under management including assets of certain affiliates. While the Investment Adviser is at all times subject to the direction of the Board of Directors of the Company, the Investment Advisory Agreements provide that the Investment Adviser, subject to review by the Board of Directors, is responsible for the actual management of the Funds and has responsibility for making decisions to buy, sell or hold any particular security. The Investment Adviser provides the portfolio managers for the Funds, who consider information from various sources, make the necessary investment decisions and effect transactions accordingly. The Investment Adviser is also obligated to perform certain administrative and management services for the Company (certain of which it may delegate to third parties) and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreements. The Investment Adviser has access to the full range of the securities and economic research facilities of Merrill Lynch. During the Company's fiscal year ended December 31, 1996, the advisory fees expense incurred by the Company totalled $24,131,430 of which $2,414,605 related to the Basic Value Focus Fund (representing .60% of its average net assets), $518,022 related to the Global Bond Focus Fund (representing .60% of its average net assets), $880,959 related to the Global Utility Focus Fund (representing .60% of its average net assets), $2,358,140 related to the International Equity Focus (representing .75% of its average net assets), $765,718 related to the Developing Capital Markets Focus Fund (representing 1.00% of its average net assets) of which $52,388 was voluntarily waived by MLAM, $3,010,613 related to the Equity Growth Fund (representing .75% of its average net assets) and $1,638 related to the Index 500 Fund (representing .30% of its net assets) all of which was voluntarily waived by MLAM. During the Company's fiscal year ended December 31, 1996, the total operating expenses of the Company's Funds (including the advisory fees paid to the Investment Adviser), before any fee waiver or reimbursement of a portion of such expenses were as follows: $2,657,872 related to the Basic Value Focus Fund (representing .66% of its average net assets), $593,766 related to the Global Bond Focus Fund (representing .69% of its average net assets), $970,696 related to the Global Utility Focus Fund (representing .66% of its average net assets), $2,802,938 related to the International Equity Focus Fund (representing .89% of its average net assets), $1,009,535 related to the Developing Capital Markets Focus Fund (representing 1.33% of its average net assets), $3,240,858 related to the Equity Growth Fund (representing .81% of its average net assets) and $3,289 related to the Index 500 Fund (representing .60% of its average net assets). The Investment Adviser has entered into a sub-advisory agreement (the "Sub- Advisory Agreement") with MLAM U.K., an indirect wholly owned subsidiary of ML & Co., and an affiliate of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing investment advisory services to the Investment Adviser with respect to the Funds in an amount to be determined from time to time by the Investment Adviser and MLAM U.K. but in no event in excess of the amount that the Investment Adviser actually receives for providing services to the Funds pursuant to the Investment Advisory Agreement. The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into two agreements which limit the operating expenses paid by each Fund in a given year to 1.25% of its average daily net assets 28 (the "Reimbursement Agreements"). The reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide that any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. The Investment Adviser has entered into administrative services agreements with certain Insurance Companies, including MLLIC and ML of New York, pursuant to which the Investment Adviser compensates such companies for administrative responsibilities relating to the Company which are performed by such Insurance Companies. CODE OF ETHICS The Board of Directors of the Company has adopted a Code of Ethics under Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment Adviser (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Investment Adviser and, as described below, impose additional, more onerous, restrictions on fund investment personnel. The Codes require that all employees of the Investment Adviser preclear any personal securities investment (with limited exceptions, such as government securities). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Investment Adviser include a ban on acquiring any securities in a "hot" initial public offering and a prohibition from profiting on short- term trading in securities. In addition, no employee may purchase or sell any security which at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Investment Adviser. Furthermore, the Codes provide for trading "blackout periods" which prohibit trading by investment personnel of the Company within periods of trading by the Company in the same (or equivalent) security (15 or 30 days depending upon the transaction). PORTFOLIO MANAGERS The following is information with respect to the Portfolio Managers for each of the Company's Funds. Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since December 1993; Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990. Walter Rogers has served as the Global Utility Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to- day management. He has served as Vice President of MLAM since 1987. Andrew Bascand has served as the International Equity Focus Fund's Co- Portfolio Manager since July 1993 and became sole Portfolio Manager in March 1997. He is primarily responsible for the Fund's day-to-day management. He has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P. Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior Research Officer of the Bank of England's International Department from 1986 to 1987. Grace Pineda has served as the Developing Capital Markets Focus Fund's Portfolio Manager since May 1994, and is primarily responsible for the Fund's day-to-day management. She has served as Vice President of MLAM since 1989. Sean Casey has served as the Co-Portfolio Manager of the Global Bond Focus Fund (formerly, the World Income Focus Fund) since July 1993 and, together with Robert Parish, is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1995. 29 Robert Parish has served as the Portfolio Manager of Global Bond Focus Fund (formerly, the World Income Focus Fund) since July 1993 and, together with Sean Casey, is primarily responsible for the Fund's day-to-day management. He served as Vice President of MLAM since 1991, and was Vice President and Senior Portfolio Manager for Templeton International from 1987 to 1991. Thomas D'Auria has served as the Portfolio Manager of the Equity Growth Fund since March 1997 and will be responsible for the day-to-day management of the Equity Growth Fund. Mr. D'Auria was previously the principal analyst for the Equity Growth Fund. From 1989 to 1995, he served as Manager of International Strategy for Merrill Lynch & Co., Global Securities Research & Economics Group. Eric Mitofsky has served as the Index 500 Fund's Portfolio Manager since the Fund commenced operations on December 13, 1996. He has served as Vice President of MLAM since 1992, and was an employee of Merrill Lynch's Equity Trading Group from 1983 to 1992. PORTFOLIO TRANSACTIONS AND BROKERAGE None of the Company's Funds has any obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Board of Directors of the Company, the Investment Adviser is primarily responsible for the Company's portfolio decisions and the placing of the Company's portfolio transactions. In placing orders, it is the policy of each Fund to obtain the most favorable net results, taking into account various factors, including price, dealer spread or commission, if any, size of the transactions and difficulty of execution. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Company will not necessarily be paying the lowest spread or commission available. Under the Investment Company Act of 1940, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Affiliated persons of the Company may serve as its broker in over- the-counter transactions conducted on an agency basis. During the year ended December 31, 1996, the Company engaged in 16 transactions pursuant to such order involving approximately $64.9 million of securities. For the year ended December 31, 1996, the Company paid brokerage commissions of $6,656,814, of which $266,405 was paid to Merrill Lynch. PURCHASE OF SHARES The Company continuously offers shares of Class A Common Stock in each of its Funds to the Insurance Companies at prices equal to the respective per share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly owned subsidiary of the Investment Adviser, acts as the distributor of the shares. Net asset value is determined in the manner set forth below under "Additional Information--Determination of Net Asset Value." The Company and the Distributor reserve the right to suspend the sale of shares of each Fund in response to conditions in the securities markets or otherwise. REDEMPTION OF SHARES The Company is required to redeem all full and fractional shares of the Funds for cash. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. DIVIDENDS, DISTRIBUTIONS AND TAXES It is the Company's intention to distribute substantially all of the net investment income, if any, of each Fund. For dividend purposes, net investment income of each Fund, other than the Domestic Money Market and 30 Reserve Assets Funds, will consist of all payments of dividends or interest received by such Fund less the estimated expenses of such Fund (including fees payable to the Investment Adviser). Dividends from net investment income of the Global Bond Focus Fund are declared and reinvested monthly in additional full and fractional shares of the respective Funds at net asset value. Dividends from net investment income of the Global Utility Focus Fund are declared and reinvested quarterly in additional full and fractional shares of the Fund. Dividends from net investment income of the International Equity Focus, Basic Value Focus, Developing Capital Markets Focus, Index 500 and Equity Growth Funds are declared and reinvested at least annually in additional full and fractional shares of the respective Funds. All net realized long-term or short-term capital gains of the Company, if any, are declared and distributed annually after the close of the Company's fiscal year to the shareholders of the Fund or Funds to which such gains are attributable. Short-term capital gains are taxable as ordinary income. TAX TREATMENT OF THE COMPANY Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Under such provisions, a Fund will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. One of the requirements to qualify for treatment as a regulated investment company under the Code is that a Fund, among other things, derive less than 30% of its gross income in each taxable year from gains (without deduction of losses) from the sale or other disposition of stocks, securities and certain options, futures or forward contracts held for less than three months. This requirement may limit the ability of certain Funds to dispose of certain securities at times when management of the Company might otherwise deem such disposition appropriate or desirable. If a Fund earns original issue discount income in a taxable year which is not represented by correlative cash income, or if a Fund receives property rather than cash in payment of interest, shareholders will be allocated income greater than the amount of cash distributed to them. In addition, the Fund may have to dispose of securities and use the proceeds thereof to make distributions in amounts necessary to satisfy its distribution requirements under the Code. TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS Dividends paid by the Company from its ordinary income and distributions of the Company's net realized capital gains are includable in the respective Insurance Company's gross income. Distributions of the Company's net realized long-term capital gains retain their character as long-term capital gains in the hands of the Insurance Companies if certain requirements are met. The tax treatment of such dividends and distributions depends on the respective Insurance Company's tax status. To the extent that income of the Company represents dividends on common or preferred stock, rather than interest income, its distributions to the Insurance Companies will be eligible for the present 70% dividends received deduction applicable in the case of a life insurance company as provided in the Code. See the Prospectus for the Contracts for a description of the respective Insurance Company's tax status and the charges which may be made to cover any taxes attributable to the Separate Account. Not later than 60 days after the end of each calendar year, the Company will send to the Insurance Companies a written notice required by the Code designating the amount and character of any distributions made during such year. PERFORMANCE DATA From time to time the average annual total return and yield of one or more of the Company's Funds for various specified time periods may be included in advertisements or information furnished by the Insurance Companies to present or prospective Contract owners. Average annual total return and yield are computed in accordance with formulas specified by the Securities and Exchange Commission. In connection with its reorganization on December 6, 1996, the Global Bond Focus Fund (i) acquired substantially all of the assets and 31 assumed substantially all the liabilities of the International Bond Fund, a separate fund of the Company, (ii) implemented a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (iii) changed its name from the World Income Focus Fund to its current name. For the period from the commencement of the World Income Focus Fund's operations through its reorganization on December 6, 1996, the portfolio of the Fund included debt securities rated below investment grade (i.e., junk bonds). Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield to maturity of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the offering price per share on the last day of the period. The yield for the 30-day period ending December 31, 1996 was 6.42% for the Global Bond Focus Fund. Total return and yield figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return and yield will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The yield and total return quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level, which, if included, would decrease the yield. On occasion, one or more of the Company's Funds may compare its performance to that of the Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service or contained in publications such as Morningstar Publications, Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and Ibbotson Associates. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. ADDITIONAL INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each Fund is determined once daily by the Investment Adviser immediately after the declaration of dividends, if any, and is determined as of fifteen minutes following the close of trading on each day the New York Stock Exchange is open for business. The New York Stock Exchange is open on business days other than national holidays (except for Martin Luther King Day, when it is open) and Good Friday. The net asset value per share of each Fund other than the Domestic Money Market Fund is computed by dividing the sum of the value of the securities held by that Fund plus any cash or other assets (including interest and dividends accrued) minus all liabilities (including accrued expenses) by the total number of shares outstanding of that Fund at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment Adviser, are accrued daily. Securities held by each Fund will be valued as follows: Portfolio securities that are traded on stock exchanges are valued at the last sale price (regular way) as of the close of business on the day the securities are 32 being valued, or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter ("OTC") market are valued at the last available bid price in the OTC market prior to the time of valuation, provided however, that the Index 500 Fund will value its portfolio holdings which trade on the NASDAQ national market system at the last sale price prior to the time of valuation. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. When a Portfolio writes an option, the amount of the premium received is recorded on the books as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options being traded in the OTC market, the last asked price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The Company has used pricing services, including Merrill Lynch Securities Pricing SM Service ("MLSPS"), to value bonds held by certain of the Company's Funds. The Board of Directors of the Company has examined the methods used by the pricing services in estimating the value of securities held by the Funds and believes that such methods will reasonably and fairly approximate the price at which those securities may be sold and result in a good faith determination of the fair value of such securities; however, there is no assurance that securities can be sold at the prices at which they are valued. During the fiscal year ended December 31, 1996, Global Bond Focus Fund and the Global Utility Focus Fund paid MLSPS $3,020 and $77, respectively for such services. ORGANIZATION OF THE COMPANY The Company was incorporated on October 16, 1981. The Equity Growth Fund commenced operations on April 20, 1982. The Basic Value Focus, Global Bond Focus, Global Utility Focus and International Equity Focus Funds commenced operations on July 1, 1993. The Developing Capital Markets Focus Fund commenced operations on May 2, 1994. The authorized capital stock of the Company consists of 3,400,000,000 shares of Class A Common Stock, par value $0.10 per share, and 3,400,000,000 shares of Class B Common Stock, par value $0.10 per share. The shares of Class A and Class B Common Stock are each divided into sixteen classes designated Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch Global Bond Focus Fund, Merrill Lynch Global Utility Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch Government Bond Fund Common Stock and Merrill Lynch Index 500 Common Stock, respectively. The Company may, from time to time, at the sole discretion of its Board of Directors and without the need to obtain the approval of its shareholders or of Contract Owners, offer and sell shares of one or more of such classes. Each class consists of 100,000,000 Class A shares and 100,000,000 Class B shares except for Domestic Money Market Fund Common Stock which consists of 1,300,000,000 Class A shares and 1,300,000,000 Class B shares, Reserve Assets Fund Common Stock which consists of 500,000,000 Class A shares and 500,000,000 Class B shares and Global Bond Focus Fund Common Stock and Global Strategy Focus Fund Common Stock, each of which consists of 200,000,000 Class A shares and 200,000,000 Class B shares. All shares of Common Stock have equal voting rights, except that only shares of the respective classes are entitled to vote on matters concerning only that class. Pursuant to the Investment Company Act of 1940 and the rules and regulations thereunder, certain matters approved by a vote of all shareholders of the Company may not be binding on a class whose shareholders have not approved such matter. Each issued and outstanding share of a class is entitled to one vote and to participate equally in dividends and distributions declared with respect to such class and in net assets of such class upon liquidation or dissolution 33 remaining after satisfaction of outstanding liabilities. The shares of each class, when issued, will be fully paid and nonassessable, have no preference, preemptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any class are entitled to redeem their shares as set forth under "Redemption of Shares." Shares do not have cumulative voting rights and the holders of more than 50% of the shares of the Company voting for the election of directors can elect all of the directors of the Company if they choose to do so and in such event the holders of the remaining shares would not be able to elect any directors. The Company does not intend to hold meetings of shareholders unless under the Investment Company Act of 1940 shareholders are required to act on any of the following matters: (i) election of directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of the selection of independent accountants. The Board of Directors of the Company has authorized the issuance of shares of such Class B Common Stock with respect to each of the Company's Funds, with the existing shares of Common Stock of each Fund to be designated Class A Common Stock of such Fund. The Board of Directors have also authorized the Company to enter into a Distribution Plan with Merrill Lynch Funds Distributor, Inc. under which the Company would pay distribution fees in respect of the shares of its Class B Common Stock. No shares of Class B Common Stock have been issued; however, the Company may commence issuing shares of Class B Common Stock later in 1997 pursuant to a separate or amended Prospectus. MLLIC purchased $100 worth of shares of each of the Basic Value Focus, Global Bond Focus, Global Utility Focus and International Equity Focus Funds on June 28, 1993. MLLIC purchased, on July 1, 1993, $8,000,000 worth of shares of each of the Global Bond Focus Fund and International Equity Focus Fund and $2,000,000 worth of shares of each of the Basic Value Focus Fund and the Global Utility Focus Fund. MLLIC purchased, on May 2, 1994 and $8,000,000 worth of shares of the Developing Capital Markets Focus Fund. On December 13, 1996, MLLIC purchased $10,000,000 worth of shares of the Index 500 Fund. The organizational expenses of each of the Company's Funds are paid by the Investment Adviser. The Investment Adviser is reimbursed by MLLIC for all such expenses over a five-year period. In connection with a reorganization on December 6, 1996 conducted by the Company with respect to certain of its Funds, the Company, with the approval of the affected shareholders of the Funds, caused (i) Global Bond Focus Fund (a) to acquire substantially all of the assets and assume substantially all the liabilities of the International Bond Fund, a separate fund of the Company, (b) to implement a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (c) to change its name from the World Income Focus Fund to its current name. INDEPENDENT AUDITORS Deloitte & Touche, llp, 117 Campus Drive, Princeton, New Jersey 08540, has been selected as the independent auditors of the Company. The selection of independent auditors is subject to annual ratification by the Company's shareholders. CUSTODIAN The Bank of New York ("BONY"), 110 Washington Street, New York, New York 10286, acts as Custodian of the Company's assets, except that Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02102, acts as Custodian for assets of the Company's Developing Capital Markets Focus Fund. TRANSFER AND DIVIDEND DISBURSING AGENT Merrill Lynch Financial Data Services, Inc. ("MLFDS"), which is a wholly owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's Transfer Agent and is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. MLFDS will receive an annual fee of $5,000 per Fund and will be entitled to reimbursement of out-of- pocket expenses. 34 LEGAL COUNSEL Rogers & Wells, New York, New York, is counsel for the Company. REPORTS TO SHAREHOLDERS The fiscal year of the Company ends on December 31 of each year. The Company will send to its shareholders at least semi-annually reports showing the Funds' portfolio securities and other information. An annual report containing financial statements, audited by independent auditors, will be sent to shareholders each year. ADDITIONAL INFORMATION This Prospectus does not contain all of the information included in the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940, with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Statement of Additional Information, dated April 25, 1997, which forms a part of the Registration Statement, is incorporated by reference into this Prospectus. The Statement of Additional Information may be obtained without charge as provided on the cover page of this Prospectus. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the Securities and Exchange Commission in Washington, D.C. 35 APPENDIX A U.S. GOVERNMENT SECURITIES For temporary or defensive purposes, each of the Funds may invest in the various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES For temporary or defensive purposes, each of the Funds may invest in government agency securities, which are debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Funds may invest in all types of government agency securities currently outstanding or to be issued in the future. DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS For temporary or defensive purposes, each of the Funds may invest in depositary institutions money instruments, such as certificates of deposit, including variable rate certificates of deposit, bankers' acceptances, time deposits and bank notes. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks, savings banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market rate. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Often, dealers selling variable rate certificates of deposit to the Funds agree to repurchase such instruments, at the Funds' option, at par on the coupon dates. The dealers' obligations to repurchase these instruments are subject to conditions imposed by the various dealers; such conditions typically are the continued credit standing of the issuer and the existence of reasonably orderly market conditions. The Funds are also able to sell variable rate certificates of deposit in the secondary market. Variable rate certificates of deposit normally carry a higher interest rate than comparable fixed rate certificates of deposit because variable rate certificates of deposit generally have a longer stated maturity than comparable fixed rate certificates of deposit. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. For temporary or defensive purposes, the Global Bond Focus Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund may invest in certificates of deposit and bankers' acceptances issued by foreign branches or subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign banks ("Yankeedollar" obligations). The Fund may invest only in Eurodollar obligations which by their terms are general obligations of the U.S. parent bank and meet the other criteria discussed below. Yankeedollar obligations in which the Fund may invest must be issued by U.S. branches or subsidiaries of foreign banks which are subject to state or federal banking regulations in the U.S. and by their terms must be general obligations of the foreign parent. In addition, the Fund will limit its investments in Yankeedollar obligations to obligations issued by banking institutions with more than $1 billion in assets. For temporary or defensive purposes, the Global Bond Focus Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund may also invest in U.S. dollar-denominated obligations of foreign depository institutions and their foreign branches and subsidiaries, such as certificates of deposit, bankers' acceptances, time deposits and deposit notes. The obligations of such foreign branches and subsidiaries may be the general obligation of the parent bank or may be limited to the issuing branch or subsidiary by the terms of the specific obligation or by government regulation. A-1 Except as otherwise provided above with respect to investment in Yankeedollar and other foreign bank obligations no Fund may invest in any bank money instrument issued by a commercial bank or a savings and loan association unless the bank or association is organized and operating in the United States, has total assets of at least $1 billion and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this limitation shall not prohibit the investment of up to 10% of the total assets of a Fund (taken at market value at the time of each investment) in certificates of deposit issued by banks and savings and loan associations with assets of less than $1 billion if the principal amount of each such certificate of deposit is fully insured by the FDIC. SHORT-TERM DEBT INSTRUMENTS For temporary or defensive purposes, each of the Funds may invest in commercial paper (including variable amount master demand notes and insurance company funding agreements), which refers to short-term, unsecured promissory notes issued by corporations, partnerships, trusts and other entities to finance short-term credit needs and by trusts issuing asset-backed commercial paper. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable amount master notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis, in accordance with a stated short-term interest rate benchmark. Because the interest rate of a variable amount master note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Investment Adviser values such a note in accordance with the amortized cost basis described under "Determination of Net Asset Value" in the Statement of Additional Information. For temporary or defensive purposes, the Global Bond Focus Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund may also invest in U.S. dollar-denominated commercial paper and other short-term obligations issued by foreign entities. Such investments are subject to quality standards similar to those applicable to investments in comparable obligations of domestic issuers. Investments in foreign entities in general involve the same risks as those described in the Statement of Additional Information in connection with investments in Eurodollar, Yankeedollar and foreign bank obligations. REPURCHASE AGREEMENTS Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Under a repurchase agreement, the seller agrees, upon entering into the contract with the Fund, to repurchase a security (typically a security issued or guaranteed by the U.S. government) at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed yield for the Fund insulated from fluctuations in the market value of the underlying security during such period, although, to the extent the repurchase agreement is not denominated in U.S. dollars, the Fund's return may be affected by currency fluctuations. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System, a primary dealer in U.S. government securities or an affiliate thereof. A purchase and sale contract is similar to a repurchase agreement, but purchase and sale contracts, unlike repurchase agreements, allocate interest on the underlying security to the purchaser during the term of the agreement and generally do not require the seller to provide additional securities in the event of a decline in the market value of the purchased security during the term of the agreement. In all instances, the Fund takes possession of the underlying securities when investing in repurchase agreements or purchase and sale contracts. If the seller were to default on its obligation to repurchase a security under a repurchase agreement or purchase and sale contract and the market value of the underlying security at such time was less than the Fund had paid to the seller, the Fund would realize a loss. Repurchase agreements maturing in more than seven days will be considered "illiquid securities." A-2 DESCRIPTION OF CORPORATE BOND RATINGS Moody's Investors Service, Inc.: Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded both during good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other market shortcomings. C--Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Standard & Poor's Corporation: AAA--This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A--Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. A-3 BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. NR--Not rated by the indicated rating agency. Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. A-4 APPENDIX B Certain Funds of the Company are authorized to use derivative instruments, including indexed and inverse securities, options, and futures, and to purchase and sell foreign exchange, as described below. Such instruments are referred to collectively herein as "Strategic Instruments." INDEXED AND INVERSE SECURITIES The Global Bond Focus Fund, the Global Utility Focus Fund, the Index 500 Fund and the International Equity Focus Fund may invest in securities the potential return of which is based on the change in particular measurements of value or rate (an "index"). As an illustration, a Fund may invest in a debt security that pays interest and returns principal based on the change in the value of an interest rate index (such as the prime rate or federal funds rate), a securities index (such as the S&P 500 or a more narrowly-focused index such as the AMEX Oil & Gas Index) or a basket of securities, or based on the relative changes of two indices. In addition, the Developing Capital Markets Focus Fund and the International Equity Focus Fund may invest in securities the potential return of which is based inversely on the change in an index. For example, these Funds may invest in securities that pay a higher rate of interest when a particular index decreases and pay a lower rate of interest (or do not fully return principal) when the value of the index increases. If the Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the event of an adverse movement in the relevant index or indices. Certain indexed and inverse securities may have the effect of providing investment leverage because the rate of interest or amount of principal payable increases or decreases at a rate that is a multiple of the changes in the relevant index. As a consequence, the market value of such securities may be substantially more volatile than the market values of other debt securities. The Company believes that indexed and inverse securities may provide portfolio management flexibility that permits Funds to seek enhanced returns, hedge other portfolio positions or vary the degree of portfolio leverage with greater efficiency than would otherwise be possible under certain market conditions. OPTIONS ON SECURITIES AND SECURITIES INDICES Purchasing Options. The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Utility Focus Fund, the Index 500 Fund and the International Equity Focus Fund are each authorized to purchase put options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When a Fund purchases a put option, in consideration for an upfront payment (the "option premium") the Fund acquires a right to sell to another party specified securities owned by the Fund at a specified price (the "exercise price") on or before a specified date (the "expiration date"), in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index declines below a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a put option limits the Fund's risk of loss in the event of a decline in the market value of the portfolio holdings underlying the put option prior to the option's expiration date. If the market value of the portfolio holdings associated with the put option increases rather than decreases, however, the Fund will lose the option premium and will consequently realize a lower return on the portfolio holdings than would have been realized without the purchase of the put. The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Index 500 Fund and the International Equity Focus Fund are each authorized to purchase call options on securities it intends to purchase or securities indices the performance of which are substantially correlated with the performance of the types of securities it intends to purchase. When a Fund purchases a call option, in consideration for the option premium the Fund acquires a right to purchase from another party specified securities at the exercise price on or before the expiration date, in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index increases beyond a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a call option may protect the Fund from having to pay more for a security as a consequence of increases in the market value for the security during a period when the Fund is contemplating its purchase, in the case of an option on a security, or attempting to identify specific B-1 securities in which to invest in a market the Fund believes to be attractive, in the case of an option on an index (an "anticipatory hedge"). In the event the Fund determines not to purchase a security underlying a call option, however, the Fund may lose the entire option premium. Each Fund is also authorized to purchase put or call options in connection with closing out put or call options it has previously sold. Writing Options. The Basic Value Focus Fund, the Developing Capital Markets Focus Fund, the Equity Growth Fund, the Global Bond Focus Fund, the Global Utility Focus Fund, the Index 500 Fund and the International Equity Focus Fund are each authorized to write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When a Fund writes a call option, in return for an option premium the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write call options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is less than the exercise price, the Fund will partially offset any decline in the value of the underlying securities through the receipt of the option premium. By writing a call option, however, the Fund limits its ability to sell the underlying securities, and gives up the opportunity to profit from any increase in the value of the underlying securities beyond the exercise price, while the option remains outstanding. The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Utility Focus Fund, the Index 500 Fund and the International Equity Focus Fund each may also write put options on securities or securities indices. When the Fund writes a put option, in return for an option premium the Fund gives another party the right to sell to the Fund a specified security at the exercise price on or before the expiration date, in the case of an option on a security, or agrees to pay to another party an amount based on any decline in a specified securities index below a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write put options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is greater than the exercise price, the Fund will profit by the amount of the option premium. By writing a put option, however, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of the security at the time of exercise as long as the put option is outstanding, in the case of an option on a security, or make a cash payment reflecting any decline in the index, in the case of an option on an index. Accordingly, when the Fund writes a put option it is exposed to a risk of loss in the event the value of the underlying securities falls below the exercise price, which loss potentially may substantially exceed the amount of option premium received by the Fund for writing the put option. The Fund will write a put option on a security or a securities index only if the Fund would be willing to purchase the security at the exercise price for investment purposes (in the case of an option on a security) or is writing the put in connection with trading strategies involving combinations of options--for example, the sale and purchase of options with identical expiration dates on the same security or index but different exercise prices (a technique called a "spread"). Each Fund is also authorized to sell call or put options in connection with closing out call or put options it has previously purchased. Other than with respect to closing transactions, a Fund will only write call or put options that are "covered." A call or put option will be considered covered if the Fund has segregated assets with respect to such option in the manner described in "Risk Factors in Options, Futures, and Currency Instruments" below. A call option will also be considered covered if a Fund owns the securities it would be required to deliver upon exercise of the option (or, in the case of option on a securities index, securities which are substantially correlated with the performance of such index) or owns a call option, warrant or convertible instrument which is immediately exercisable for, or convertible into, such security. B-2 Types of Options. A Fund may engage in transactions in options on securities or securities indices on exchanges and in the over-the-counter ("OTC") markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties' obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater risk of counterparty default. See "Additional Risk Factors of OTC Transactions" below. FUTURES The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Utility Focus Fund, the Index 500 Fund and the International Equity Focus Fund may each engage in transactions in futures and options thereon. Futures are standardized, exchange-traded contracts which obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of a commodity at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral ("margin") equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. The sale of a futures contract limits a Fund's risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract's expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract. The purchase of a futures contract may protect a Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position. A Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying commodity is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). Each Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a "commodity pool" under regulations of the Commodity Futures Trading Commission. FOREIGN EXCHANGE TRANSACTIONS The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global Utility Focus Fund and the International Equity Focus Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, "Currency Instruments") for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the US dollar. Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. A Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio position. A Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. A Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a B-3 portfolio position in the near future. A Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. The Funds authorized to engage in Currency Instrument transactions may also hedge against the decline in the value of a currency against the US dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized exchange-traded contracts. See "Futures" above. The Funds authorized to engage in Currency Instrument transactions may also hedge against the decline in the value of a currency against the US dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See "Types of Options" above and "Additional Risk Factors of OTC Transactions" below. No Fund will speculate in Currency Instruments. Accordingly, a Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. A Fund may, however, hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the Investment Adviser believes that (i) there is a demonstrable high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged. Risk Factors in Hedging Foreign Currency Risks. While a Fund's use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund's shares, the net asset value of the Fund's shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund's hedging strategies will be ineffective. To the extent that a Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses, and decrease its total return, as the result of its hedging transactions. Furthermore, a Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur. It may not be possible for a Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available (such as certain developing markets) and it is not possible to engage in effective foreign currency hedging. RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS Use of Strategic Instruments for hedging purposes involves the risk of imperfect correlation in movements in the value of the Strategic Instruments and the value of the instruments being hedged. If the value of the Strategic Instruments moves more or less than the value of the hedged instruments a Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments. Each Fund intends to enter into transactions involving Strategic Instruments only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under "Additional Risk Factors of OTC Transactions." However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Strategic Instrument or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Strategic Instrument without incurring substantial losses, if at all. B-4 Certain transactions in Strategic Instruments (e.g., forward foreign exchange transactions, futures transactions, sales of put options) may expose a Fund to potential losses which exceed the amount originally invested by the Fund in such instruments. When a Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund's exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Securities and Exchange Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund's exposure to loss. ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC STRATEGIC INSTRUMENTS Certain Strategic Instruments traded in OTC markets, including indexed securities and OTC options, may be substantially less liquid than other instruments in which a Fund may invest. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. A Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Investment Adviser anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer's quotation may be used. The staff of the Securities and Exchange Commission has taken the position that purchased OTC options and the assets underlying written OTC options are illiquid securities. Each Fund has therefore adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the securities underlying OTC call options currently outstanding which have been sold by the Fund and margin deposits on the Fund's outstanding OTC options exceeds 15% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are deemed to be illiquid or are otherwise not readily marketable. However, if an OTC option is sold by the Fund to a dealer in U.S. government securities recognized as a "primary dealer" by the Federal Reserve Bank of New York and the Fund has the unconditional contractual right to repurchase such OTC option at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying security minus the option's exercise price). Because Strategic Instruments traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin to the extent that a Fund has unrealized gains in such instruments or has deposited collateral with its counterparty, the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. A Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Strategic Instruments traded in OTC markets only with financial institutions which have substantial capital or which have provided the Fund with a third-party guaranty or other credit enhancement. ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS No Fund may use any Strategic Instrument to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly. B-5 PROSPECTUS APRIL 25, 1997 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800 ---------------- Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end management investment company which has a wide range of investment objectives among its sixteen separate funds (hereinafter referred to as the "Funds" or individually as a "Fund"). A separate class of common stock ("Common Stock") is issued for each Fund. The Company is offering shares of its Class A Common Stock pursuant to this Prospectus. The shares of the Funds are sold to separate accounts ("Separate Accounts") of certain insurance companies (the "Insurance Companies"), including Merrill Lynch Life Insurance Company ("MLLIC") and ML Life Insurance Company of New York ("ML of New York"), to fund benefits under variable annuity contracts ("Variable Annuity Contracts") and/or variable life insurance contracts (together with the Variable Annuity Contracts, the "Contracts") issued by such companies. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. Certain insurance companies are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). The investment objectives of the Funds and certain investment policies, each of whose name is preceded by "Merrill Lynch," are as follows: BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term domestic money market securities. GLOBAL STRATEGY FOCUS FUND. High total investment return by investing primarily in a portfolio of equity and fixed income securities of U.S. and foreign issuers. HIGH CURRENT INCOME FUND. As high a level of current income as is consistent with its investment policies and prudent investment management, and as a secondary objective, capital appreciation when consistent with the foregoing objective. The Fund invests principally in fixed-income securities that are rated in the lower rating categories of the established rating services or in unrated securities of comparable quality. THE DOMESTIC MONEY MARKET FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO. AN INVESTMENT IN THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND INVESTS IN HIGH YIELD BONDS (COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES." ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. ---------------- MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR 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....................................................... 3 The Insurance Companies.................................................... 7 Domestic Money Market Fund Yield Information............................... 7 Investment Objectives and Policies of the Funds............................ 7 Directors.................................................................. 16 Investment Adviser......................................................... 17 Portfolio Transactions and Brokerage....................................... 18 Purchase of Shares......................................................... 19 Redemption of Shares....................................................... 19 Dividends, Distributions and Taxes......................................... 19 Performance Data........................................................... 20 Additional Information..................................................... 21 Appendix A................................................................. A-1 Appendix B................................................................. B-1
2 FINANCIAL HIGHLIGHTS The financial information in the tables below has been audited in conjunction with annual audits of the financial statements of each of the Company's Funds by Deloitte & Touche llp, independent auditors. Financial Statements and the independent auditors' report thereon for the fiscal year ended December 31, 1996 are included in the Statement of Additional Information. The following per share data and ratios have been derived from information provided in the Company's audited financial statements. Further information about the performance of the Company is contained in the Company's most recent annual report to shareholders which may be obtained, without charge, by calling or by writing the Company at the telephone number or address on the front cover of this prospectus.
BASIC VALUE FOCUS FUND ------------------------------------------ --- FOR THE FOR THE YEAR ENDED PERIOD JULY DECEMBER 31, 1, 1993+ TO ---------------------------- DECEMBER 31, 1996 1995 1994 1993 -------- -------- -------- ------------ INCREASE (DECREASE) IN NET AS- SET VALUE: PER SHARE OPERATING PERFOR- MANCE: Net asset value, beginning of period........................ $ 13.10 $ 11.10 $ 10.95 $ 10.00 -------- -------- -------- ------- Investment income--net......... .17 .18 .17 .04 Realized and unrealized gain (loss) on investments--net.... 2.37 2.49 .08 .91 -------- -------- -------- ------- Total from investment opera- tions......................... 2.54 2.67 .25 .95 -------- -------- -------- ------- Less dividends and distribu- tions: Investment income--net........ (.18) (.19) (.10) -- Realized gain on investments-- net.......................... (.72) (.48) -- -- -------- -------- -------- ------- Total dividends and distribu- tions......................... (.90) (.67) (.10) -- -------- -------- -------- ------- Net asset value, end of peri- od............................ $ 14.74 $ 13.10 $ 11.10 $ 10.95 ======== ======== ======== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share......................... 20.69% 25.49% 2.36% 9.50%# ======== ======== ======== ======= RATIOS TO AVERAGE NET ASSETS: Expenses....................... .66% .66% .72% .86%* ======== ======== ======== ======= Investment income--net......... 1.37% 1.68% 2.08% 1.69%* ======== ======== ======== ======= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).................... $524,930 $306,463 $164,307 $47,207 ======== ======== ======== ======= Portfolio turnover............. 68.41% 74.10% 60.55% 30.86% ======== ======== ======== ======= Average commission rate paid##........................ $ .0549 -- -- -- ======== ======== ======== =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. 3 FINANCIAL HIGHLIGHTS (CONTINUED)
DOMESTIC MONEY MARKET FUND ---------------------------------------------------------- FOR THE PERIOD FOR THE YEAR ENDED DECEMBER 31, FEBRUARY 20, 1992+ -------------------------------------- TO DECEMBER 31, 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- ------- Investment income--net.. .0504 .0547 .0386 .0302 .0302 Realized and unrealized gain (loss) on investments--net....... (.0005) .0012 (.0007) .0005 .0013 -------- -------- -------- -------- ------- Total from investment operations............. .0499 .0559 .0379 .0307 .0315 -------- -------- -------- -------- ------- Less dividends and distributions: Investment income-- net................... (.0504) (.0547) (.0386) (.0302) (.0302) Realized gain on in- vestments--net........ (.0001) (.0002) -- (.0005) (.0010) -------- -------- -------- -------- ------- Total dividends and distributions.......... (.0505) (.0549) (.0386) (.0307) (.0312) -------- -------- -------- -------- ------- Net asset value, end of year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 5.13% 5.64% 3.93% 3.10% 3.65%* ======== ======== ======== ======== ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .54% .55% .50% .36% .32%* ======== ======== ======== ======== ======= Expenses................ .54% .55% .57% .63% .88%* ======== ======== ======== ======== ======= Investment income--net, and realized gain (loss) on investments-- net.................... 4.97% 5.50% 4.02% 3.03% 3.48%* ======== ======== ======== ======== ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $274,756 $303,912 $363,199 $170,531 $41,128 ======== ======== ======== ======== =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. 4 FINANCIAL HIGHLIGHTS (CONTINUED)
GLOBAL STRATEGY FOCUS FUND# ----------------------------------------------------- FOR THE PERIOD FEBRUARY 28, FOR THE YEAR ENDED DECEMBER 31, 1992+ TO --------------------------------------- DECEMBER 31, 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------------ INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year....... $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00 -------- -------- -------- -------- ------- Investment income--net... .28 .39 .30 .16 .13 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net..................... 1.33 .82 (.48) 1.96 .13 -------- -------- -------- -------- ------- Total from investment operations.............. 1.61 1.21 (.18) 2.12 .26 -------- -------- -------- -------- ------- Less dividends and distributions: Investment income--net.. (.29) (.39) (.21) (.17) (.04) Realized gain on invest- ments--net............. -- -- (.04) -- -- In excess of realized gain on investments-- net.................... -- --++ (.01) -- -- -------- -------- -------- -------- ------- Total dividends and distributions........... (.29) (.39) (.26) (.17) (.04) -------- -------- -------- -------- ------- Net asset value, end of year.................... $ 13.87 $ 12.55 $ 11.73 $ 12.17 $ 10.22 ======== ======== ======== ======== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share............... 13.17% 10.60% (1.46)% 21.03% 2.62%## ======== ======== ======== ======== ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........... .71% .72% .77% .88% 1.25%* ======== ======== ======== ======== ======= Expenses................. .71% .72% .77% .88% 1.35%* ======== ======== ======== ======== ======= Investment income--net... 2.68% 3.33% 2.85% 2.41% 2.66%* ======== ======== ======== ======== ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands).......... $870,203 $540,242 $515,407 $269,627 $15,527 ======== ======== ======== ======== ======= Portfolio turnover....... 173.44% 27.23% 21.03% 17.07% 14.47% ======== ======== ======== ======== ======= Average commission rate paid###................. $ .0143 -- -- -- -- ======== ======== ======== ======== =======
- -------- * Annualized ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Amount is less than $.01 per share. # On December 6, 1996, the Global Strategy Focus Fund acquired substantially all of the assets and assumed substantially all the liabilities of the Flexible Strategy Fund, a separate Fund of the Company. ## Aggregate total investment return. ### For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transactions. Such conversions may significantly affect the average rate shown. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 5 FINANCIAL HIGHLIGHTS (CONCLUDED)
HIGH CURRENT INCOME FUND ------------------------------------------------------------------------------------------ FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1996+ 1995 1994 1993 1992 1991 1990 1989 1988 1987 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55 $ 11.42 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Investment income--net.. 1.08 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23 Realized and unrealized gain (loss) on investments--net....... .12 .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Total from investment operations............. 1.20 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Less dividends and distributions: Investment income-- net................... (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23) Realized gain on investments--net...... -- -- -- -- -- -- -- -- -- (.08) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Total dividends and distributions.......... (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Net asset value, end of year................... $ 11.39 $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= TOTAL INVESTMENT RETURN:* Based on net asset value per share.............. 11.27% 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87% 3.82% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses................ .54% .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= Investment income--net.. 9.50% 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $414,615 $356,352 $255,719 $163,428 $26,343 $9,649 $8,106 $12,942 $13,960 $13,075 ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= Portfolio turnover...... 48.92% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07% ======== ======== ======== ======== ======= ====== ====== ======= ======= =======
- -------- *Total investment returns exclude insurance-related fees and expenses. +Based on average shares outstanding during the year. 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 four Funds to certain separate accounts (the "Separate Accounts") of certain Insurance Companies to fund benefits under the Contracts. Those four Funds are: the Basic Value Focus Fund, Domestic Money Market Fund, Global Strategy Focus Fund, and High Current Income Fund. Through separate Prospectuses, the Company offers shares in some or all of its funds to certain other Separate Accounts of other Insurance Companies to fund benefits under variable life and variable annuity Contracts issued by them. The right of the Insurance Companies as shareholders should be distinguished from the rights of a Contract owner, which are set forth in the Contract. A Contract owner has no interest in the shares of a Fund, but only in the Contract. The Contract is described in the Prospectus for each Contract. That Prospectus describes the relationship between increases or decreases in the net asset value of shares of a Fund, and any distributions on such shares, and the benefits provided under a Contract. The Prospectus for the Contracts also describes various fees payable to the Insurance Companies and charges to the Separate Accounts made by the Insurance Companies with respect to the Contracts. Because shares of the Funds will be sold only to the Insurance Companies for the Separate Accounts, the terms "shareholder" and "shareholders" in this Prospectus refer to the Insurance Companies. DOMESTIC MONEY MARKET FUND YIELD INFORMATION Set forth below is yield information for the Domestic Money Market Fund for the seven-day period ended December 31, 1996, computed to include and exclude realized and unrealized gains and losses, and information as to the compounded annualized yield, excluding gains and losses, for the same periods. The yield quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease the yield.
DOMESTIC MONEY MARKET FUND -------------- Annualized Yield: Including gains and losses................................. 5.05% Excluding gains and losses................................. 5.05% Compounded Annualized Yield................................. 5.18% Average maturity of portfolio at end of period.............. 73 days
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS INVESTMENT OBJECTIVES Each Fund of the Company has a different investment objective which it pursues through separate investment policies as described below. The differences in objectives and policies among the Funds can be expected to affect the return of each Fund and the degree of market and financial risk to which each Fund is subject. Each Fund is classified as "diversified," as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act" or, the "Act"), except for the Global Strategy Focus Fund, which is classified as "nondiversified." The investment objectives and classification of each Fund may not be changed without the approval of the holders of a majority of the outstanding shares of each Fund affected. The investment objectives and policies of each Fund are discussed below. There can be no assurance that any Fund will achieve its investment objective. Fixed Income Security Ratings. No Fund other than the High Current Income Fund invests in fixed-income securities which are rated below investment grade (i.e., securities rated Ba or below by Moody's Investors Service, Inc. ("Moody's") or BB or below by Standard & Poor's Rating Group ("Standard & Poor's")). However, securities purchased by a Fund may subsequently be downgraded. Such securities may continue to be 7 held and will be sold only if, in the judgement of the Investment Adviser, it is advantageous to do so. Securities in the lowest category of investment grade debt securities may have speculative characteristics which may lead to weakened capacity to pay interest and principal during periods of adverse economic conditions. See Appendix A for a fuller description of corporate bond ratings. BASIC VALUE FOCUS FUND The investment objective of the Basic Value Focus Fund is to seek capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. There can be no assurance that the Fund's investment objectives will be achieved. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above average dividend return and sell at a below- average price-earnings ratio. The investment policy of the Basic Value Focus Fund is based on the belief that the pricing mechanism of the securities market lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and depress prices of securities in unfavorable climates. Based on this premise, management believes that favorable changes in market prices are more likely to begin when securities are out of favor, earnings are depressed, price-earnings ratios are relatively low, investment expectations are limited, and there is no real general interest in the particular security or industry involved. On the other hand, management believes that negative developments are more likely to occur when investment expectations are generally high, stock prices are advancing or have advanced rapidly, price-earnings ratios have been inflated, and the industry or issue continues to gain new investment acceptance on an accelerated basis. In other words, management believes that market prices of securities with relatively high price-earnings ratios are more susceptible to unexpected adverse developments while securities with relatively low price-earnings ratios are more favorably positioned to benefit from favorable, but generally unanticipated, events. This investment policy departs from traditional philosophy. Management of the Fund believes that the market risk involved in this policy is moderated somewhat by an emphasis on securities with above-average dividend returns. The current institutionally-dominated market tends to ignore, to some extent, the numerous secondary issues whose market capitalizations are below those of the relatively few larger size growth companies. It is expected that the Basic Value Focus Fund's portfolio generally will have significant representation in this secondary segment of the market. The basic orientation of the Fund's investment policies is such that at times a large portion of its common stock holdings may carry less than favorable research ratings from research analysts. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks. The Basic Value Focus Fund also may invest in preferred stocks and non-convertible debt securities rated investment grade and utilize covered call options with respect to portfolio securities as described in Appendix B. It reserves the right as a defensive measure to hold other types of securities, including U.S. Government and Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may invest up to 10% of its total assets, taken at market value at the time of acquisition, in the securities of foreign issuers. DOMESTIC MONEY MARKET FUND The investment objectives of the Domestic Money Market Fund are to preserve shareholder capital, to maintain liquidity and to achieve the highest possible current income consistent with the foregoing objectives by investing in short- term domestic money market securities. The Fund will invest in short-term U.S. Government securities, U.S. Government agency securities, domestic depository institution money instruments (including certificates of deposit, bankers' acceptances, time deposits and bank notes), short-term debt securities (such as commercial paper), variable amount master demand notes and insurance company funding agreements, repurchase and reverse repurchase agreements of U.S. issuers and other money market instruments. As a matter of fundamental policy, which may be changed only with the approval of a majority of the Domestic Money Market Fund's outstanding voting securities, as defined in the Investment Company Act, the Fund may not 8 purchase securities of foreign issuers (including Eurodollar or Yankeedollar bank obligations). U.S. Government securities may be purchased on a forward commitment basis. The types of money market securities in which the Domestic Money Market Fund may invest are described more fully in Appendix A to this Prospectus. The Domestic Money Market Fund will be subject to portfolio maturity, quality and diversification restrictions discussed below under "Money Market Fund Portfolio Restrictions." GLOBAL STRATEGY FOCUS FUND The investment objective of the Global Strategy Focus Fund is to seek high total investment return by investing primarily in a portfolio of equity and fixed income securities, including convertible securities, of U.S. and foreign issuers. Total investment return consists of interest, dividends, discount accruals and capital changes, including changes in the value of non-dollar- denominated securities and other assets and liabilities resulting from currency fluctuations. There can be no assurance that the Fund's investment objective will be achieved. Investing on an international basis involves special considerations. See "Other Portfolio Strategies--Foreign Securities." The Global Strategy Focus Fund seeks to achieve its objective by investing in the securities of issuers located in the United States, Canada, Western Europe and the Far East and Latin America. There are no prescribed limits on the geographical allocation of the Fund among these regions. Such allocation will be made primarily on the basis of the anticipated total return from investments in the securities of issuers wherever located, considering such factors as the condition and growth potential of the various economies and securities markets and the issuers domiciled therein, anticipated movements in interest rates in the various capital markets and in the value of foreign currencies relative to the U.S. dollar, tax considerations and economic, social, financial, national and political factors which may affect the climate for investing within such securities markets. When, in the judgement of the Investment Adviser, economic or market conditions warrant, the Fund reserves the right to concentrate its investments in one or more capital markets, including the United States. For additional information, concerning the risks of investing in foreign securities, see "Other Portfolio Strategies--Foreign Securities." The corporate debt securities, including convertible debt securities, in which the Fund may invest will be rated BBB or better by Standard and Poor's or Baa or better by Moody's or in the opinion of the Investment Adviser, of comparable quality. The Fund may also invest in debt obligations issued or guaranteed by sovereign governments, political subdivisions thereof (including states, provinces and municipalities) or their agencies or instrumentalities or issued or guaranteed by international organizations designated or supported by governmental entities to promote economic reconstruction or development ("supranational entities") such as the International Bank for Reconstruction (the "World Bank") and the European Coal and Steel Community. Investments in securities of supranational entities are subject to the risk that member governments will fail to make required capital contributions and that a supranational entity will thus be unable to meet its obligations. When market or financial considerations warrant, the Global Strategy Focus Fund may invest as a temporary defensive measure up to 100% of its assets in U.S. Government or Government agency securities issued or guaranteed by the United States Government or its agencies or instrumentalities, money market securities or other fixed income securities deemed by the Investment Adviser to be consistent with a defensive posture, or may hold its assets in cash. The Global Strategy Focus Fund may use derivatives in connection with certain trading strategies. See Appendix B. HIGH CURRENT INCOME FUND The primary investment objective of the High Current Income Fund is to obtain the highest level of current income that is consistent with the investment policies of the Fund and with prudent investment management. As a secondary objective, the Fund seeks capital appreciation when consistent with its primary objective. There can be no assurance that the Fund's investment objectives will be achieved. The High Current Income Fund seeks high current income by investing principally in fixed-income securities that are rated in the lower rating categories of the established rating services (Baa or lower by Moody's and BBB or lower by Standard and Poor's), or in unrated securities of comparable quality. Securities rated below Baa by Moody's and below BBB by Standard and Poor's are commonly known as "junk bonds." Additional 9 information regarding various bond ratings is set forth in Appendix A to the Prospectus. The market price of fixed-income securities such as those purchased by the Fund is affected by changes in interest rates generally. As interest rates rise, the market value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. Although they can be expected to provide higher yields, lower-rated securities such as those purchased by the Fund may be subject to greater market fluctuations and risks of loss of income and principal than lower- yielding, higher-rated fixed-income securities. Such securities are generally issued by corporations which are not as financially secure or as creditworthy as issuers of higher-rated securities. There is, accordingly, a greater risk that the issuers of higher-yielding securities will not be able to pay principal and interest on such securities, especially during periods of adverse economic conditions. Because investment in such high-yield securities entails relatively greater risk of loss of income or principal, an investment in the High Current Income Fund may not be appropriate as the exclusive investment to fund the Contracts for all Contract Owners. See "Risks of High Yield Securities." Selection and supervision by the management of the Company of investments in lower-rated fixed-income securities involves continuous analysis of individual issuers, general business conditions and other factors which may be too time consuming or too costly for the average investor. The furnishing of these services does not, of course, guarantee successful results. The analysis of issuers may include, among other things, historic and current financial condition, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing, and current and anticipated results of operations. Analysis of general business conditions and other factors may include anticipated changes in economic activity and interest rates, the availability of new investment opportunities, and the economic outlook for specific industries. While the Investment Adviser considers as one factor in its credit analysis the ratings assigned by the rating services, the Investment Adviser performs its own independent credit analysis of issuers and consequently, the Fund may invest, without limit, in unrated securities if such securities offer, in the opinion of the Investment Adviser, a relatively high yield without undue risk. As a result, the High Current Income Fund's ability to achieve its investment objective may depend to a greater extent on the Investment Adviser's own credit analysis than the Funds which invest in higher-rated securities. Although the High Current Income Fund will invest primarily in lower-rated securities, it will not invest in securities rated Ca or lower by Moody's and CC or lower by Standard and Poor's unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded to the particular securities is stronger than would otherwise be indicated by such low ratings. However, securities purchased by the Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgement of the Investment Adviser, it is advantageous to do so. When changing economic conditions and other factors cause the yield difference between lower-rated and higher-rated securities to narrow, the Fund may purchase higher-rated securities if the Investment Adviser believes that the risk of loss of income and principal may be substantially reduced with only a relatively small reduction in yield. The securities in the Fund will be varied from time to time depending upon the judgement of management as to prevailing conditions in the economy and the securities markets and the prospects for interest rate changes among different categories of fixed-income securities. It is anticipated that under normal circumstances more than 90% of the Fund's assets will be invested in fixed- income securities, including convertible and non-convertible debt securities and preferred stock. Although it is expected that, in general, the Fund will not invest in common stocks, rights or other equity securities, it will acquire or hold such securities (if consistent with the objectives of the Fund) when such securities are acquired in unit offerings with fixed-income securities or in connection with an actual or proposed conversion or exchange of fixed-income securities. In addition, under unusual market or economic conditions, the High Current Income Fund for defensive purposes may invest up to 100% of its assets in U.S. Government or Government agency securities, money market securities or other fixed income securities deemed by the Investment Adviser to be consistent with a defensive posture, or may hold its assets in cash. The yield on such securities may be lower than the yield on lower-rated fixed-income securities. 10 The table below shows the average monthly dollar-weighted market value, by Standard and Poor's rating category, of the securities held by the High Current Income Fund during the year ended December 31, 1996.
% MARKET VALUE % NET CORPORATE RATING* ASSETS BONDS ------- ------ --------- BBB....................................................... 0.7% 0.8% BB........................................................ 29.2% 33.8% B......................................................... 47.5% 55.2% CCC....................................................... 4.2% 4.7% NR**...................................................... 5.0% 5.5% ----- 100.0%
- -------- * A description of corporate bond ratings of Standard & Poor's is set forth in Appendix A to the Prospectus. ** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by nationally recognized statistical rating organizations other than Standard & Poor's, or may not be rated by any other organizations. NON-DIVERSIFIED FUNDS The Global Strategy Focus Fund is classified as a non-diversified investment company under the Investment Company Act. However, the Fund will have to limit its investments to the extent required by the diversification requirements applicable to regulated investment companies under the Internal Revenue Code. To qualify as a regulated investment company, a Fund, at the close of each fiscal quarter, may not have more than 25% of its total assets invested in the securities (except obligations of the U.S. Government, its agencies or instrumentalities) of any one issuer and with respect to 50% of its assets, (i) may not have more than 5% of its total assets invested in the securities of any one issuer and (ii) may not own more than 10% of the outstanding voting securities of any one issuer. INVESTMENT RESTRICTIONS The Company has adopted a number of restrictions and policies relating to the investment of its assets and its activities which are fundamental policies and may not be changed without the approval of the holders of the Company's outstanding voting securities (including a majority of the shares of each Fund). Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. MONEY MARKET FUND PORTFOLIO RESTRICTIONS For purposes of the investment policies of the Domestic Money Market Fund, the Company defines short-term money market securities as securities having a maturity of no more than 762 days (25 months) in the case of U.S. Government and agency securities and no more than 397 days (13 months) in the case of all other securities. Management of the Company expects that substantially all the assets of the Domestic Money Market Fund will be invested in securities maturing in less than one year, but at times some portion may have maturities of up to 25 months. For these purposes, the maturity of a variable rate security is deemed to be the next coupon date on which the interest rate is adjusted. The dollar-weighted average maturity of the Fund's portfolio assets will not exceed 90 days. The Domestic Money Market Fund's investments in short-term debt and depository institution money instruments will be rated, or will be issued by issuers who have been rated, in one of the two highest rating categories for short-term debt obligations by a nationally recognized statistical rating organization (an "NRSRO") or, if not rated, will be of comparable quality as determined by the Directors of the Company. The Fund's investments in corporate bonds and debentures (which must have maturities at the date of purchase of 397 days (13 months) or less) will be in issuers which have received from an NRSRO a rating, with respect to a class of short-term debt obligations that is comparable in priority and security with the investment, in one of the two highest rating categories for short-term obligations or, if not rated, are of comparable quality as determined 11 by the Directors of the Company. Currently, there are six NRSROs: Duff & Phelps Inc., Fitch Investors Services, Inc., IBCA Limited and its affiliate IBCA Inc., Moody's, Standard & Poor's and Thomson BankWatch. A regulation of the Securities and Exchange Commission (the "SEC") limits investments by the Domestic Money Market Fund in securities issued by any one issuer (other than the U.S. Government, its agencies or instrumentalities) ordinarily to not more than 5% of its total assets, or in the event that such securities do not have the highest rating, not more than 1% of its total assets. In addition, this regulation requires that not more than 5% of the Fund's total assets be invested in securities that have a rating lower than the highest rating. OTHER PORTFOLIO STRATEGIES Restricted Securities. Each of the Funds is subject to limitations on the amount of illiquid securities it may purchase; however, each Fund may purchase without regard to that limitation certain securities that are not registered under the Securities Act of 1933, as amended (the "Securities Act"), including (a) commercial paper exempt from registration under Section 4(2) of the Securities Act, and (b) securities that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities sold under Rule 144A which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Funds' investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Foreign Securities. The Basic Value Focus, Global Strategy Focus and High Current Income Funds may invest in securities of foreign issuers. Investments in foreign securities, particularly those of non-governmental issuers, involve considerations and risks which are not ordinarily associated with investing in domestic issuers. These considerations and risks include changes in currency rates, currency exchange control regulations, the possibility of expropriation, the unavailability of financial information or the difficulty of interpreting financial information prepared under foreign accounting standards, less liquidity and more volatility in foreign securities markets, the impact of political, social or diplomatic developments, and the difficulty of assessing economic trends in foreign countries. If it should become necessary, a Fund could encounter greater difficulties in invoking legal processes abroad than would be the case in the United States. Transaction costs in foreign securities may be higher. The operating expense ratio of a Fund investing in foreign securities can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial costs, are higher. In addition, net investment income earned by a Fund on a foreign security may be subject to withholding and other taxes imposed by foreign governments which will reduce a Fund's net investment income. The Investment Adviser will consider these and other factors before investing in foreign securities, and will not make such investments unless, in its opinion, such investments will meet the standards and objectives of a particular Fund. No Fund which may invest in foreign securities will concentrate its investments in any particular country. The Global Strategy Focus Fund may from time to time be substantially invested in non-dollar-denominated securities of foreign issuers. For a Fund that invests in foreign securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of securities in the portfolio and the unrealized appreciation or depreciation of investments insofar as United States investors are concerned, and a Fund's return on investments in non- dollar-denominated securities may be reduced or enhanced as a result of changes in foreign currency rates during the period in which the Fund holds such investments. Foreign currency exchange rates are determined by forces of supply and demand in the foreign exchange markets. These forces are, in turn, affected by international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment 12 in those countries. Each Fund other than the Basic Value Focus and Global Strategy Focus Funds will purchase only securities issued in dollar denominations. Each of the Funds which is permitted to invest in foreign securities may from time to time invest in securities of foreign issuers in smaller capital markets. Foreign investments involve risks including fluctuations in foreign exchange rates, future political and economic developments, different legal systems, the existence or possible imposition of exchange controls, or other foreign or United States governmental laws or restrictions, which are often heightened for investments in smaller capital markets. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. Smaller capital markets, while often growing in trading volume, have substantially less volume than United States markets, and securities in many smaller capital markets are less liquid and their prices may be more volatile than securities of comparable United States companies. Brokerage commissions, custodial services, and other costs relating to investment in smaller capital markets are generally more expensive than in the United States. Such markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, satisfactory custodial services for investment securities may not be available in some countries having smaller capital markets, which may result in a Fund which invests in these markets incurring additional costs and delays in transporting and custodying such securities outside such countries. Delays in settlement could result in temporary periods when assets of such a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. There is generally less government supervision and regulation of exchanges, brokers and issuers in countries having smaller capital markets than there is in the United States. As a result, management of a Fund which invests in foreign securities may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience. Certain of the Funds may invest in debt securities issued by foreign governments. Investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging market country's debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. Holders of government debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors. 13 As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. Government obligors in developing and emerging market countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. The issuers of the government debt securities in which a Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements. Some countries with smaller capital markets prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Fund. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms than securities of the company available for purchase by nationals. In some countries, banks or other financial institutions may constitute a substantial number of the leading companies or the companies with the most actively traded securities. Also, the Investment Company Act restricts a Fund's investments in any equity security of an issuer which, in its most recent fiscal year, derived more than 15% of its revenues from "securities related activities," as defined by the rules thereunder. These provisions may also restrict a Fund's investments in certain foreign banks and other financial institutions. Lending of Portfolio Securities. Each Fund of the Company may from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government which, while the loan is outstanding, will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities plus accrued interest. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. Forward Commitments. Each of the Funds may purchase securities on a when- issued basis, and they may purchase or sell such securities for delayed delivery. These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. The value of the security on the delivery date may be more or less than its purchase price. A Fund entering into such transactions will maintain a segregated account with its custodian of cash or liquid, high- grade debt obligations in an aggregate amount equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Standby Commitment Agreements. The High Current Income Fund may from time to time enter into standby commitment agreements. Such agreements commit the Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will at all times maintain a segregated account with its custodian of cash or liquid equity or debt securities in an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Portfolio Strategies Involving Indexed and Inverse Securities, Options, Futures and Foreign Exchange Transactions. Certain Funds may use derivative instruments, including indexed and inverse securities, options and futures and purchase and sell foreign exchange. Transactions involving such instruments expose these Funds to certain risks. Each Fund's use of these instruments and the associated risks are described in detail in Appendix B attached to this Prospectus. 14 RISKS OF HIGH YIELD SECURITIES The High Current Income Fund may invest a substantial portion of its assets in high yield, high risk securities or junk bonds, which are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During recessionary periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. While the high yield securities in which the High Current Income Fund may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs. In an effort to minimize the risk of issuer default or bankruptcy, the High Current Income Fund will diversify its holdings among many issuers. However, there can be no assurance that diversification will protect the Fund from widespread defaults brought about by a sustained economic downturn. High yield securities tend to be more volatile than higher-rated fixed- income securities, so that adverse economic events may have a greater impact on their prices and yields than on higher-rated fixed-income securities. Zero coupon bonds and bonds which pay interest and/or principal in additional bonds rather than in cash are especially volatile. Like higher-rated fixed-income securities, junk bonds are generally purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in this market, which may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for such bonds by various dealers. Adverse economic conditions or investor perceptions (whether or not based on economic fundamentals) may impair the liquidity of this market, and may cause the prices the High Current Income Fund receives for its junk bonds to be reduced, or the Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Under such conditions, judgement may play a greater role in valuing certain of the Fund's portfolio securities than in the case of securities trading in a more liquid market. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the net asset value of the High Current Income Fund. In addition, the Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. Sovereign Debt. The junk bonds in which the High Current Income Fund may invest include junk bonds issued by sovereign entities. Investment in such sovereign debt involves a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service 15 of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt. Holders of sovereign debt, including the High Current Income Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies available to the Fund and there can be no assurance the Fund will be able to collect on defaulted sovereign debt in whole or in part. INSURANCE LAW RESTRICTIONS In order for shares of the Company's Funds to remain eligible investments for the Separate Accounts, it may be necessary, from time to time, for a Fund to limit its investments in certain types of securities in accordance with the insurance laws or regulations of the various states in which the Contracts are sold. The New York insurance law requires that investments of each Fund be made with the degree of care of an "ordinarily prudent person." The Investment Adviser believes that compliance with this standard will not have any negative impact on the performance of any of the Funds. OTHER CONSIDERATIONS The Investment Adviser will use its best efforts to assure that each Fund of the Company complies with certain investment limitations of the Internal Revenue Service to assure favorable income tax treatment for the Contracts. It is not expected that such investment limitations will materially affect the ability of any Fund to achieve its investment objective. DIRECTORS The Directors of the Company consist of six individuals, five of whom are not "interested persons" of the Company as defined in the Investment Company Act of 1940. The Directors of the Company are responsible for the overall supervision of the operations of the Company and perform the various duties imposed on the directors of the investment companies by the Investment Company Act of 1940. The Board of Directors elects officers of the Company annually. The Directors of the Company and their principal employment are as follows: Arthur Zeikel*--President of the Investment Adviser and its affiliate, Fund Asset Management, L.P. ("FAM"); President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of "ML&Co."; and Director of the Merrill Lynch Funds Distributor, Inc. (the "Distributor"). Joe Grills--Member of the Committee on Investment of Employee Benefit Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive Committee; and Member of the Investment Advisory Committee of the State of New York Common Retirement Fund and the Howard Hughes Medical Institute; Director, Duke Management Company, LaSalle Street Fund and Kimco Realty Corporation. Walter Mintz--Special Limited Partner of Cumberland Partners (investment partnership). Robert S. Salomon, Jr.--Principal of STI Management (investment adviser). Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate, consulting and investments). Stephen B. Swensrud--Chairman of Fernwood Associates (financial consultants). - -------- *Interested person, as defined in the Investment Company Act of 1940, of the Company. 16 INVESTMENT ADVISER Merrill Lynch Asset Management L.P. ("MLAM"), an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc., is the investment adviser (the "Investments Adviser") for the Fund. The general partner of the Investment Adviser is Princeton Services, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc. The principal address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset Management, L.P. ("FAM"), acts as the investment adviser for over 130 other registered investment companies. The Investment Adviser also offers portfolio management and portfolio analysis services to individuals and institutions. In the aggregate, as of March 31, 1997, MLAM and FAM had a total of approximately $247.2 billion in investment company and other portfolio assets under management including assets of certain affiliates. While the Investment Adviser is at all times subject to the direction of the Board of Directors of the Company, the Investment Advisory Agreements provide that the Investment Adviser, subject to review by the Board of Directors, is responsible for the actual management of the Funds and has responsibility for making decisions to buy, sell or hold any particular security. The Investment Adviser provides the portfolio managers for the Funds, who consider information from various sources, make the necessary investment decisions and effect transactions accordingly. The Investment Adviser is also obligated to perform certain administrative and management services for the Company (certain of which it may delegate to third parties) and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreements. The Investment Adviser has access to the full range of the securities and economic research facilities of Merrill Lynch. During the Company's fiscal year ended December 31, 1996, the advisory fees expense incurred by the Company totalled $24,131,430 of which $2,414,605 related to the Basic Value Focus Fund (representing .60% of its average net assets), $1,386,726 related to the Domestic Money Market Fund (representing .50% of its average net assets), $3,715,122 related to the Global Strategy Focus Fund (representing .65% of its average net assets), and $1,881,541 related to the High Current Income Fund (representing .49% of its average net assets). During the Company's fiscal year ended December 31, 1996, the total operating expenses of the Company's Funds (including the advisory fees paid to the Investment Adviser), before any fee waiver or reimbursement of a portion of such expenses, were as follows: $2,657,872 related to the Basic Value Focus Fund (representing .66% of its average net assets), $1,507,384 related to the Domestic Money Market Fund (representing .54% of its average net assets), $4,077,255 related to the Global Strategy Focus Fund (representing .71% of its average net assets), and $2,096,102 related to the High Current Income Fund (representing .54% of its average net assets). The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into two agreements which limit the operating expenses paid by each Fund in a given year to 1.25% of its average daily net assets (the "Reimbursement Agreements"). The reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide that any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. See "Investment Advisory Arrangements" in the Statement of Additional Information. MLLA sells certain Contracts described in the Prospectus for such Contracts. The Investment Adviser has entered into a sub-advisory agreement (the "Sub- Advisory Agreement") with MLAM U.K., an indirect wholly owned subsidiary of ML & Co., and an affiliate of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing investment advisory services to the Investment Adviser with respect to the Funds in an amount to be determined from time to time by the Investment Adviser and MLAM U.K. but in no event in excess of the amount that the Investment Adviser actually receives for providing services to the Funds pursuant to the Investment Advisory Agreement. The Investment Adviser has entered into administrative services agreements with certain Insurance Companies, including Insurance Companies owned by ML&Co., pursuant to which the Investment Adviser compensates such companies for administrative responsibilities relating to the Company which are performed by such Insurance Companies. 17 CODE OF ETHICS The Board of Directors of the Company has adopted a Code of Ethics under Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment Adviser (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Investment Adviser and, as described below, impose additional, more onerous, restrictions on fund investment personnel. The Codes require that all employees of the Investment Adviser preclear any personal securities investment (with limited exceptions, such as government securities). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Investment Adviser include a ban on acquiring any securities in a "hot" initial public offering and a prohibition from profiting on short- term trading in securities. In addition, no employee may purchase or sell any security which at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Investment Adviser. Furthermore, the Codes provide for trading "blackout periods" which prohibit trading by investment personnel of the Company within periods of trading by the Company in the same (or equivalent) security (15 or 30 days depending upon the transaction). PORTFOLIO MANAGERS The following is information with respect to the Portfolio Managers for each of the Company's Funds. Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since December 1993; Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990. Jacqueline Rogers has served as the Domestic Money Market Fund's Portfolio Manager since October 1996, and is primarily responsible for the Fund's day- to-day management. She has served as Vice President of MLAM since January 1986. Thomas R. Robinson has served as the Global Strategy Focus Fund's Portfolio Manager since November 1995, and is primarily responsible for the Fund's day- to-day management. He has served as a Senior Portfolio Manager of MLAM since November 1995. From 1989 to 1995, he served as Manager of International Strategy for Merrill Lynch & Co. Global Securities Research & Economics Group. Aldona Schwartz has served as the High Current Income Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to- day management. She has served as Vice President of MLAM since 1991 and an employee of the Investment Adviser since 1986. PORTFOLIO TRANSACTIONS AND BROKERAGE None of the Company's Funds has any obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Board of Directors of the Company, the Investment Adviser is primarily responsible for the Company's portfolio decisions and the placing of the Company's portfolio transactions. In placing orders, it is the policy of each Fund to obtain the most favorable net results, taking into account various factors, including price, dealer spread or commission, if any, size of the transactions and difficulty of execution. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Company will not necessarily be paying the lowest spread or commission available. Under the Investment Company Act, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the SEC. Affiliated persons of the Company may serve as its broker in over-the-counter transactions conducted on an agency basis. The SEC has issued an order permitting the Company to conduct certain principal transactions with respect to the Domestic Money Market Fund with Merrill Lynch Government Securities Inc. and Merrill Lynch Money Markets Inc. in U.S. Government and government agency securities, and certain other money market securities, subject to certain terms and conditions. 18 During the year ended December 31, 1996, the Company engaged in 16 transactions pursuant to such order involving approximately $64.9 million of securities. For the year ended December 31, 1996, the Company paid brokerage commissions of $6,656,814, of which $266,405 was paid to Merrill Lynch. PURCHASE OF SHARES The Company will offer shares in the Funds, without sales charge, only for purchase by the Insurance Companies for the Separate Accounts to fund benefits under the Contracts. The Company continuously offers shares of Class A Common Stock in each of its Funds to the Insurance Companies at prices equal to the respective per share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly owned subsidiary of the Investment Adviser, acts as the distributor of the shares. Net asset value is determined in the manner set forth below under "Additional Information--Determination of Net Asset Value." The Company and the Distributor reserve the right to suspend the sale of shares of each Fund in response to the conditions in the securities markets or otherwise. REDEMPTION OF SHARES The Company is required to redeem all full and fractional shares of the Funds for cash. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. DIVIDENDS, DISTRIBUTIONS AND TAXES It is the Company's intention to distribute substantially all of the net investment income, if any, of each Fund. For dividend purposes, net investment income of each Fund, other than the Domestic Money Market Fund, will consist of all payments of dividends or interest received by such Fund less the estimated expenses of such Fund (including fees payable to the Investment Adviser). Dividends on the Domestic Money Market Fund are declared daily and reinvested monthly in additional full and fractional shares of such Fund. Dividends from net investment income of the High Current Income Fund are declared and reinvested monthly in additional full and fractional shares of the respective Funds at net asset value. Dividends from net investment income of the Basic Value Focus and Global Strategy Focus Funds are declared and reinvested at least annually in additional full and fractional shares of the respective Funds. All net realized long-term or short-term capital gains of the Company, if any, are declared and distributed annually after the close of the Company's fiscal year to the shareholders of the Fund or Funds to which such gains are attributable. Short-term capital gains are taxable as ordinary income. TAX TREATMENT OF THE COMPANY Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Under such provisions, a Fund will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. One of the requirements to qualify for treatment as a regulated investment company under the Code is that a Fund, among other things, derive less than 30% of its gross income in each taxable year from gains (without deduction of losses) from the sale or other disposition of stocks, securities and certain options, futures or forward contracts held for less than three months. This requirement may limit the ability of certain Funds to dispose of certain securities at times when management of the Company might otherwise deem such disposition appropriate or desirable. If a Fund earns original issue discount income in a taxable year which is not represented by correlative cash income, or if a Fund receives property rather than cash in payment of interest, shareholders will be allocated income greater than the amount of cash distributed to them. In addition, the Fund may have to dispose of securities and use the proceeds thereof to make distributions in amounts necessary to satisfy its distribution requirements under the Code. 19 TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS Dividends paid by the Company from its ordinary income and distributions of the Company's net realized capital gains are includable in the respective Insurance Company's gross income. Distributions of the Company's net realized long-term capital gains retain their character as long-term capital gains in the hands of the Insurance Companies if certain requirements are met. The tax treatment of such dividends and distributions depends on the respective Insurance Company's tax status. To the extent that income of the Company represents dividends on common or preferred stock, rather than interest income, its distributions to the Insurance Companies will be eligible for the present 70% dividends received deduction applicable in the case of a life insurance company as provided in the Code. See the Prospectus for the Contracts for a description of the respective Insurance Company's tax status and the charges which may be made to cover any taxes attributable to the Separate Account. Not later than 60 days after the end of each calendar year, the Company will send to the Insurance Companies a written notice required by the Code designating the amount and character of any distributions made during such year. PERFORMANCE DATA From time to time the average annual total return and yield of one or more of the Company's Funds for various specified time periods may be included in advertisements or information furnished by the Insurance Companies to present or prospective Contract owners. Average annual total return and yield are computed in accordance with formulas specified by the SEC. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield to maturity of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the offering price per share on the last day of the period. The yield for the 30-day period ending December 31, 1996 was 9.30% for the High Current Income Fund. Total return and yield figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return and yield will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The yield and total return quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease the yield. On occasion, one or more of the Company's Funds may compare its performance to that of the Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service or contained in publications such as Morningstar Publications, Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and Ibbotson Associates. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. 20 ADDITIONAL INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each Fund is determined once daily by the Investment Adviser immediately after the declaration of dividends, if any, and is determined as of fifteen minutes following the close of trading on each day the New York Stock Exchange is open for business. The New York Stock Exchange is open on business days other than national holidays (except for Martin Luther King Day, when it is open) and Good Friday. The net asset value per share of each Fund other than the Domestic Money Market Fund is computed by dividing the sum of the value of the securities held by that Fund plus any cash or other assets (including interest and dividends accrued) minus all liabilities (including accrued expenses) by the total number of shares outstanding of that Fund at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment Adviser, are accrued daily. Because the net investment income of the Domestic Money Market Fund (including realized and unrealized gains and losses on its portfolio securities) are declared as a dividend each time the net income of the Fund is determined (see "Dividends, Distributions and Taxes"), the net asset value per share of the Fund normally remains at $1.00 per share immediately after each such determination and dividend declaration. Securities held by each Fund will be valued as follows: Portfolio securities that are traded on stock exchanges are valued at the last sale price (regular way) as of the close of business on the day the securities are being valued, or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter ("OTC") market are valued at the last available bid price in the OTC market prior to the time of valuation. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. When a Portfolio writes an option, the amount of the premium received is recorded on the books as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options being traded in the OTC market, the last asked price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. Securities held by the Domestic Money Market Fund with a remaining maturity of 60 days or less are valued on an amortized cost basis, unless particular circumstances dictate otherwise. The Company has used pricing services, including Merrill Lynch Securities PricingSM Service ("MLSPS"), to value securities held by the High Current Income Fund and to value bonds held by other of the Company's Funds. The Board of Directors of the Company has examined the methods used by the pricing services in estimating the value of securities held by the Funds and believes that such methods will reasonably and fairly approximate the price at which those securities may be sold and result in a good faith determination of the fair value of such securities; however, there is no assurance that securities can be sold at the prices at which they are valued. During the fiscal year ended December 31, 1996, High Current Income Fund and Global Strategy Focus Fund paid MLSPS $7,269 and $175 respectively, for such pricing services. ORGANIZATION OF THE COMPANY The Company was incorporated on October 16, 1981. Operations of the High Current Income Fund commenced on April 20, 1982. The Domestic Money Market and Global Strategy Focus Funds commenced operations on February 20 and February 28, 1992, respectively. The Basic Value Focus Fund commenced operations on July 1, 1993. The authorized capital stock of the Company consists of 3,400,000,000 shares of Class A Common Stock, par value $0.10 per share, and 3,400,000,000 shares of Class B Common Stock, par value $0.10 per share. The shares of Class A and Class B Common Stock are each divided into sixteen classes designated Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, 21 Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch Global Bond Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch Government Bond Fund Common Stock and Merrill Lynch Index 500 Fund Common Stock, respectively. The Company may, from time to time, at the sole discretion of its Board of Directors and without the need to obtain the approval of its shareholders or of Contract Owners, offer and sell shares of one or more of such classes. Each class consists of 100,000,000 Class A shares and 100,000,000 Class B shares except for Domestic Money Market Fund Common Stock which consists of 1,300,000,000 Class A shares and 1,300,000,000 Class B shares, Reserve Assets Fund Common Stock which consists of 500,000,000 Class A shares and 500,000,000 Class B shares and Global Bond Focus Fund Common Stock and Global Strategy Focus Fund Common Stock, each of which consists of 200,000,000 Class A shares and 200,000,000 Class B shares. All shares of Common Stock have equal voting rights, except that only shares of the respective classes are entitled to vote on matters concerning only that class. Pursuant to the Investment Company Act and the rules and regulations thereunder, certain matters approved by a vote of all shareholders of the Company may not be binding on a class whose shareholders have not approved such matter. Each issued and outstanding share of a class is entitled to one vote and to participate equally in dividends and distributions declared with respect to such class and in net assets of such class upon liquidation or dissolution remaining after satisfaction of outstanding liabilities. The shares of each class, when issued, will be fully paid and nonassessable, have no preference, preemptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any class are entitled to redeem their shares as set forth under "Redemption of Shares." Shares do not have cumulative voting rights and the holders of more than 50% of the shares of the Company voting for the election of directors can elect all of the directors of the Company if they choose to do so and in such event the holders of the remaining shares would not be able to elect any directors. The Company does not intend to hold meetings of shareholders unless under the Investment Company Act shareholders are required to act on any of the following matters: (i) election of directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of the selection of independent accountants. The Board of Directors of the Company has authorized the issuance of shares of Class B Common Stock with respect to each of the Company's Funds, with the existing shares of Common Stock of each Fund to be designated Class A Common Stock of such Fund. The Board of Directors have also authorized the Company to enter into a Distribution Plan with Merrill Lynch Funds Distributor, Inc. under which the Company would pay distribution fees in respect of the shares of its Class B Common Stock. No shares of Class B Common Stock have been issued; however, the Company may commence issuing shares of Class B Common Stock later in 1997 pursuant to a separate or amended Prospectus. The organizational expenses of each of the Company's Funds are paid by the Investment Adviser. The Investment Adviser is reimbursed by its affiliate, Merrill Lynch Life Insurance Company, for all such expenses over a five-year period. In connection with the reorganization on December 6, 1996, the Global Strategy Focus Fund acquired substantially all of the assets and assumed substantially all the liabilities of the Flexible Strategy Fund, a separate Fund of the Company. INDEPENDENT AUDITORS Deloitte & Touche llp, 117 Campus Drive, Princeton, New Jersey 08540, has been selected as the independent auditors of the Company. The selection of independent auditors is subject to annual ratification by the Company's shareholders. 22 CUSTODIAN The Bank of New York ("BONY"), 110 Washington Street, New York, New York 10286, acts as Custodian of each of the Funds. TRANSFER AND DIVIDEND DISBURSING AGENT Merrill Lynch Financial Data Services, Inc. ("MLFDS"), which is a wholly owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's Transfer Agent and is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. MLFDS will receive an annual fee of $5,000 per Fund and will be entitled to reimbursement of out-of- pocket expenses. LEGAL COUNSEL Rogers & Wells, New York, New York, is counsel for the Company. REPORTS TO SHAREHOLDERS The fiscal year of the Company ends on December 31 of each year. The Company will send to its shareholders at least semi-annually reports showing the Funds' portfolio securities and other information. An annual report containing financial statements, audited by independent auditors, will be sent to shareholders each year. ADDITIONAL INFORMATION This Prospectus does not contain all of the information included in the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940, with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Statement of Additional Information, dated April 25, 1997, which forms a part of the Registration Statement, is incorporated by reference into this Prospectus. The Statement of Additional Information may be obtained without charge as provided on the cover page of this Prospectus. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the Securities and Exchange Commission in Washington, D.C. 23 APPENDIX A U.S. GOVERNMENT SECURITIES For temporary or defensive purposes, each of the Funds may invest in the various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES For temporary or defensive purposes, each of the Funds may invest in government agency securities, which are debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Funds may invest in all types of government agency securities currently outstanding or to be issued in the future. DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS For temporary or defensive purposes, each of the Funds may invest in depositary institutions money instruments, such as certificates of deposit, including variable rate certificates of deposit, bankers' acceptances, time deposits and bank notes. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks, savings banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market rate. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Often, dealers selling variable rate certificates of deposit to the Funds agree to repurchase such instruments, at the Funds' option, at par on the coupon dates. The dealers' obligations to repurchase these instruments are subject to conditions imposed by the various dealers; such conditions typically are the continued credit standing of the issuer and the existence of reasonably orderly market conditions. The Funds are also able to sell variable rate certificates of deposit in the secondary market. Variable rate certificates of deposit normally carry a higher interest rate than comparable fixed rate certificates of deposit because variable rate certificates of deposit generally have a longer stated maturity than comparable fixed rate certificates of deposit. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. For temporary or defensive purposes, the Global Strategy Focus Fund may invest in certificates of deposit and bankers' acceptances issued by foreign branches or subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign banks ("Yankeedollar" obligations). The Fund may invest only in Eurodollar obligations which by their terms are general obligations of the U.S. parent bank and meet the other criteria discussed below. Yankeedollar obligations in which the Fund may invest must be issued by U.S. branches or subsidiaries of foreign banks which are subject to state or federal banking regulations in the U.S. and by their terms must be general obligations of the foreign parent. In addition, the Fund will limit its investments in Yankeedollar obligations to obligations issued by banking institutions with more than $1 billion in assets. For temporary or defensive purposes, the Global Strategy Focus Fund may also invest in U.S. dollar-denominated obligations of foreign depository institutions and their foreign branches and subsidiaries, such as certificates of deposit, bankers' acceptances, time deposits and deposit notes. The obligations of such foreign branches and subsidiaries may be the general obligation of the parent bank or may be limited to the issuing branch or subsidiary by the terms of the specific obligation or by government regulation. A-1 Except as otherwise provided above with respect to investment in Yankeedollar and other foreign bank obligations no Fund may invest in any bank money instrument issued by a commercial bank or a savings and loan association unless the bank or association is organized and operating in the United States, has total assets of at least $1 billion and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this limitation shall not prohibit the investment of up to 10% of the total assets of a Fund (taken at market value at the time of each investment) in certificates of deposit issued by banks and savings and loan associations with assets of less than $1 billion if the principal amount of each such certificate of deposit is fully insured by the FDIC. SHORT-TERM DEBT INSTRUMENTS For temporary or defensive purposes (and the Domestic Money Market Fund for other than temporary or defensive purposes), each of the Funds may invest in commercial paper (including variable amount master demand notes and insurance company funding agreements), which refers to short-term, unsecured promissory notes issued by corporations, partnerships, trusts and other entities to finance short-term credit needs and by trusts issuing asset-backed commercial paper. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable amount master notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis, in accordance with a stated short-term interest rate benchmark. Because the interest rate of a variable amount master note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Investment Adviser values such a note in accordance with the amortized cost basis described under "Determination of Net Asset Value" in the Statement of Additional Information. The Domestic Money Fund may also invest in nonconvertible debt securities issued by entities or asset-backed nonconvertible debt securities issued by trusts (e.g., bonds and debentures) with no more than 397 days (13 months) remaining to maturity at date of settlement. Short-term debt securities with a remaining maturity of less than one year tend to become extremely liquid and are traded as money market securities. For a discussion of the ratings requirements of the Funds' portfolio securities, see "Investment Objectives and Policies of the Funds' Money Market Fund Portfolio Restrictions" and "Investment Objectives and Policies of the Funds--Domestic Money Market Fund" in the Prospectus. For temporary or defensive purposes, the Global Strategy Focus Fund may also invest in U.S. dollar-denominated commercial paper and other short-term obligations issued by foreign entities. Such investments are subject to quality standards similar to those applicable to investments in comparable obligations of domestic issuers. Investments in foreign entities in general involve the same risks as those described in the Statement of Additional Information in connection with investments in Eurodollar, Yankeedollar and foreign bank obligations. REPURCHASE AGREEMENTS Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Under a repurchase agreement, the seller agrees, upon entering into the contract with the Fund, to repurchase a security (typically a security issued or guaranteed by the U.S. government) at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed yield for the Fund insulated from fluctuations in the market value of the underlying security during such period, although, to the extent the repurchase agreement is not denominated in U.S. dollars, the Fund's return may be affected by currency fluctuations. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System, a primary dealer in U.S. government securities or an affiliate thereof. A purchase and sale contract is similar to a repurchase agreement, but purchase and sale contracts, unlike repurchase agreements, allocate interest on the underlying security to the purchaser during the A-2 term of the agreement and generally do not require the seller to provide additional securities in the event of a decline in the market value of the purchased security during the term of the agreement. In all instances, the Fund takes possession of the underlying securities when investing in repurchase agreements or purchase and sale contracts. If the seller were to default on its obligation to repurchase a security under a repurchase agreement or purchase and sale contract and the market value of the underlying security at such time was less than the Fund had paid to the seller, the Fund would realize a loss. Repurchase agreements maturing in more than seven days will be considered "illiquid securities." DESCRIPTION OF CORPORATE BOND RATINGS Moody's Investors Service, Inc.: Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded both during good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other market shortcomings. C--Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Standard & Poor's Corporation: AAA--This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. A-3 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. A-4 APPENDIX B Certain Funds of the Company are authorized to use derivative instruments, including indexed and inverse securities, options, and futures, and to purchase and sell foreign exchange, as described below. Such instruments are referred to collectively herein as "Strategic Instruments." INDEXED AND INVERSE SECURITIES The Domestic Money Market Fund and the Global Strategy Focus Fund may invest in securities the potential return of which is based on the change in particular measurements of value or rate (an "index"). As an illustration, a Fund may invest in a debt security that pays interest and returns principal based on the change in the value of an interest rate index (such as the prime rate or federal funds rate), a securities index (such as the S&P 500 or a more narrowly-focused index such as the AMEX Oil & Gas Index) or a basket of securities, or based on the relative changes of two indices. In addition, the Global Strategy Focus Fund may invest in securities the potential return of which is based inversely on the change in an index. For example, this Fund may invest in securities that pay a higher rate of interest when a particular index decreases and pay a lower rate of interest (or do not fully return principal) when the value of the index increases. If the Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the event of an adverse movement in the relevant index or indices. Certain indexed and inverse securities may have the effect of providing investment leverage because the rate of interest or amount of principal payable increases or decreases at a rate that is a multiple of the changes in the relevant index. As a consequence, the market value of such securities may be substantially more volatile than the market values of other debt securities. The Company believes that indexed and inverse securities may provide portfolio management flexibility that permits Funds to seek enhanced returns, hedge other portfolio positions or vary the degree of portfolio leverage with greater efficiency than would otherwise be possible under certain market conditions. OPTIONS ON SECURITIES AND SECURITIES INDICES Purchasing Options. The Global Strategy Focus Fund is authorized to purchase put options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When a Fund purchases a put option, in consideration for an upfront payment (the "option premium") the Fund acquires a right to sell to another party specified securities owned by the Fund at a specified price (the "exercise price") on or before a specified date (the "expiration date"), in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index declines below a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a put option limits the Fund's risk of loss in the event of a decline in the market value of the portfolio holdings underlying the put option prior to the option's expiration date. If the market value of the portfolio holdings associated with the put option increases rather than decreases, however, the Fund will lose the option premium and will consequently realize a lower return on the portfolio holdings than would have been realized without the purchase of the put. The Global Strategy Focus Fund is authorized to purchase call options on securities it intends to purchase or securities indices the performance of which are substantially correlated with the performance of the types of securities it intends to purchase. When a Fund purchases a call option, in consideration for the option premium the Fund acquires a right to purchase from another party specified securities at the exercise price on or before the expiration date, in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index increases beyond a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a call option may protect the Fund from having to pay more for a security as a consequence of increases in the market value for the security during a period when the Fund is contemplating its purchase, in the case of an option on a security, or attempting to identify specific securities in which to invest in a market the Fund believes to be attractive, in the case of an option on an index (an "anticipatory hedge"). In the event the Fund determines not to purchase a security underlying a call option, however, the Fund may lose the entire option premium. B-1 The Fund is also authorized to purchase put or call options in connection with closing out put or call options it has previously sold. Writing Options. The Basic Value Focus Fund and the Global Strategy Focus Fund are each authorized to write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When a Fund writes a call option, in return for an option premium the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write call options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is less than the exercise price, the Fund will partially offset any decline in the value of the underlying securities through the receipt of the option premium. By writing a call option, however, the Fund limits its ability to sell the underlying securities, and gives up the opportunity to profit from any increase in the value of the underlying securities beyond the exercise price, while the option remains outstanding. The Global Strategy Focus Fund may also write put options on securities or securities indices. When the Fund writes a put option, in return for an option premium the Fund gives another party the right to sell to the Fund a specified security at the exercise price on or before the expiration date, in the case of an option on a security, or agrees to pay to another party an amount based on any decline in a specified securities index below a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write put options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is greater than the exercise price, the Fund will profit by the amount of the option premium. By writing a put option, however, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of the security at the time of exercise as long as the put option is outstanding, in the case of an option on a security, or make a cash payment reflecting any decline in the index, in the case of an option on an index. Accordingly, when the Fund writes a put option it is exposed to a risk of loss in the event the value of the underlying securities falls below the exercise price, which loss potentially may substantially exceed the amount of option premium received by the Fund for writing the put option. The Fund will write a put option on a security or a securities index only if the Fund would be willing to purchase the security at the exercise price for investment purposes (in the case of an option on a security) or is writing the put in connection with trading strategies involving combinations of options--for example, the sale and purchase of options with identical expiration dates on the same security or index but different exercise prices (a technique called a "spread"). Each Fund is also authorized to sell call or put options in connection with closing out call or put options it has previously purchased. Other than with respect to closing transactions, a Fund will only write call or put options that are "covered." A call or put option will be considered covered if the Fund has segregated assets with respect to such option in the manner described in "Risk Factors in Options, Futures, and Currency Instruments" below. A call option will also be considered covered if a Fund owns the securities it would be required to deliver upon exercise of the option (or, in the case of option on a securities index, securities which are substantially correlated with the performance of such index) or owns a call option, warrant or convertible instrument which is immediately exercisable for, or convertible into, such security. Types of Options. A Fund may engage in transactions in options on securities or securities indices on exchanges and in the over-the-counter ("OTC") markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties' obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater risk of counterparty default. See "Additional Risk Factors of OTC Transactions" below. B-2 FUTURES The Global Strategy Focus Fund may each engage in transactions in futures and options thereon. Futures are standardized, exchange-traded contracts which obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of a commodity at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral ("margin") equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. The sale of a futures contract limits the Fund's risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract's expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract. The purchase of a futures contract may protect a Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position. A Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying commodity is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). Each Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a "commodity pool" under regulations of the Commodity Futures Trading Commission. FOREIGN EXCHANGE TRANSACTIONS The Global Strategy Focus Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, "Currency Instruments") for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the US dollar. Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. The Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio position. A Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. The Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. The Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. The Fund may also hedge against the decline in the value of a currency against the US dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized exchange-traded contracts. See "Futures" above. The Funds may also hedge against the decline in the value of a currency against the US dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case B-3 of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See "Types of Options" above and "Additional Risk Factors of OTC Transactions" below. The Fund will not speculate in Currency Instruments. Accordingly, the Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. The Fund may, however, hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the Investment Adviser believes that (i) there is a demonstrable high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged. Risk Factors in Hedging Foreign Currency Risks. While a Fund's use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund's shares, the net asset value of the Fund's shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund's hedging strategies will be ineffective. To the extent that a Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses, and decrease its total return, as the result of its hedging transactions. Furthermore, the Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur. It may not be possible for the Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available (such as certain developing markets) and it is not possible to engage in effective foreign currency hedging. RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS Use of Strategic Instruments for hedging purposes involves the risk of imperfect correlation in movements in the value of the Strategic Instruments and the value of the instruments being hedged. If the value of the Strategic Instruments moves more or less than the value of the hedged instruments a Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments. Each Fund intends to enter into transactions involving Strategic Instruments only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under "Additional Risk Factors of OTC Transactions." However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Strategic Instrument or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Strategic Instrument without incurring substantial losses, if at all. Certain transactions in Strategic Instruments (e.g., forward foreign exchange transactions, futures transactions, sales of put options) may expose a Fund to potential losses which exceed the amount originally invested by the Fund in such instruments. When a Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund's exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Securities and Exchange Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund's exposure to loss. B-4 ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC STRATEGIC INSTRUMENTS Certain Strategic Instruments traded in OTC markets, including indexed securities and OTC options, may be substantially less liquid than other instruments in which a Fund may invest. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. A Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Investment Adviser anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer's quotation may be used. The staff of the Securities and Exchange Commission has taken the position that purchased OTC options and the assets underlying written OTC options are illiquid securities. Each Fund has therefore adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the securities underlying OTC call options currently outstanding which have been sold by the Fund and margin deposits on the Fund's outstanding OTC options exceeds 15% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are deemed to be illiquid or are otherwise not readily marketable. However, if an OTC option is sold by the Fund to a dealer in U.S. government securities recognized as a "primary dealer" by the Federal Reserve Bank of New York and the Fund has the unconditional contractual right to repurchase such OTC option at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying security minus the option's exercise price). Because Strategic Instruments traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin to the extent that a Fund has unrealized gains in such instruments or has deposited collateral with its counterparty, the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. A Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Strategic Instruments traded in OTC markets only with financial institutions which have substantial capital or which have provided the Fund with a third-party guaranty or other credit enhancement. ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS No Fund may use any Strategic Instrument to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly. B-5 PROSPECTUS APRIL 25, 1997 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800 ---------------- Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end management investment company which has a wide range of investment objectives among its sixteen separate funds (hereinafter referred to as the "Funds" or individually as a "Fund"). A separate class of common stock ("Common Stock") is issued for each Fund. The Company is offering shares of its Class A Common Stock pursuant to this Prospectus. The shares of the Funds are sold to separate accounts ("Separate Accounts") of certain insurance companies (the "Insurance Companies") to fund benefits under variable annuity contracts ("Variable Annuity Contracts") and/or variable life insurance contracts (together with the Variable Annuity Contracts, the "Contracts") issued by such companies. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. Certain Insurance Companies are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). The investment objectives of the Funds and certain investment policies, each of whose name is preceded by "Merrill Lynch," are as follows: BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. HIGH CURRENT INCOME FUND. As high a level of current income as is consistent with its investment policies and prudent investment management, and as a secondary objective, capital appreciation when consistent with the foregoing objective. The Fund invests principally in fixed-income securities that are rated in the lower rating categories of the established rating services or in unrated securities of comparable quality. THE HIGH CURRENT INCOME FUND AND DEVELOPING CAPITAL MARKETS FOCUS FUND INVEST OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES." ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. ---------------- MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-- DISTRIBUTOR NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY BE MADE. ---------------- TABLE OF CONTENTS
PAGE ---- Financial Highlights....................................................... 3 The Insurance Companies.................................................... 5 Investment Objectives and Policies of the Funds............................ 5 Directors.................................................................. 15 Investment Adviser......................................................... 15 Portfolio Transactions and Brokerage....................................... 17 Purchase of Shares......................................................... 17 Redemption of Shares....................................................... 17 Dividends, Distributions and Taxes......................................... 17 Performance Data........................................................... 18 Additional Information..................................................... 19 Appendix A................................................................. A-1 Appendix B................................................................. B-1
2 FINANCIAL HIGHLIGHTS The financial information in the tables below has been audited in conjunction with annual audits of the financial statements of each of the Company's Funds by Deloitte & Touche llp, independent auditors. Financial Statements and the independent auditors' report thereon for the fiscal year ended December 31, 1996 are included in the Statement of Additional Information. The following per share data and ratios have been derived from information provided in the Company's audited financial statements. Further information about the performance of the Company is contained in the Company's most recent annual report to shareholders which may be obtained, without charge, by calling or by writing the Company at the telephone number or address on the front cover of this prospectus.
DEVELOPING CAPITAL MARKETS BASIC VALUE FOCUS FUND FOCUS FUND --------------------------------------------- --------------------------------- FOR THE YEAR FOR THE FOR THE YEAR ENDED FOR THE PERIOD ENDED PERIOD MAY 2, DECEMBER 31, JULY 1, 1993+ DECEMBER 31, 1994+ TO ---------------------------- TO DECEMBER 31, ------------------ DECEMBER 31, 1996 1995 1994 1993 1996 1995 1994 -------- -------- -------- --------------- ------- ------- ------------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 13.10 $ 11.10 $ 10.95 $ 10.00 $ 9.32 $ 9.51 $ 10.00 -------- -------- -------- ------- ------- ------- ------- Investment income--net.. .17 .18 .17 .04 .20 .20 .09 Realized and unrealized gain (loss) on investments and foreign currency transactions-- net.................... 2.37 2.49 .08 .91 .76 (.30) (.58) -------- -------- -------- ------- ------- ------- ------- Total from investment operations............. 2.54 2.67 .25 .95 .96 (.10) (.49) -------- -------- -------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net.. (.18) (.19) (.10) -- (.23) (.09) -- Realized gain on investments--net....... (.72) (.48) -- -- -- -- -- -------- -------- -------- ------- ------- ------- ------- Total dividends and distributions.......... (.90) (.67) (.10) -- (.23) (.09) -- -------- -------- -------- ------- ------- ------- ------- Net asset value, end of year................... $ 14.74 $ 13.10 $ 11.10 $ 10.95 $ 10.05 $ 9.32 $ 9.51 ======== ======== ======== ======= ======= ======= ======= Total Investment Return:** Based on net asset value per share.............. 20.69% 25.49% 2.36% 9.50%# 10.59% (1.08)% (4.90)%# ======== ======== ======== ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......... .66% .72% .86%* 1.25% 1.25% 1.29%* ======== ======== ======== ======= ======= ======= ======= Expenses................ .66% .66% .72% .86%* 1.31% 1.36% 1.35%* ======== ======== ======== ======= ======= ======= ======= Investment income--net.. 1.37% 1.68% 2.08% 1.69%* 2.42% 2.73% 2.18%* ======== ======== ======== ======= ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $524,930 $306,463 $164,307 $47,207 $95,599 $55,209 $36,676 ======== ======== ======== ======= ======= ======= ======= Portfolio turnover...... 68.41% 74.10% 60.55% 30.86% 87.33% 62.53% 29.79% ======== ======== ======== ======= ======= ======= ======= Average commission rate paid##................. $ .0549 -- -- -- $ .0003### -- -- ======== ======== ======== ======= ======= ======= =======
- -------- * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. ### The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the average rate shown. 3 FINANCIAL HIGHLIGHTS (CONCLUDED)
HIGH CURRENT INCOME FUND ------------------------------------------------------------------------------------------ FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1996+ 1995 1994 1993 1992 1991 1990 1989 1988 1987 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55 $ 11.42 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Investment income--net.. 1.08 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23 Realized and unrealized gain (loss) on investments--net....... .12 .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Total from investment operations............. 1.20 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44 -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Less dividends and distributions: Investment income-- net................... (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23) Realized gain on investments--net...... -- -- -- -- -- -- -- -- -- (.08) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Total dividends and distributions.......... (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31) -------- -------- -------- -------- ------- ------ ------ ------- ------- ------- Net asset value, end of year................... $ 11.39 $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= TOTAL INVESTMENT RE- TURN:* Based on net asset value per share.............. 11.27% 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87% 3.82% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses................ .54% .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= Investment income--net.. 9.50% 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88% ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $414,615 $356,352 $255,719 $163,428 $26,343 $9,649 $8,106 $12,942 $13,960 $13,075 ======== ======== ======== ======== ======= ====== ====== ======= ======= ======= Portfolio turnover...... 48.92% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07% ======== ======== ======== ======== ======= ====== ====== ======= ======= =======
- -------- * Total investment returns exclude insurance-related fees and expenses. + Based on average shares outstanding during the year. 4 THE INSURANCE COMPANIES The Company was organized to fund benefits under Contracts issued by Family Life Insurance Company ("Family Life"), formerly a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). On June 12, 1991, Family Life was sold to a non-affiliated corporation and most (although not all) of its Contracts were transferred to Merrill Lynch Life Insurance Company ("MLLIC") and ML Life Insurance Company of New York ("ML of New York"). Shares of the Funds currently are sold to Separate Accounts of Family Life, MLLIC and ML of New York as well as other insurance companies not affiliated with Family Life, MLLIC or ML of New York (together with MLLIC, ML of New York and Family Life, "Insurance Companies") to fund certain variable life insurance contracts and/or variable annuities issued by such companies. The rights of the Insurance Companies as shareholders should be distinguished from the rights of a Contract owner, which are set forth in the Contract. A Contract owner has no interest in the shares of a Fund, but only in the Contract. The Contract is described in the Prospectus for each Contract. That Prospectus describes the relationship between increases or decreases in the net asset value of shares of a Fund, and any distributions on such shares, and the benefits provided under a Contract. The Prospectus for the Contracts also describes various fees payable to the Insurance Companies and charges to the Separate Accounts made by the Insurance Companies with respect to the Contracts. Since shares of the Funds will be sold only to the Insurance Companies for the Separate Accounts, the terms "shareholder" and "shareholders" in this Prospectus refer to the Insurance Companies. MLLIC and ML of New York are wholly owned subsidiaries of ML&Co., as is the Investment Adviser. INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS INVESTMENT OBJECTIVES Each Fund of the Company has a different investment objective, which it pursues through separate investment policies as described below. The differences in objectives and policies among the Funds can be expected to affect the return of each Fund and the degree of market and financial risk to which each Fund is subject. Each Fund is classified as "diversified," as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act" or the "Act"), except for the Developing Capital Markets Focus Fund, which is classified as "non-diversified." The investment objectives and classification of each Fund may not be changed without the approval of the holders of a majority of the outstanding shares of each Fund affected. The investment objectives and policies of each Fund are discussed below. There can be no assurance that any Fund will achieve its investment objective. Fixed Income Security Ratings. No Fund other than the High Current Income Fund and Developing Capital Markets Focus Fund invests in fixed-income securities which are rated below investment grade (i.e., securities rated Ba or below by Moody's or BB or below by Standard & Poor's). However, securities purchased by a Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgement of the Investment Adviser, it is advantageous to do so. Securities in the lowest category of investment grade debt securities may have speculative characteristics which may lead to weakened capacity to pay interest and principal during periods of adverse economic conditions. See Appendix A for a fuller description of corporate bond ratings. HIGH CURRENT INCOME FUND The primary investment objective of the High Current Income Fund, like the Prime Bond Fund, is to obtain the highest level of current income that is consistent with the investment policies of the Fund and with prudent investment management. As a secondary objective, the Fund seeks capital appreciation when consistent with its primary objective. There can be no assurance that the Fund's investment objectives will be achieved. The High Current Income Fund seeks high current income by investing principally in fixed-income securities that are rated in the lower rating categories of the established rating services (Baa or lower by Moody's and BBB or lower by Standard & Poor's), or in unrated securities of comparable quality. Securities rated below Baa by Moody's and below BBB by Standard & Poor's are commonly known as "junk bonds." Additional 5 information regarding various bond ratings is set forth in Appendix A to the Prospectus. The market price of fixed-income securities such as those purchased by the Fund is affected by changes in interest rates generally. As interest rates rise, the market value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. Although they can be expected to provide higher yields, lower-rated securities such as those purchased by the Fund may be subject to greater market fluctuations and risks of loss of income and principal than lower- yielding, higher-rated fixed-income securities. Such securities are generally issued by corporations which are not as financially secure or as creditworthy as issuers of higher-rated securities. There is, accordingly, a greater risk that the issuers of higher-yielding securities will not be able to pay principal and interest on such securities, especially during periods of adverse economic conditions. Because investment in such high-yield securities entails relatively greater risk of loss of income or principal, an investment in the High Current Income Fund may not be appropriate as the exclusive investment to fund the Contracts for all Contract Owners. See "Risks of High Yield Securities." Selection and supervision by the management of the Company of investments in lower-rated fixed-income securities involves continuous analysis of individual issuers, general business conditions and other factors which may be too time consuming or too costly for the average investor. The furnishing of these services does not, of course, guarantee successful results. The analysis of issuers may include, among other things, historic and current financial condition, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing, and current and anticipated results of operations. Analysis of general business conditions and other factors may include anticipated changes in economic activity and interest rates, the availability of new investment opportunities, and the economic outlook for specific industries. While the Investment Adviser considers as one factor in its credit analysis the ratings assigned by the rating services, the Investment Adviser performs its own independent credit analysis of issuers and consequently, the Fund may invest, without limit, in unrated securities if such securities offer, in the opinion of the Investment Adviser, a relatively high yield without undue risk. As a result, the High Current Income Fund's ability to achieve its investment objective may depend to a greater extent on the Investment Adviser's own credit analysis than the Funds which invest in higher-rated securities. Although the High Current Income Fund will invest primarily in lower-rated securities, it will not invest in securities rated Ca or lower by Moody's and CC or lower by Standard & Poor's unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded to the particular securities is stronger than would otherwise be indicated by such low ratings. However, securities purchased by the Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgement of the Investment Adviser, it is advantageous to do so. When changing economic conditions and other factors cause the yield difference between lower-rated and higher-rated securities to narrow, the Fund may purchase higher-rated securities if the Investment Adviser believes that the risk of loss of income and principal may be substantially reduced with only a relatively small reduction in yield. The securities in the Fund will be varied from time to time depending upon the judgement of management as to prevailing conditions in the economy and the securities markets and the prospects for interest rate changes among different categories of fixed-income securities. It is anticipated that under normal circumstances more than 90% of the Fund's assets will be invested in fixed- income securities, including convertible and non-convertible debt securities and preferred stock. Although it is expected that, in general, the Fund will not invest in common stocks, rights or other equity securities, it will acquire or hold such securities (if consistent with the objectives of the Fund) when such securities are acquired in unit offerings with fixed-income securities or in connection with an actual or proposed conversion or exchange of fixed-income securities. In addition, under unusual market or economic conditions, the High Current Income Fund for defensive purposes may invest up to 100% of its assets in U.S. Government or Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or may hold its assets in cash. The yield on such securities may be lower than the yield on lower-rated fixed-income securities. 6 The table below shows the average monthly dollar-weighted market value, by Standard & Poor's rating category, of the securities held by the High Current Income Fund during the year ended December 31, 1996.
% MARKET % VALUE NET CORPORATE RATING* ASSETS BONDS ------- ------ --------- BBB................................................... 0.7% 0.8% BB.................................................... 29.2 33.8 B..................................................... 47.5 55.2 CCC................................................... 4.2 4.7 NR**.................................................. 5.0 5.5 ----- 100.0% =====
- -------- * A description of corporate bond ratings of Standard & Poor's is set forth in Appendix A to the Prospectus. ** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by nationally recognized statistical rating organizations other than Standard & Poor's, or may not be rated by any other organizations. BASIC VALUE FOCUS FUND The investment objective of the Basic Value Focus Fund is to seek capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. There can be no assurance that the Fund's investment objectives will be achieved. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below- average price-earnings ratio. The investment policy of the Basic Value Focus Fund is based on the belief that the pricing mechanism of the securities market lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and depress prices of securities in unfavorable climates. Based on this premise, management believes that favorable changes in market prices are more likely to begin when securities are out of favor, earnings are depressed, price-earnings ratios are relatively low, investment expectations are limited, and there is no real general interest in the particular security or industry involved. On the other hand, management believes that negative developments are more likely to occur when investment expectations are generally high, stock prices are advancing or have advanced rapidly, price-earnings ratios have been inflated, and the industry or issue continues to gain new investment acceptance on an accelerated basis. In other words, management believes that market prices of securities with relatively high price-earnings ratios are more susceptible to unexpected adverse developments while securities with relatively low price-earnings ratios are more favorably positioned to benefit from favorable, but generally unanticipated, events. This investment policy departs from traditional philosophy. Management of the Fund believes that the market risk involved in this policy is moderated somewhat by an emphasis on securities with above-average dividend returns. The current institutionally-dominated market tends to ignore, to some extent, the numerous secondary issues whose market capitalizations are below those of the relatively few larger size growth companies. It is expected that the Basic Value Focus Fund's portfolio generally will have significant representation in this secondary segment of the market. The basic orientation of the Fund's investment policies is such that at times a large portion of its common stock holdings may carry less than favorable research ratings from research analysts. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks. The Basic Value Focus Fund also may invest in preferred stocks and non-convertible debt securities rated investment grade and utilize covered call options with respect to portfolio securities as described in Appendix B. It reserves the right as a defensive measure to hold other types of securities, including U.S. Government and Government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may invest up to 10% of its total assets, taken at market value at the time of acquisition, in the securities of foreign issuers. 7 DEVELOPING CAPITAL MARKETS FOCUS FUND The investment objective of the Developing Capital Markets Focus Fund is to seek long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. See Appendix B. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See "Other Portfolio Strategies--Foreign Securities." The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. For purposes of its investment objective, the Fund considers countries having smaller capital markets to be all countries other than the four countries having the largest equity market capitalizations. Currently, these four countries are Japan, the United Kingdom, the United States and Germany. At December 31, 1996, those countries' equity market capitalizations totalled approximately 69.84% of the world's equity market capitalization according to data provided by Morgan Stanley Capital International. The Fund will at all times, except during defensive periods, maintain investments in at least three countries having smaller capital markets. The Fund seeks to benefit from economic and other developments in smaller capital markets. The investment objective of the Fund reflects the belief that investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain countries having smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called "emerging" countries (such as Malaysia, Mexico and Thailand) which may be in the process of developing more market- oriented economies, may experience relatively high rates of economic growth. Other countries (such as France, the Netherlands and Spain), although having relatively mature smaller capital markets, may also be in a position to benefit from local or international developments encouraging greater market orientation and diminishing governmental intervention in economic affairs. Many investors, particularly individuals, lack the information, capability or inclination to invest in countries having smaller capital markets. It also may not be permissible for such investors to invest directly in certain such markets. Unlike many intermediary investment vehicles, such as closed-end investment companies that invest in a single country, the Fund intends to diversify investment risk among the capital markets of a number of countries. The Fund will not necessarily seek to diversify investments on a geographical basis or on the basis of the level of economic development of any particular country. In its investment decision-making, the Investment Adviser will emphasize the allocation of assets among certain countries' capital markets, rather than the selection of particular industries or issuers. Because of the general illiquidity of the capital markets in some countries, the Fund may invest in a relatively small number of leading or actively traded companies in a country's capital markets in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of the country's capital markets as a whole. The Fund also may invest in debt securities of issuers in countries having smaller capital markets. Capital appreciation in debt securities may arise as a result of a favorable change in relative foreign exchange rates, in relative interest rate levels, or in the creditworthiness of issuers. In accordance with its investment objective, the Fund will not seek to benefit from anticipated short-term fluctuations in currency exchange rates. The Fund may, from time to time, invest in debt securities with relatively high yields (as compared to other debt securities meeting the Fund's investment criteria), notwithstanding that the Fund may not anticipate that such securities will experience substantial capital appreciation. See "Risks of High Yield Securities" below. Such income can be used, however, to offset the operating expenses of the Fund. 8 The Fund may invest in debt securities issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ("governmental entities"), issued or guaranteed by international organizations designated or supported by multiple foreign governmental entities (which are not obligations of foreign governments) to promote economic reconstruction or development ("supranational entities"), or issued by foreign corporations or financial institutions. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the World Bank, the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. The Fund has established no rating criteria for the debt securities in which it may invest, and such securities may not be rated at all for creditworthiness. Securities rated in the medium to lower rating categories of nationally recognized statistical rating organizations and unrated securities of comparable quality are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser's judgement, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. See "Other Portfolio Strategies--Foreign Securities" and "Risks of High Yield Securities" below. For purposes of the Fund's investment objective, an issuer ordinarily will be considered to be located in the country where the primary trading market of its securities is located. The Fund, however, may consider a company to be located in countries having smaller capital markets, without reference to its domicile or to the primary trading market of its securities, when at least 50% of its non-current assets, capitalization, gross revenues or profits in any one of the two most recent fiscal years represents (directly or indirectly through subsidiaries) assets or activities located in such countries. The Fund also may consider closed-end investment companies to be located in the country or countries in which they primarily make their portfolio investments. Foreign investments in smaller capital markets involve risks not involved in domestic investment, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. These risks are often heightened for investments in small capital markets. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. In addition, certain foreign investments may be subject to foreign withholding taxes. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. The Fund reserves the right, as a temporary defensive measure or to provide for redemptions or in anticipation of investment in countries having smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term securities, including money market securities. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities convertible into securities of foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose material information in the United States, and therefore, there may not be a correlation between such information and the market value of such ADRs. 9 NON-DIVERSIFIED FUNDS The Developing Capital Markets Focus Fund is classified as a non-diversified investment company under the Investment Company Act. However, the Fund will have to limit its investments to the extent required by the diversification requirements applicable to regulated investment companies under the Internal Revenue Code. To qualify as a regulated investment company, a Fund, at the close of each fiscal quarter, may not have more than 25% of its total assets invested in the securities (except obligations of the U.S. Government, its agencies or instrumentalities) of any one issuer and with respect to 50% of its assets, (i) may not have more than 5% of its total assets invested in the securities of any one issuer and (ii) may not own more than 10% of the outstanding voting securities of any one issuer. INVESTMENT RESTRICTIONS The Company has adopted a number of restrictions and policies relating to the investment of its assets and its activities which are fundamental policies and may not be changed without the approval of the holders of the Company's outstanding voting securities (including a majority of the shares of each Fund). Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. OTHER PORTFOLIO STRATEGIES Restricted Securities. Each of the Funds is subject to limitations on the amount of illiquid securities it may purchase; however, each Fund may purchase without regard to that limitation certain securities that are not registered under the Securities Act of 1933, as amended (the "Securities Act"), including (a) commercial paper exempt from registration under Section 4(2) of the Securities Act, and (b) securities that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities sold under Rule 144A which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Funds' investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Foreign Securities. The High Current Income, Basic Value Focus and Developing Capital Markets Focus Funds may invest in securities of foreign issuers. Investments in foreign securities, particularly those of non- governmental issuers, involve considerations and risks which are not ordinarily associated with investing in domestic issuers. These considerations and risks include changes in currency rates, currency exchange control regulations, the possibility of expropriation, the unavailability of financial information or the difficulty of interpreting financial information prepared under foreign accounting standards, less liquidity and more volatility in foreign securities markets, the impact of political, social or diplomatic developments, and the difficulty of assessing economic trends in foreign countries. If it should become necessary, a Fund could encounter greater difficulties in invoking legal processes abroad than would be the case in the United States. Transaction costs in foreign securities may be higher. The operating expense ratio of a Fund investing in foreign securities can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial costs, are higher. In addition, net investment income earned by a Fund on a foreign security may be subject to withholding and other taxes imposed by foreign governments which will reduce a Fund's net investment income. The Investment Adviser will consider these and other factors before investing in foreign securities, and will not make such investments unless, in its opinion, such investments will meet the standards and objectives of a particular Fund. No Fund which may invest in foreign securities other than the Developing Capital Markets Focus Fund may from time to time be substantially invested in non-dollar-denominated securities of foreign issuers. For a Fund that invests in foreign securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value 10 of securities in the portfolio and the unrealized appreciation or depreciation of investments insofar as United States investors are concerned, and a Fund's return on investments in non-dollar-denominated securities may be reduced or enhanced as a result of changes in foreign currency rates during the period in which the Fund holds such investments. Foreign currency exchange rates are determined by forces of supply and demand in the foreign exchange markets. These forces are, in turn, affected by international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. The High Current Income Fund will purchase only securities issued in dollar denominations. The Developing Capital Markets Focus Fund may invest a significant portion of its assets in securities of foreign issuers in smaller capital markets, while each of the other Funds which is permitted to invest in foreign securities may from time to time invest in securities of such foreign issuers. Foreign investments involve risks, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems, the existence or possible imposition of exchange controls, or other foreign or United States governmental laws or restrictions are often heightened for investments in smaller capital markets. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. Smaller capital markets, while often growing in trading volume, have substantially less volume than United States markets, and securities in many smaller capital markets are less liquid and their prices may be more volatile than securities of comparable United States companies. Brokerage commissions, custodial services, and other costs relating to investment in smaller capital markets are generally more expensive than in the United States. Such markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, satisfactory custodial services for investment securities may not be available in some countries having smaller capital markets, which may result in a Fund which invests in these markets incurring additional costs and delays in transporting and custodying such securities outside such countries. Delays in settlement could result in temporary periods when assets of such a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. There is generally less government supervision and regulation of exchanges, brokers and issuers in countries having smaller capital markets than there is in the United States. As a result, management of a Fund which invests in foreign securities may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience. Due to its emphasis on securities of issuers located in smaller capital markets, the Developing Capital Markets Focus Fund should be considered as a vehicle for diversification and not as a balanced investment program. Certain of the Funds may invest in debt securities issued by foreign governments. Investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging market country's debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor's willingness or ability to repay principal and 11 interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. Holders of government debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors. As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. Government obligors in developing and emerging market countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. The issuers of the government debt securities in which a Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements. The Developing Capital Markets Focus Fund intends to invest in securities of foreign issuers in smaller capital markets. Some countries with smaller capital markets prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Fund. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms than securities of the company available for purchase by nationals. A number of countries, such as South Korea, Taiwan and Thailand, have authorized the formation of closed-end investment companies to facilitate indirect foreign investment in their capital markets. In accordance with the Investment Company Act, the Developing Capital Markets Focus Fund may invest up to 10% of its total assets in securities of such closed-end investment companies. This restriction on investments in securities of closed-end investment companies may limit opportunities for the Fund to invest indirectly in certain smaller capital markets. Shares of certain closed-end investment companies may at times be acquired only at market prices representing premiums to their net asset values. If a Fund acquires shares in closed-end investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies. A Fund also may seek, at its own cost, to create its own investment entities under the laws of certain countries. In some countries, banks or other financial institutions may constitute a substantial number of the leading companies or the companies with the most actively traded securities. Also, the Investment Company Act restricts a Fund's investments in any equity security of an issuer which, in its most recent fiscal year, derived more than 15% of its revenues from "securities related activities," as defined by the rules thereunder. These provisions may also restrict a Fund's investments in certain foreign banks and other financial institutions. Lending of Portfolio Securities. Each Fund of the Company may from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government which, while the loan is outstanding, will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities plus accrued interest. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. Forward Commitments. Each of the Funds may purchase securities on a when- issued basis, and they may purchase or sell such securities for delayed delivery. These transactions occur when securities are purchased or 12 sold by a Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. The value of the security on the delivery date may be more or less than its purchase price. A Fund entering into such transactions will maintain a segregated account with its custodian of cash or liquid securities in an aggregate amount equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Standby Commitment Agreements. The High Current Income and Developing Capital Markets Focus Funds may from time to time enter into standby commitment agreements. Such agreements commit the respective Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will at all times maintain a segregated account with its custodian of cash or liquid securities in an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Portfolio Strategies Involving Options, Futures and Foreign Exchange Transactions. Certain Funds may use derivative instruments, including options and futures and purchase and sell foreign exchange. Transactions involving such instruments expose these Funds to certain risks. Each Fund's use of these instruments and the associated risks are described in detail in Appendix B attached to this Prospectus. RISKS OF HIGH YIELD SECURITIES The High Current Income Fund and Developing Capital Markets Focus Fund may invest a substantial portion of their assets in high yield, high risk securities or junk bonds, which are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During recessionary periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. While the high yield securities in which the High Current Income Fund or Developing Capital Markets Focus Fund may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after a Fund purchases a particular security, in which case a Fund may experience losses and incur costs. In an effort to minimize the risk of issuer default or bankruptcy, the High Current Income Fund and the Developing Capital Markets Focus Fund each will diversify its holdings among many issuers. However, there can be no assurance that diversification will protect a Fund from widespread defaults brought about by a sustained economic downturn. High yield securities tend to be more volatile than higher-rated fixed- income securities, so that adverse economic events may have a greater impact on their prices and yields than on higher-rated fixed-income securities. Zero coupon bonds and bonds which pay interest and/or principal in additional bonds rather than in cash are especially volatile. Like higher-rated fixed-income securities, junk bonds are generally purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in this market, which may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for such bonds 13 by various dealers. Adverse economic conditions or investor perceptions (whether or not based on economic fundamentals) may impair the liquidity of this market, and may cause the prices the High Current Income Fund and the Developing Capital Markets Focus Fund receive for their junk bonds to be reduced, or a Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Under such conditions, judgement may play a greater role in valuing certain of each Fund's portfolio securities than in the case of securities trading in a more liquid market. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the net asset value of the High Current Income Fund and the Developing Capital Markets Focus Fund. In addition, each Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. Sovereign Debt. The junk bonds in which the High Current Income Fund and Developing Capital Markets Focus Fund may invest include junk bonds issued by sovereign entities. Investment in such sovereign debt involves a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt. Holders of sovereign debt, including the High Current Income Fund and the Developing Capital Markets Focus Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies available to a Fund and there can be no assurance a Fund will be able to collect on defaulted sovereign debt in whole or in part. INSURANCE LAW RESTRICTIONS In order for shares of the Company's Funds to remain eligible investments for the Separate Accounts, it may be necessary, from time to time, for a Fund to limit its investments in certain types of securities in accordance with the insurance laws or regulations of the various states in which the Contracts are sold. The New York insurance law requires that investments of each Fund be made with the degree of care of an "ordinarily prudent person." The Investment Adviser believes that compliance with this standard will not have any negative impact on the performance of any of the Funds. OTHER CONSIDERATIONS The Investment Adviser will use its best efforts to assure that each Fund of the Company complies with certain investment limitations of the Internal Revenue Service to assure favorable income tax treatment for the Contracts. It is not expected that such investment limitations will materially affect the ability of any Fund to achieve its investment objective. 14 DIRECTORS The Directors of the Company consist of six individuals, five of whom are not "interested persons" of the Company as defined in the Investment Company Act of 1940. The Directors of the Company are responsible for the overall supervision of the operations of the Company and perform the various duties imposed on the directors of the investment companies by the Investment Company Act of 1940. The Board of Directors elects officers of the Company annually. The Directors of the Company and their principal employment are as follows: Arthur Zeikel*--President of the Investment Adviser and its affiliate, Fund Asset Management, L.P. ("FAM"); President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of ML&Co.; and Director of the Merrill Lynch Funds Distributor, Inc. (the "Distributor"). Joe Grills--Member of the Committee on Investment of Employee Benefit Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive Committee; and Member of the Investment Advisory Committee of the State of New York Common Retirement Fund and the Howard Hughes Medical Institute; Director, Duke Management Company, LaSalle Street Fund and Kimco Realty Corporation. Walter Mintz--Special Limited Partner of Cumberland Partners (investment partnership). Robert S. Salomon, Jr.--Principal of STI Management (investment adviser). Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate, consulting and investments). Stephen R. Swensrud--Chairman of Fernwood Associates (financial consultants). INVESTMENT ADVISER Merrill Lynch Asset Management L.P. ("MLAM"), an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc., is the investment adviser (the "Investment Adviser") for the Fund. The general partner of the Investment Adviser is Princeton Services, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc. The principal address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset Management, L.P. ("FAM"), acts as the investment adviser for over 130 other registered investment companies. The Investment Adviser also offers portfolio management and portfolio analysis services to individuals and institutions. In the aggregate, as of March 31, 1997, MLAM and FAM had a total of approximately $247.2 billion in investment company and other portfolio assets under management including assets of certain affiliates. While the Investment Adviser is at all times subject to the direction of the Board of Directors of the Company, the Investment Advisory Agreements provide that the Investment Adviser, subject to review by the Board of Directors, is responsible for the actual management of the Funds and has responsibility for making decisions to buy, sell or hold any particular security. The Investment Adviser provides the portfolio managers for the Funds, who consider information from various sources, make the necessary investment decisions and effect transactions accordingly. The Investment Adviser is also obligated to perform certain administrative and management services for the Company (certain of which it may delegate to third parties) and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreements. The Investment Adviser has access to the full range of the securities and economic research facilities of Merrill Lynch. During the Company's fiscal year ended December 31, 1996, the advisory fees expense incurred by the Company totaled $24,131,430 of which $1,881,541 related to the High Current Income Fund (representing .49% of its average net assets), $2,414,605 related to the Basic Value Focus Fund (representing .60% of its average net assets), and, $765,718 related to the Developing Capital Markets Focus Fund (representing 1.00% of its average net assets) of which $52,388 was voluntarily waived by MLAM. - -------- * Interested person, as defined in the Investment Company Act of 1940, of the Company. 15 During the Company's fiscal year ended December 31, 1996, the total operating expenses of the Company's Funds (including the advisory fees paid to the Investment Adviser), before any fee waiver or reimbursement of a portion of such expenses were as follows: $2,096,102 related to the High Current Income Fund (representing .54% of its average net assets), $2,657,872 related to the Basic Value Focus Fund (representing .66% of its average net assets), and, $1,009,535 related to the Developing Capital Markets Focus Fund (representing 1.31% of its average net assets). The Investment Adviser has entered into a sub-advisory agreement (the "Sub- Advisory Agreement") with MLAM U.K., an indirect wholly owned subsidiary of ML & Co., and an affiliate of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing investment advisory services to the Investment Adviser with respect to the Funds in an amount to be determined from time to time by the Investment Adviser and MLAM U.K. but in no event in excess of the amount that the Investment Adviser actually receives for providing services to the Funds pursuant to the Investment Advisory Agreement. The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into two agreements which limit the operating expenses paid by each Fund in a given year to 1.25% of its average daily net assets (the "Reimbursement Agreements"). The reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide that any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. The Investment Adviser has entered into administrative services agreements with certain Insurance Companies, including MLLIC and ML of New York, pursuant to which the Investment Adviser compensates such companies for administrative responsibilities relating to the Company which are performed by such Insurance Companies. CODE OF ETHICS The Board of Directors of the Company has adopted a Code of Ethics under Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment Adviser (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Investment Adviser and, as described below, impose additional, more onerous, restrictions on fund investment personnel. The Codes require that all employees of the Investment Adviser preclear any personal securities investment (with limited exceptions, such as government securities). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Investment Adviser include a ban on acquiring any securities in a "hot" initial public offering and a prohibition from profiting on short- term trading in securities. In addition, no employee may purchase or sell any security which at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Investment Adviser. Furthermore, the Codes provide for trading "blackout periods" which prohibit trading by investment personnel of the Company within periods of trading by the Company in the same (or equivalent) security (15 or 30 days depending upon the transaction). PORTFOLIO MANAGERS The following is information with respect to the Portfolio Managers for each of the Company's Funds. Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since December 1993; Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990. Aldona Schwartz has served as the High Current Income Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to- day management. She has served as Vice President of MLAM since 1991 and employee of the Investment Adviser since 1986. Grace Pineda has served as the Developing Capital Markets Focus Fund's Portfolio Manager since May 1994, and is primarily responsible for the Fund's day-to-day management. She has served as Vice President of MLAM since 1989. 16 PORTFOLIO TRANSACTIONS AND BROKERAGE None of the Company's Funds has any obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Board of Directors of the Company, the Investment Adviser is primarily responsible for the Company's portfolio decisions and the placing of the Company's portfolio transactions. In placing orders, it is the policy of each Fund to obtain the most favorable net results, taking into account various factors, including price, dealer spread or commission, if any, size of the transactions and difficulty of execution. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Company will not necessarily be paying the lowest spread or commission available. Under the Investment Company Act of 1940, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Affiliated persons of the Company may serve as its broker in over- the-counter transactions conducted on an agency basis. During the year ended December 31, 1996, the Company engaged in 16 transactions pursuant to such order involving approximately $64.9 million of securities. For the year ended December 31, 1996, the Company paid brokerage commissions of $6,656,814, of which $266,405 was paid to Merrill Lynch. PURCHASE OF SHARES The Company continuously offers shares of Class A Common Stock in each of its Funds to the Insurance Companies at prices equal to the respective per share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly owned subsidiary of the Investment Adviser, acts as the distributor of the shares. Net asset value is determined in the manner set forth below under "Additional Information--Determination of Net Asset Value." The Company and the Distributor reserve the right to suspend the sale of shares of each Fund in response to conditions in the securities markets or otherwise. REDEMPTION OF SHARES The Company is required to redeem all full and fractional shares of the Funds for cash. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. DIVIDENDS, DISTRIBUTIONS AND TAXES It is the Company's intention to distribute substantially all of the net investment income, if any, of each Fund. For dividend purposes, net investment income of each Fund, other than the Domestic Money Market and Reserve Assets Funds, will consist of all payments of dividends or interest received by such Fund less the estimated expenses of such Fund (including fees payable to the Investment Adviser). Dividends from net investment income of the High Current Income Fund are declared and reinvested monthly in additional full and fractional shares at net asset value. Dividends from net investment income of the Basic Value Focus and Developing Capital Markets Focus Funds are declared and reinvested at least annually in additional full and fractional shares of the respective Funds. All net realized long-term or short-term capital gains of the Company, if any, are declared and distributed annually after the close of the Company's fiscal year to the shareholders of the Fund or Funds to which such gains are attributable. Short-term capital gains are taxable as ordinary income. TAX TREATMENT OF THE COMPANY Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Under such provisions, a Fund will not be subject to 17 federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. One of the requirements to qualify for treatment as a regulated investment company under the Code is that a Fund, among other things, derive less than 30% of its gross income in each taxable year from gains (without deduction of losses) from the sale or other disposition of stocks, securities and certain options, futures or forward contracts held for less than three months. This requirement may limit the ability of certain Funds to dispose of certain securities at times when management of the Company might otherwise deem such disposition appropriate or desirable. If a Fund earns original issue discount income in a taxable year which is not represented by correlative cash income, or if a Fund receives property rather than cash in payment of interest, shareholders will be allocated income greater than the amount of cash distributed to them. In addition, the Fund may have to dispose of securities and use the proceeds thereof to make distributions in amounts necessary to satisfy its distribution requirements under the Code. TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS Dividends paid by the Company from its ordinary income and distributions of the Company's net realized capital gains are includable in the respective Insurance Company's gross income. Distributions of the Company's net realized long-term capital gains retain their character as long-term capital gains in the hands of the Insurance Companies if certain requirements are met. The tax treatment of such dividends and distributions depends on the respective Insurance Company's tax status. To the extent that income of the Company represents dividends on common or preferred stock, rather than interest income, its distributions to the Insurance Companies will be eligible for the present 70% dividends received deduction applicable in the case of a life insurance company as provided in the Code. See the Prospectus for the Contracts for a description of the respective Insurance Company's tax status and the charges which may be made to cover any taxes attributable to the Separate Account. Not later than 60 days after the end of each calendar year, the Company will send to the Insurance Companies a written notice required by the Code designating the amount and character of any distributions made during such year. PERFORMANCE DATA From time to time the average annual total return and yield of one or more of the Company's Funds for various specified time periods may be included in advertisements or information furnished by the Insurance Companies to present or prospective Contract owners. Average annual total return and yield are computed in accordance with formulas specified by the Securities and Exchange Commission. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield to maturity of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the offering price per share on the last day of the period. The yield for the 30-day period ending December 31, 1996 was 9.30% for the High Current Income Fund. Total return and yield figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return and yield will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The yield and total return quotations 18 may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease the yield. On occasion, one or more of the Company's Funds may compare its performance to that of the S&P 500 Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service or contained in publications such as Morningstar Publications, Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and Ibbotson Associates. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. ADDITIONAL INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each Fund is determined once daily by the Investment Adviser immediately after the declaration of dividends, if any, and is determined as of fifteen minutes following the close of trading on each day the New York Stock Exchange is open for business. The New York Stock Exchange is open on business days other than national holidays (except for Martin Luther King Day, when it is open) and Good Friday. The net asset value per share of each Fund is computed by dividing the sum of the value of the securities held by that Fund plus any cash or other assets (including interest and dividends accrued) minus all liabilities (including accrued expenses) by the total number of shares outstanding of that Fund at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment Adviser, are accrued daily. Securities held by each Fund will be valued as follows: Portfolio securities that are traded on stock exchanges are valued at the last sale price (regular way) as of the close of business on the day the securities are being valued, or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter ("OTC") market are valued at the last available bid price in the OTC market prior to the time of valuation. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the OTC market. When a Portfolio writes an option, the amount of the premium received is recorded on the books as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options being traded in the OTC market, the last asked price. Options purchased are valued at their last sale price in the case of exchange- traded options or, in the case of options traded in the OTC market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The Company has used pricing services, including Merrill Lynch Securities Pricing(TM) Service ("MLSPS"), to value securities held by the High Current Income and Prime Bond Funds and to value bonds held by other of the Company's Funds. The Board of Directors of the Company has examined the methods used by the pricing services in estimating the value of securities held by the Funds and believes that such methods will reasonably and fairly approximate the price at which those securities may be sold and result in a good faith determination of the fair value of such securities; however, there is no assurance that securities can be sold at the prices at which they are valued. During the fiscal year ended December 31, 1996, the High Current Income Fund paid MLSPS $7,269, for such services. ORGANIZATION OF THE COMPANY The Company was incorporated on October 16, 1981, and operations of its Reserve Assets Fund commenced on November 12, 1981. Operations of the Prime Bond, High Current Income, Quality Equity and 19 Equity Growth Funds commenced on April 20, 1982. The Natural Resources Focus Fund and the American Balanced Fund commenced operations on June 1, 1988 and June 1, 1988, respectively. The Domestic Money Market Fund and the Global Strategy Focus Fund commenced operations on February 20 and February 28, 1992, respectively. The Basic Value Focus, Global Bond Focus, Global Utility Focus and International Equity Focus Funds commenced operations on July 1, 1993. The Developing Capital Markets Focus Fund and Government Bond Fund commenced operations on May 2, 1994. The Index 500 Fund commenced operations on December 13, 1996. The authorized capital stock of the Company consists of 3,400,000,000 shares of Class A Common Stock, par value $0.10 per share, and 3,400,000,000 shares of Class B Common Stock, par value $0.10 per share. The shares of Class A and Class B Common Stock are each divided into sixteen classes designated Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch Global Bond Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch Government Bond Fund Common Stock and Merrill Lynch Index 500 Common Stock, respectively. The Company may, from time to time, at the sole discretion of its Board of Directors and without the need to obtain the approval of its shareholders or of Contract Owners, offer and sell shares of one or more of such classes. Each class consists of 100,000,000 Class A shares and 100,000,000 Class B shares except for Domestic Money Market Fund Common Stock which consists of 1,300,000,000 Class A shares and 1,300,000,000 Class B shares, Reserve Assets Fund Common Stock which consists of 500,000,000 Class A shares and 500,000,000 Class B shares and Global Bond Focus Fund Common Stock and Global Strategy Focus Fund Common Stock, each of which consists of 200,000,000 Class A shares and 200,000,000 Class B shares. All shares of Common Stock have equal voting rights, except that only shares of the respective classes are entitled to vote on matters concerning only that class. Pursuant to the Investment Company Act of 1940 and the rules and regulations thereunder, certain matters approved by a vote of all shareholders of the Company may not be binding on a class whose shareholders have not approved such matter. Each issued and outstanding share of a class is entitled to one vote and to participate equally in dividends and distributions declared with respect to such class and in net assets of such class upon liquidation or dissolution remaining after satisfaction of outstanding liabilities. The shares of each class, when issued, will be fully paid and nonassessable, have no preference, preemptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any class are entitled to redeem their shares as set forth under "Redemption of Shares." Shares do not have cumulative voting rights and the holders of more than 50% of the shares of the Company voting for the election of directors can elect all of the directors of the Company if they choose to do so and in such event the holders of the remaining shares would not be able to elect any directors. The Company does not intend to hold meetings of shareholders unless under the Investment Company Act of 1940 shareholders are required to act on any of the following matters: (i) election of directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of the selection of independent accountants. The Board of Directors of the Company has authorized the issuance of shares of Class B Common Stock with respect to each of the Company's Funds, with the existing shares of Common Stock of each Fund to be designated Class A Common Stock of such Fund. The Board of Directors have also authorized the Company to enter into a Distribution Plan with Merrill Lynch Funds Distributor, Inc. under which the Company would pay distribution fees in respect of the shares of its Class B Common Stock. No shares of Class B Common Stock have been issued; however, the Company may commence issuing shares of Class B Common Stock later in 1997 pursuant to a separate or amended Prospectus. MLLIC purchased $100 worth of Shares of the Basic Value Focus Fund on June 28, 1993. MLLIC purchased, on July 1, 1993, $2,000,000 worth of shares of the Basic Value Focus Fund. MLLIC purchased on May 2, 1994 $8,000,000 worth of shares of the Developing Capital Markets Focus Fund. The organizational expenses of each of the Company's Funds are paid by the Investment Adviser. The Investment Adviser is reimbursed by MLLIC for all such expenses over a five-year period. 20 INDEPENDENT AUDITORS Deloitte & Touche llp, 117 Campus Drive, Princeton, New Jersey 08540, has been selected as the independent auditors of the Company. The selection of independent auditors is subject to annual ratification by the Company's shareholders. CUSTODIAN The Bank of New York ("BONY"), 110 Washington Street, New York, New York 10286, acts as Custodian of the Company's assets, except that Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, acts as Custodian for assets of the Company's Developing Capital Markets Focus Fund. TRANSFER AND DIVIDEND DISBURSING AGENT Merrill Lynch Financial Data Services, Inc. ("MLFDS"), which is a wholly owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's Transfer Agent and is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. MLFDS will receive an annual fee of $5,000 per Fund and will be entitled to reimbursement of out-of- pocket expenses. LEGAL COUNSEL Rogers & Wells, New York, New York, is counsel for the Company. REPORTS TO SHAREHOLDERS The fiscal year of the Company ends on December 31 of each year. The Company will send to its shareholders at least semi-annually reports showing the Funds' portfolio securities and other information. An annual report containing financial statements, audited by independent auditors, will be sent to shareholders each year. ADDITIONAL INFORMATION This Prospectus does not contain all of the information included in the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940, with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Statement of Additional Information, dated April 25, 1997, which forms a part of the Registration Statement, is incorporated by reference into this Prospectus. The Statement of Additional Information may be obtained without charge as provided on the cover page of this Prospectus. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the Securities and Exchange Commission in Washington, D.C. 21 APPENDIX A U.S. GOVERNMENT SECURITIES For temporary or defensive purposes, each Fund may invest in the various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES For temporary or defensive purposes, each Fund may invest in government agency securities, which are debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Funds may invest in all types of government agency securities currently outstanding or to be issued in the future. DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS For temporary or defensive purposes, each Fund may invest in depositary institutions money instruments, such as certificates of deposit, including variable rate certificates of deposit, bankers' acceptances, time deposits and bank notes. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks, savings banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market rate. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Often, dealers selling variable rate certificates of deposit to the Funds agree to repurchase such instruments, at the Funds' option, at par on the coupon dates. The dealers' obligations to repurchase these instruments are subject to conditions imposed by the various dealers; such conditions typically are the continued credit standing of the issuer and the existence of reasonably orderly market conditions. The Funds are also able to sell variable rate certificates of deposit in the secondary market. Variable rate certificates of deposit normally carry a higher interest rate than comparable fixed rate certificates of deposit because variable rate certificates of deposit generally have a longer stated maturity than comparable fixed rate certificates of deposit. As a matter of policy, the Domestic Money Market Fund will invest only in these types of instruments issued by U.S. issuers. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. For temporary or defensive purposes, the Developing Capital Markets Focus Fund may invest in certificates of deposit and bankers' acceptances issued by foreign branches or subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign banks ("Yankeedollar" obligations). The Fund may invest only in Eurodollar obligations which by their terms are general obligations of the U.S. parent bank and meet the other criteria discussed below. Yankeedollar obligations in which the Fund may invest must be issued by U.S. branches or subsidiaries of foreign banks which are subject to state or federal banking regulations in the U.S. and by their terms must be general obligations of the foreign parent. In addition, the Fund will limit its investments in Yankeedollar obligations to obligations issued by banking institutions with more than $1 billion in assets. For temporary or defensive purposes, the Developing Capital Markets Focus Fund may also invest in U.S. dollar-denominated obligations of foreign depository institutions and their foreign branches and subsidiaries, such as certificates of deposit, bankers' acceptances, time deposits and deposit notes. The obligations of such foreign branches and subsidiaries may be the general obligation of the parent bank or may be limited to the issuing branch or subsidiary by the terms of the specific obligation or by government regulation. A-1 Except as otherwise provided above with respect to investment in Yankeedollar and other foreign bank obligations no Fund may invest in any bank money instrument issued by a commercial bank or a savings and loan association unless the bank or association is organized and operating in the United States, has total assets of at least $1 billion and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this limitation shall not prohibit the investment of up to 10% of the total assets of a Fund (taken at market value at the time of each investment) in certificates of deposit issued by banks and savings and loan associations with assets of less than $1 billion if the principal amount of each such certificate of deposit is fully insured by the FDIC. SHORT-TERM DEBT INSTRUMENTS For temporary or defensive purposes, each Fund may invest in commercial paper (including variable amount master demand notes and insurance company funding agreements), which refers to short-term, unsecured promissory notes issued by corporations, partnerships, trusts and other entities to finance short-term credit needs and by trusts issuing asset-backed commercial paper. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable amount master notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis, in accordance with a stated short-term interest rate benchmark. Because the interest rate of a variable amount master note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Investment Adviser values such a note in accordance with the amortized cost basis described under "Determination of Net Asset Value" in the Statement of Additional Information. For temporary or defensive purposes, the Developing Capital Markets Focus Fund may also invest in U.S. dollar-denominated commercial paper and other short-term obligations issued by foreign entities. Such investments are subject to quality standards similar to those applicable to investments in comparable obligations of domestic issuers. Investments in foreign entities in general involve the same risks as those described in the Statement of Additional Information in connection with investments in Eurodollar, Yankeedollar and foreign bank obligations. REPURCHASE AGREEMENTS Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Under a repurchase agreement, the seller agrees, upon entering into the contract with the Fund, to repurchase a security (typically a security issued or guaranteed by the U.S. government) at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed yield for the Fund insulated from fluctuations in the market value of the underlying security during such period, although, to the extent the repurchase agreement is not denominated in U.S. dollars, the Fund's return may be affected by currency fluctuations. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System, a primary dealer in U.S. government securities or an affiliate thereof. A purchase and sale contract is similar to a repurchase agreement, but purchase and sale contracts, unlike repurchase agreements, allocate interest on the underlying security to the purchaser during the term of the agreement and generally do not require the seller to provide additional securities in the event of a decline in the market value of the purchased security during the term of the agreement. If the seller were to default on its obligation to repurchase a security under a repurchase agreement or purchase and sale contract and the market value of the underlying security at such time was less than the Fund had paid to the seller, the Fund would realize a loss. Repurchase agreements maturing in more than seven days will be considered "illiquid securities." A-2 DESCRIPTION OF CORPORATE BOND RATINGS Moody's Investors Service, Inc.: Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded both during good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other market shortcomings. C--Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Standard & Poor's Corporation: AAA--This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A--Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. A-3 BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. NR--Not rated by the indicated rating agency. Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. A-4 APPENDIX B Certain Funds of the Company are authorized to use derivative instruments, including options, and futures, and to purchase and sell foreign exchange, as described below. Such instruments are referred to collectively herein as "Strategic Instruments." OPTIONS ON SECURITIES AND SECURITIES INDICES Purchasing Options. The Developing Capital Markets Focus Fund is authorized to purchase put options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When the Fund purchases a put option, in consideration for an upfront payment (the "option premium") the Fund acquires a right to sell to another party specified securities owned by the Fund at a specified price (the "exercise price") on or before a specified date (the "expiration date"), in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index declines below a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a put option limits the Fund's risk of loss in the event of a decline in the market value of the portfolio holdings underlying the put option prior to the option's expiration date. If the market value of the portfolio holdings associated with the put option increases rather than decreases, however, the Fund will lose the option premium and will consequently realize a lower return on the portfolio holdings than would have been realized without the purchase of the put. The Developing Capital Markets Focus Fund is authorized to purchase call options on securities it intends to purchase or securities indices the performance of which are substantially correlated with the performance of the types of securities it intends to purchase. When the Fund purchases a call option, in consideration for the option premium the Fund acquires a right to purchase from another party specified securities at the exercise price on or before the expiration date, in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index increases beyond a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a call option may protect the Fund from having to pay more for a security as a consequence of increases in the market value for the security during a period when the Fund is contemplating its purchase, in the case of an option on a security, or attempting to identify specific securities in which to invest in a market the Fund believes to be attractive, in the case of an option on an index (an "anticipatory hedge"). In the event the Fund determines not to purchase a security underlying a call option, however, the Fund may lose the entire option premium. The Developing Capital Markets Focus Fund is also authorized to purchase put or call options in connection with closing out put or call options it has previously sold. Writing Options. The Basic Value Focus Fund and the Developing Capital Markets Focus Fundare each authorized to write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which is substantially correlated with securities held in its portfolio. When a Fund writes a call option, in return for an option premium the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write call options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is less than the exercise price, the Fund will partially offset any decline in the value of the underlying securities through the receipt of the option premium. By writing a call option, however, the Fund limits its ability to sell the underlying securities, and gives up the opportunity to profit from any increase in the value of the underlying securities beyond the exercise price, while the option remains outstanding. The Developing Capital Markets Focus Fund may also write put options on securities or securities indices. When the Fund writes a put option, in return for an option premium the Fund gives another party the right to sell to the Fund a specified security at the exercise price on or before the expiration date, in the case of an option on a security, or agrees to pay to another party an amount based on any decline in a specified securities index below B-1 a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write put options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is greater than the exercise price, the Fund will profit by the amount of the option premium. By writing a put option, however, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of the security at the time of exercise as long as the put option is outstanding, in the case of an option on a security, or make a cash payment reflecting any decline in the index, in the case of an option on an index. Accordingly, when the Fund writes a put option it is exposed to a risk of loss in the event the value of the underlying securities falls below the exercise price, which loss potentially may substantially exceed the amount of option premium received by the Fund for writing the put option. The Fund will write a put option on a security or a securities index only if the Fund would be willing to purchase the security at the exercise price for investment purposes (in the case of an option on a security) or is writing the put in connection with trading strategies involving combinations of options--for example, the sale and purchase of options with identical expiration dates on the same security or index but different exercise prices (a technique called a "spread"). The Developing Capital Markets Focus Fund is also authorized to sell call or put options in connection with closing out call or put options it has previously purchased. Other than with respect to closing transactions, a Fund will only write call or put options that are "covered." A call or put option will be considered covered if the Fund has segregated assets with respect to such option in the manner described in "Risk Factors in Options, Futures, and Currency Instruments" below. A call option will also be considered covered if a Fund owns the securities it would be required to deliver upon exercise of the option (or, in the case of option on a securities index, securities which are substantially correlated with the performance of such index) or owns a call option, warrant or convertible instrument which is immediately exercisable for, or convertible into, such security. Types of Options. A Fund may engage in transactions in options on securities or securities indices on exchanges and in the over-the-counter ("OTC") markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties' obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater risk of counterparty default. See "Additional Risk Factors of OTC Transactions" below. FUTURES The Developing Capital Markets Focus Fund may engage in transactions in futures and options thereon. Futures are standardized, exchange-traded contracts which obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of a commodity at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral ("margin") equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. The sale of a futures contract limits the Fund's risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract's expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract. The purchase of a futures contract may protect the Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position. B-2 The Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying commodity is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). The Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a "commodity pool" under regulations of the Commodity Futures Trading Commission. FOREIGN EXCHANGE TRANSACTIONS The Developing Capital Markets Focus Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, "Currency Instruments") for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the US dollar. Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. The Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio position. The Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. A Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. The Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. The Fund may also hedge against the decline in the value of a currency against the US dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized exchange-traded contracts. See "Futures" above. The Fund may also hedge against the decline in the value of a currency against the US dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See "Types of Options" above and "Additional Risk Factors of OTC Transactions" below. The Fund will not speculate in Currency Instruments. Accordingly, the Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. The Fund may, however, hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the Investment Adviser believes that (i) there is a demonstrable high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged. Risk Factors in Hedging Foreign Currency Risks. While a Fund's use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund's shares, the net asset value of the Fund's shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund's hedging strategies will be ineffective. To the extent that a Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses, and decrease its total return, as the result of its hedging transactions. Furthermore, a B-3 Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur. It may not be possible for a Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available (such as certain developing markets) and it is not possible to engage in effective foreign currency hedging. RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS Use of Strategic Instruments for hedging purposes involves the risk of imperfect correlation in movements in the value of the Strategic Instruments and the value of the instruments being hedged. If the value of the Strategic Instruments moves more or less than the value of the hedged instruments a Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments. Each Fund intends to enter into transactions involving Strategic Instruments only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under "Additional Risk Factors of OTC Transactions." However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Strategic Instrument or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Strategic Instrument without incurring substantial losses, if at all. Certain transactions in Strategic Instruments (e.g., forward foreign exchange transactions, futures transactions, sales of put options) may expose a Fund to potential losses which exceed the amount originally invested by the Fund in such instruments. When a Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund's exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Securities and Exchange Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund's exposure to loss. ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC STRATEGIC INSTRUMENTS Certain Strategic Instruments traded in OTC markets, including indexed securities and OTC options, may be substantially less liquid than other instruments in which a Fund may invest. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. A Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Investment Adviser anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer's quotation may be used. The staff of the Securities and Exchange Commission has taken the position that purchased OTC options and the assets underlying written OTC options are illiquid securities. Each Fund has therefore adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the securities underlying OTC call options currently outstanding which have been sold by the Fund and margin deposits on the Fund's outstanding OTC options exceeds 15% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are deemed to be illiquid or are otherwise not readily marketable. However, if an OTC option is sold by the Fund to a dealer in U.S. government securities recognized as a "primary dealer" by the Federal Reserve Bank of New York and the Fund has the unconditional contractual right to repurchase such OTC option at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying security minus the option's exercise price). B-4 Because Strategic Instruments traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin to the extent that a Fund has unrealized gains in such instruments or has deposited collateral with its counterparty, the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. A Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Strategic Instruments traded in OTC markets only with financial institutions which have substantial capital or which have provided the Fund with a third-party guaranty or other credit enhancement. ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS No Fund may use any Strategic Instrument to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly. B-5 APRIL 25, 1997 STATEMENT OF ADDITIONAL INFORMATION MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800 ---------------- Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end management investment company which has a wide range of investment objectives among its sixteen separate funds (hereinafter referred to as the "Funds" or individually as a "Fund"): Merrill Lynch Domestic Money Market Fund, Merrill Lynch Reserve Assets Fund, Merrill Lynch Prime Bond Fund, Merrill Lynch High Current Income Fund, Merrill Lynch Quality Equity Fund, Merrill Lynch Equity Growth Fund, Merrill Lynch Natural Resources Focus Fund, Merrill Lynch American Balanced Fund, Merrill Lynch Global Strategy Focus Fund, Merrill Lynch Basic Value Focus Fund, Merrill Lynch Global Bond Focus Fund, Merrill Lynch Global Utility Focus Fund, Merrill Lynch International Equity Focus Fund, Merrill Lynch Developing Capital Markets Focus Fund, Merrill Lynch Government Bond Fund and Merrill Lynch Index 500 Fund. A separate class of Common Stock is issued for each Fund. The shares of the Funds are sold to separate accounts ("Separate Accounts") of certain insurance companies (the "Insurance Companies") including Merrill Lynch Life Insurance Company ("MLLIC") and ML Life Insurance Company of New York ("ML of New York") to fund benefits under variable annuity contracts (the "Variable Annuity Contracts") and/or variable life insurance contracts (together with the Variable Annuity Contracts, the "Contracts") issued by such companies. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. MLLIC and ML of New York are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). ---------------- THIS STATEMENT OF ADDITIONAL INFORMATION OF THE COMPANY IS NOT A PROSPECTUS AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE COMPANY (THE "PROSPECTUS") DATED APRIL 25, 1997 WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND WHICH IS AVAILABLE UPON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. ---------------- MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR TABLE OF CONTENTS
PAGE ---- Investment Objectives and Policies......................................... 3 Investment Restrictions.................................................... 3 Management of the Company.................................................. 11 Investment Advisory Arrangements........................................... 15 Determination of Net Asset Value........................................... 17 Portfolio Transactions and Brokerage....................................... 18 Redemption of Shares....................................................... 20 Dividends, Distributions and Taxes......................................... 20 Distribution Arrangements.................................................. 21 Performance Data........................................................... 21 Additional Information..................................................... 24 Independent Auditors' Report............................................... 25 Audited Financial Statements............................................... 26 Unaudited Financial Statements for the Index 500 Fund...................... 142
2 INVESTMENT OBJECTIVES AND POLICIES The investment objectives and certain investment policies of the Funds are as follows: The Domestic Money Market Fund seeks preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term domestic money market securities. The Reserve Assets Fund seeks the preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term money market securities. The Prime Bond Fund seeks to attain as high a level of current income as is consistent with prudent investment management, and as a secondary objective, capital appreciation when consistent with the foregoing objective, by investing primarily in long-term corporate bonds rated A or better by either Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Rating Group ("Standard & Poor's"). The High Current Income Fund seeks to attain as high a level of current income as is consistent with its investment policies and prudent investment management, and as a secondary objective, capital appreciation when consistent with the foregoing objective; the Fund invests principally in fixed-income securities which are rated in the lower rating categories of the established rating services or in unrated securities of comparable quality. The Quality Equity Fund seeks to attain the highest total investment return consistent with prudent risk; the Fund uses a fully managed investment policy utilizing equity securities, primarily common stocks of large-capitalization companies, as well as investment grade debt and convertible securities. The Equity Growth Fund seeks to attain long-term capital growth by investing primarily in common shares, of small companies and of emerging growth companies regardless of size. The Natural Resources Focus Fund seeks to attain long-term growth of capital and the protection of the purchasing power of shareholders' capital by investing primarily in equity securities of domestic and foreign companies with substantial natural resource assets. The American Balanced Fund seeks a level of current income and a degree of stability of principal not normally available from an investment solely in equity securities and the opportunity for capital appreciation greater than normally available from an investment solely in debt securities by investing in a balanced portfolio of fixed income and equity securities. The Global Strategy Focus Fund seeks high total investment return by investing primarily in a portfolio of equity and fixed income securities of U.S. and foreign issuers. The Basic Value Focus Fund seeks to attain capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. The Global Bond Focus Fund seeks to attain high total investment return by investing in a global portfolio of fixed income securities denominated in various currencies, including multinational currency units. The Global Utility Focus Fund seeks to attain capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. The International Equity Focus Fund seeks to attain capital appreciation and, secondarily, income, through investment in securities, principally equities, of issuers in countries other than the United States. The Developing Capital Markets Focus Fund seeks long-term capital appreciation through investment in securities, principally equities, of issuers in countries having smaller capital markets. The Government Bond Fund seeks the highest possible current income consistent with the protection of capital afforded by investing in debt securities issued or guaranteed by the United States Government, its agencies or instrumentalities. The Index 500 Fund seeks to provide investment results that, before expenses, correspond to the aggregate price and yield performance of Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index"). Investors are referred to "Investment Objectives and Policies of the Funds" in the Prospectus for a more complete discussion of the investment objectives and policies of the Company. INVESTMENT RESTRICTIONS The Company has adopted the following fundamental and non-fundamental restrictions and policies relating to the investment of the assets of the Funds and their activities. The fundamental policies set forth below may not be changed without the approval of the holders of a majority of the outstanding voting shares of each Fund affected (which for this purpose and under the Investment Company Act of 1940 means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares of the affected Fund are represented or (ii) more than 50% of the outstanding shares of the affected Fund). 3 RESTRICTIONS APPLICABLE TO THE DOMESTIC MONEY MARKET FUND The Domestic Money Market Fund may not purchase any security other than money market and other securities described under "Investment Objectives and Policies of the Funds--Domestic Money Market Fund" in the Prospectus. In addition, the Domestic Money Market Fund may not purchase securities of foreign issuers (including Eurodollar and Yankeedollar obligations). In addition, the Domestic Money Market Fund may not: (1) invest more than 10% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities) of any one issuer (including repurchase agreements with any one bank) except that up to 25% of the value of the Fund's total assets may be invested without regard to such 10% limitation. (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combination thereof. (7) make loans to other persons; provided that the Fund may purchase money market securities or enter into repurchase agreements; lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 20% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes. The borrowing provisions shall not apply to reverse repurchase agreements. Usually only "leveraged" investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding. (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 25% of the Fund's total assets, taken at market value at the time thereof. Although the Fund has the authority to mortgage, pledge or hypothecate more than 10% of its total assets under this investment restriction (10), as a matter of operating policy, the Fund will not mortgage, pledge or hypothecate in excess of 10% of total net assets. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) purchase, either alone or together with any other Fund or Funds, more than 10% of the outstanding securities of an issuer except that such restriction does not apply to U.S. Government or government agency securities, bank money instruments or repurchase agreements. 4 (13) invest in securities (except for repurchase agreements or variable amount master notes) with legal or contractual restrictions on resale or for which no readily available market exists or in securities of issuers (other than issuers of government agency securities) having a record, together with predecessors, of less than three years of continuous operation if, regarding all such securities, more than 10% of its total assets (taken at market value) would be invested in such securities. (14) enter into repurchase agreements if, as a result thereof, more than 10% of the Fund's total assets (taken at market value at the time of each investment) would be subject to repurchase agreements maturing in more than seven days. (15) enter into reverse repurchase agreements if, as a result thereof, the Fund's obligations with respect to reverse repurchase agreements would exceed one-third of the Fund's net assets (defined to be total assets, taken at market value, less liabilities other than reverse repurchase agreements). (16) invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any particular industry (other than U.S. Government securities, government agency securities or bank money instruments). RESTRICTIONS APPLICABLE TO THE RESERVE ASSETS FUND The Reserve Assets Fund may not purchase any security other than money market and other securities described under "Investment Objectives and Policies of the Funds--Reserve Assets Fund" in the Prospectus. In addition, the Reserve Assets Fund may not: (1) invest more than 10% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities) of any one issuer (including repurchase agreements with any one bank) except that up to 25% of the value of the Fund's total assets may be invested without regard to such 10% limitation. (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. (7) make loans to other persons; provided that the Fund may purchase money market securities or enter into repurchase agreements; lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 20% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. The borrowing provisions shall not apply to reverse repurchase agreements. Usually only "leveraged" investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding. 5 (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 25% of the Fund's total assets, taken at market value at the time thereof. As a matter of operating policy, the Fund will not mortgage, pledge or hypothecate in excess of 10% of total net assets. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) purchase, either alone or together with any other Fund or Funds, more than 10% of the outstanding securities of an issuer except that such restriction does not apply to U.S. Government or government agency securities, bank money instruments or repurchase agreements. (13) invest in securities (except for repurchase agreements or variable amount master notes) with legal or contractual restrictions on resale or for which no readily available market exists or in securities of issuers (other than issuers of government agency securities) having a record, together with predecessors, of less than three years of continuous operation if, regarding all such securities, more than 5% of its total assets (taken at market value) would be invested in such securities. (14) enter into repurchase agreements if, as a result thereof, more than 10% of the Fund's total assets (taken at market value at the time of each investment) would be subject to repurchase agreements maturing in more than seven days. (15) enter into reverse repurchase agreements if, as a result thereof, the Fund's obligations with respect to reverse repurchase agreements would exceed one-third of the Fund's net assets (defined to be total assets, taken at market value, less liabilities other than reverse repurchase agreements). (16) invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any particular industry (other than U.S. Government securities, government agency securities or bank money instruments). RESTRICTIONS APPLICABLE TO EACH OF THE FUNDS (EXCEPT THE DOMESTIC MONEY MARKET FUND AND THE RESERVE ASSETS FUND) Under the fundamental investment restrictions, each of the Funds (unless noted otherwise below) may not: 1. Make any investment inconsistent with the Fund's classification as a diversified company under the Investment Company Act.(1) 2. Invest more than 25% of its assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities).(2) 3. Make investments for the purpose of exercising control or management. - -------- (1) The Developing Capital Markets Focus, Global Bond Focus, Global Strategy Focus, Index 500 and Natural Resource Focus Funds are classified as non- diversified investment companies under the Investment Company Act, and therefore this restriction is not applicable to those Funds. (2) For purposes of this restriction, states, municipalities and their political subdivisions are not considered to be part of any industry, and utilities will be divided according to their services; for example, gas, gas transmission, electricity, telecommunications and water each will be considered a separate industry for purposes of this restriction. In addition, this restriction will not restrict (i) the Global Utility Focus Fund, under normal circumstances, from investing 65% or more of its total assets in equity and debt securities issued by domestic and foreign companies in the utilities industries (i.e., electricity, telecommunications, gas or water), and (ii) the Natural Resources Focus Fund from investing greater than 25% of its assets in gold-related companies. 6 4. Purchase or sell real estate, except that the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 5. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Prospectus and Statement of Additional Information, as they may be amended from time to time. 6. Issue senior securities to the extent such issuance would violate applicable law. 7. Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) the Fund may borrow up to an additional 5% of its total assets for temporary purposes, (iii) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund's investment policies as set forth in the Prospectus and Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. 8. Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. 9. Purchase or sell commodities or contracts on commodities, except to the extent the Fund may do so in accordance with applicable law and the Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. Under the non-fundamental investment restrictions, each of the Funds (unless noted otherwise below) may not: a. Purchase securities of other investment companies, except to the extent such purchases are permitted by applicable law. b. Engage in short sales of securities or maintain a short position except to the extent permitted by applicable law. The Fund does not currently intend to engage in short sales or maintain a short position, except for short sales "against the box."(3) c. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its total assets would be invested in such securities. This restriction shall not apply to securities which mature within seven days or securities which the Board of Directors has otherwise determined to be liquid pursuant to applicable law. Securities purchased in accordance with Rule 144A under the Securities Act and determined to be liquid by the Board of Directors of the Company are not subject to the limitations set forth in this investment restriction. d. Invest in warrants if, at the time of acquisition, its investments in warrants, valued at the lower of cost or market value, would exceed 5% of the Fund's total assets; included within such limitation, but not to exceed 2% of the Fund's total assets, are warrants which are not listed on the New York Stock Exchange or American Stock Exchange or a major foreign exchange. For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value. - -------- (3) The Global Bond Focus, Global Strategy Focus, International Equity Focus and Natural Resources Focus Funds may maintain short positions in forward currency contracts, options, futures contracts and options on futures contracts. 7 e. Invest in securities of companies having a record, together with predecessors, of less than three years of continuous operation, except to the extent permitted under applicable law. This restriction shall not apply to mortgage-backed securities, asset-backed securities or obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. f. Purchase or retain the securities of any issuer, if those individual officers and directors of the Company, the officers and general partner of the Investment Adviser, the directors of such general partner or the officers and directors of any subsidiary thereof each owning beneficially more than one-half of one percent of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. g. Invest in real estate limited partnership interests or interests in oil, gas or other mineral leases, or exploration or development programs, except that the Fund may invest in securities issued by companies that engage in oil, gas or other mineral exploration or development activities. h. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent permitted in the Prospectus and Statement of Additional Information, as they may be amended from time to time. i. Notwithstanding fundamental investment restriction number 7 above, borrow amounts in excess of 5% (20% in the case of the Developing Capital Markets Focus and Global Bond Focus Funds and 10% in the case of the Global Strategy Focus, Government Bond, International Equity Focus and Natural Resources Focus Funds) of the total assets of the Fund, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares.(4) j. Pledge greater than 10% (20% in the case of the Developing Capital Markets Focus Fund) of its total assets, taken at market value at the time of the pledge. For the purpose of this restriction, collateral arrangements with respect to (i) transactions in options, foreign currency contracts, futures contracts and options on futures contracts and (ii) initial and variation margin are not deemed to be a pledge of assets. k. Lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided however that the Quality Equity Fund may only make loans to New York Stock Exchange Member firms, other brokerage firms having net capital of at least $10 million and financial institutions, such as registered investment companies, banks and insurance companies, having at least $10 million in capital and surplus. l. In the case of the Global Utility Focus Fund only, invest less than 65% of its total assets in equity and debt securities issued by domestic and foreign companies in the utilities industries, except during temporary defensive periods. m. In the case of each of the American Balanced Fund, the Basic Value Focus Fund, the Equity Growth Fund, the High Current Income Fund, the Prime Bond Fund and the Quality Equity Fund, invest in the securities of foreign issuers except that each such Fund (except the American Balanced Fund) may invest in securities of foreign issuers if at the time of acquisition no more than 10% (25% in the case of the Quality Equity Fund) of its total assets, taken at market value at the time of the investment, would be invested in such securities. Consistent with the general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) a country in which the issuer derives a significant proportion (at least 50%) of its revenues or profits from goods produced or sold, investments made, or services performed in the country, or in which at - -------- (4) In addition, the American Balanced, Basic Value Focus, Developing Capital Markets Focus, Equity Growth, Global Strategy Focus, High Current Income, Natural Resources Focus, Prime Bond and Quality Equity Funds will not purchase securities while borrowings are outstanding, except, in the case of the Developing Capital Markets Focus Fund, (a) to honor prior commitments or (b) to exercise subscription rights where outstanding borrowings have been obtained exclusively for settlements of other securities transactions. The Global Bond Focus, Global Utility Focus and International Equity Focus Funds will not purchase securities while borrowings in excess of 5% of its total assets are outstanding. 8 least 50% of the assets of the issuer are situated. See "Other Portfolio Strategies--Foreign Securities" in the Prospectus.(5) OVER-THE-COUNTER OPTIONS The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Company has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by a Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and margin deposits on the Fund's existing OTC options on futures contracts exceeds 15% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are otherwise not readily marketable. However, if an OTC option is sold by a Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying securities minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is "in-the-money." This policy as to OTC options is not a fundamental policy of any Fund and may be amended by the Directors of the Company without the approval of the Company's shareholders. However, the Company will not change or modify this policy prior to the change or modification by the Commission staff of its position. RESTRICTED SECURITIES From time to time a Fund may invest in securities the disposition of which is subject to legal restrictions, such as restrictions imposed by the Securities Act of 1933 (the "Securities Act") on the resale of securities acquired in private placements. If registration of such securities under the Securities Act is required, such registration may not be readily accomplished and if such securities may be sold without registration, such resale may be permissible only in limited quantities. In either event, a Fund may not be able to sell its restricted securities at a time which, in the judgement of the Investment Adviser, would be most opportune. Each of the Funds is subject to limitations on the amount of securities which are illiquid, because of restrictions under the Securities Act or otherwise, they may purchase. Each Fund may, however, purchase without regard to that limitation securities that are not registered under the Securities Act, but that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Fund's investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. - -------- (5) Notwithstanding this restriction, each of the Prime Bond Fund and the High Current Income Fund may invest up to 25% of its total assets in securities (i) issued, assumed or guaranteed by foreign governments, or political subdivisions or instrumentalities thereof, (ii) assumed or guaranteed by domestic issuers, including Eurodollar securities or (iii) issued, assumed or guaranteed by foreign issuers having a class of securities listed for trading on the New York Stock Exchange. 9 PORTFOLIO STRATEGIES Liquidity. In order to assure that each Fund has sufficient liquidity, as a matter of operating policy no Fund may invest more than 10% of its net assets, except that the Developing Capital Markets Focus Fund may not invest more than 15% of its net assets in securities for which market disposition is not readily available. Market disposition may not be readily available for repurchase agreements maturing in more than seven days and for securities having restrictions on resale. Lending of Portfolio Securities. Subject to any applicable investment restriction above, each Fund may from time to time loan securities from its portfolio to brokers, dealers and financial institutions and receive collateral in cash, securities issued or guaranteed by the U.S. Government or, in the case of the Domestic Money Market and Reserve Assets Fund, cash equivalents which while the loan is outstanding will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. The Fund will retain all rights of beneficial ownership as to the loaned portfolio securities, including voting rights and rights to interest or other distributions, and will have the right to regain record ownership of loaned securities to exercise such beneficial rights. Such loans will be terminable at any time. The Fund may pay reasonable finders', administrative and custodial fees to persons unaffiliated with the Fund in connection with the arranging of such loans. The dividends, interest and other distributions received by the Company on loaned securities may, for tax purposes, be treated as income other than qualified income for the 90% test discussed under "Dividends, Distributions and Taxes--Federal Income Taxes." The Company intends to lend portfolio securities only to the extent that such activity does not jeopardize the Company's qualification as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Forward Commitments. Securities may be purchased or sold on a delayed delivery basis or may be purchased on a forward commitment basis by each of the Company's Funds at fixed purchase terms with periods of up to 180 days between the commitment and settlement dates. The purchase will be recorded on the date the purchasing Fund enters into the commitment and the value of security will thereafter be reflected in the calculation of the Fund's net asset value. The value of the security on the delivery date may be more or less than its purchase price. A separate account of the Fund will be established with The Bank of New York or Brown Brothers Harriman & Co. (for Developing Capital Markets Focus Fund) (the "Custodian") consisting of cash or liquid securities having a market value at all times until the delivery date at least equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Although a Fund will generally enter into forward commitments with the intention of acquiring securities for its portfolio, it may dispose of a commitment prior to settlement if the Investment Adviser deems it appropriate to do so. There can, of course, be no assurance that the judgement upon which these techniques are based will be accurate or that such techniques when applied will be effective. The Funds will enter into forward commitment arrangements only with respect to securities in which they may otherwise invest as described under "Investment Objectives and Policies of the Funds" in the Prospectus. Eurodollar and Yankeedollar Obligations. The Reserve Assets Fund (and, for temporary or defensive purposes, the Natural Resources Focus, Global Strategy Focus, Global Bond Focus, Global Utility Focus, International Equity Focus and Developing Capital Markets Focus Funds) may invest in obligations issued by foreign branches or subsidiaries of U.S. banks ("Eurodollar" obligations), by U.S. branches or subsidiaries of foreign banks ("Yankeedollar" obligations), or by foreign depository institutions and their foreign branches and subsidiaries ("foreign bank obligations"). Investment in such obligations may involve different risks from the risks of investing in obligations of U.S. banks. Such risks include adverse political and economic developments, the possible imposition of withholding taxes on interest income payable on such obligations, the possible seizure or nationalization of foreign deposits and the possible establishment of exchange controls or other foreign governmental laws or restrictions which might adversely affect the payment of principal and interest. Generally the issuers of such obligations are subject to fewer U.S. regulatory requirements than are applicable to U.S. banks. Foreign depository institutions and their foreign branches and subsidiaries, and foreign branches or subsidiaries of U.S. banks, may be subject to less stringent reserve requirements than U.S. banks. U.S. branches or subsidiaries of foreign banks are subject to the reserve requirements of the state in which they are located. 10 There may be less publicly available information about a foreign depository institution, branch or subsidiary, or a U.S. branch or subsidiary of a foreign bank, than about a U.S. bank, and such institutions may not be subject to the same accounting, auditing and financial record keeping standards and requirements as U.S. banks. Evidence of ownership of Eurodollar and foreign bank obligations may be held outside of the United States, and a Fund may be subject to the risks associated with the holding of such property overseas. Eurodollar and foreign bank obligations of the Fund held overseas will be held by foreign branches of the Custodian for the Fund or by other U.S. or foreign banks under subcustodian arrangements complying with the requirements of the Investment Company Act of 1940. The Investment Adviser will consider the above factors in making investments in Eurodollar, Yankeedollar and foreign bank obligations and will not knowingly purchase obligations which, at the time of purchase, are subject to exchange controls or withholding taxes. Generally, the Reserve Assets Fund will limit its Yankeedollar investments to obligations of banks organized in Canada, France, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and other western industrialized nations. Standby Commitment Agreements. The High Current Income Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund may from time to time enter into standby commitment agreements. Such agreements commit a Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued, which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. A Fund will enter into such agreements only for the purpose of investing in the security underlying the commitment at a yield and price which is considered advantageous to the Fund. A Fund will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of the securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale, will not exceed 10% of its assets taken at the time of acquisition of such commitment or security. A Fund will at all times maintain a segregated account with its custodian of cash or liquid securities in an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, a Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued and the value of the security will thereafter be reflected in the calculation of a Fund's net asset value. If the security is issued, the cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. MANAGEMENT OF THE COMPANY The Directors and executive officers of the Company and their ages and principal occupations for at least the last five years are set forth below. Unless otherwise noted, the address of each executive officer and director is P.O. Box 9011, Princeton, New Jersey 08543-9011. Arthur Zeikel (63)--President and Director(1)(2)--President of the Investment Adviser (which term as used herein includes its corporate predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM") (which term as used herein includes its corporate predecessors) since 1977; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; Director of the Merrill Lynch Funds Distributor, Inc. (the "Distributor"). 11 Walter Mintz (67)--Director--1114 Avenue of the Americas, New York, New York 10036. Special Limited Partner of Cumberland Partners (investment partnership) since 1982. Melvin R. Seiden (66)--Director--780 Third Avenue, Suite 2502, New York, New York 10017. Director of Silbanc Properties, Ltd. (real estate, consulting and investments) since 1996 and President thereof since 1987; Chairman and President of Seiden & de Cuevas, Inc. (private investment firm) from 1964 to 1987. Stephen B. Swensrud (63)--Director--24 Federal Street, Suite 400, Boston, Massachusetts 02110. Chairman of Fernwood Associates (financial consultants) since 1996 and Principal thereof since 1975. Joe Grills (61)--Director--183 Soundview Lane, New Canaan, Connecticut 06840. Member of the Committee of Investment of Employee Benefit Assets of the Financial Executives Institute ("CIEBA") since 1986, member of CIEBA's Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Incorporated ("IBM") and Chief Investment Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund; Director, Duke Management Company since 1993; Director, LaSalle Street Fund since 1995; Director, Kimco Realty Corporation since January 1997. Robert S. Salomon, Jr. (59)--Director--106 Dolphin Cove Quay, Stamford, Connecticut 06902. Principal of STI Management (investment adviser); Director, Common Fund and the Norwalk Community Technical College Foundation; Chairman and CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers equity mutual funds from 1992 until 1995; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991. Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice President of the Investment Adviser and FAM since 1983; Executive Vice President and Director of Princeton Services since 1993; President of the Distributor since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since 1988. Norman Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of the Investment Adviser and FAM since 1982. Peter A. Lehman (38)--Senior Vice President(1)(2)--Vice President of the Investment Adviser since 1994 and employee of the Investment Adviser since 1992. Joseph T. Monagle, Jr. (47)--Senior Vice President(1)(2)--Senior Vice President of the Investment Adviser since 1990; Vice President of MLAM from 1978 to 1990. Donald C. Burke (35)--Vice President(1)(2)--Vice President of the Investment Adviser since 1990. Vincent T. Lathbury, III (54)--Vice President(1)(2)--Vice President of the Investment Adviser and FAM and Portfolio Manager of the Investment Adviser and FAM since 1982. Thomas R. Robinson (52)--Vice President(1)(2)--Senior Portfolio Manager of the Investment Adviser since November 1995; Manager of International Equity Strategy of ML&Co.'s Global Securities Research and Economics Group from 1989 to 1995. Kevin Rendino (29)--Vice President(1)(2)--Vice President of the Investment Adviser since December 1993; Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990. Walter D. Rogers (53)--Vice President(1)(2)--Vice President of the Investment Adviser since 1987; Vice President of Continental Insurance Asset Management from 1984 to 1987. Grace Pineda (38)--Vice President(1)(2)--Vice President of the Investment Adviser since 1989. Prior to joining the Investment Adviser, Ms. Pineda was a portfolio manager with Clemente Capital, Inc. 12 Andrew John Bascand (33)--Vice President(1)(2)--Director of Merrill Lynch Asset Management U.K. Limited since 1993 and Director of Merrill Lynch Global Asset Management Limited since 1994; Senior Economist of A.M.P. Asset Management plc in London from 1992 to 1993 and Chief Economist of A.M.P. Investments (NZ) in New Zealand from 1989 to 1991; Economic Adviser to the Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989. Robert Parish (42)--Vice President(1)(2)--Vice President and Portfolio Manager of the Investment Adviser since 1991; Portfolio Manager of Templeton International from 1986 to 1991 and Vice President thereof from 1989. Jay C. Harbeck (62)--Vice President(1)(2)--Vice President of the Investment Adviser since 1986. Jacqueline Rogers (38)--Vice President(1)(2)--Vice President of the Investment Adviser since January 1986. Aldona A. Schwartz (48)--Vice President(1)(2)--Vice President of the Investment Adviser since 1991 and an employee of the Investment Adviser since 1986. Sean Casey (41)--Vice President--Vice President of the Investment Adviser since 1995; Chief Investment Officer, Chase Asset Management from 1990 to 1995. P. Valle (39)--Vice President--Vice President of the Investment Adviser since 1992. Gerald M. Richard (47)--Treasurer(1)(2)--Senior Vice President and Treasurer of the Investment Adviser and FAM since 1984; Treasurer of the Distributor since 1984 and Vice President since 1981; and Senior Vice President and Treasurer of Princeton Administrators, Inc. since 1988. Ira P. Shapiro (34)--Secretary(1)(2)--Vice President of the Investment Adviser since 1997 and Attorney associated with the Investment Adviser and FAM since 1993. Prior to 1993 Mr. Shapiro was an attorney in private practice. - -------- (1) Interested person, as defined in the Investment Company Act of 1940, of the Company. (2) The Officers of the Company are officers of certain other investment companies for which the Investment Adviser or FAM acts as investment adviser. The following table sets forth for the fiscal year ended December 31, 1996, compensation paid by the Fund to the non-interested Directors and for the calendar year ended December 31, 1996, the aggregate compensation paid by all investment companies (including the Company) advised by the Investment Adviser and its affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested Directors:
PENSION OR RETIREMENT TOTAL COMPENSATION FROM AGGREGATE BENEFITS ACCRUED COMPANY AND COMPENSATION AS PART OF MLAM/FAM ADVISED NAME OF DIRECTOR FROM COMPANY COMPANY EXPENSE FUNDS PAID TO DIRECTORS(1) ---------------- ------------ --------------------- -------------------------- Walter Mintz(1)......... $20,000 NONE $164,000 Melvin R. Seiden(1)..... $20,000 NONE $164,000 Stephen B. Swensrud(1).. $17,500 NONE $154,250 Joe Grills(1)........... $20,000 NONE $164,000 Robert S. Salomon, Jr.(1)................. $18,750 NONE $187,167
- -------- (1) The Directors serve on the boards of other MLAM/FAM Advised Funds as follows: Mr. Grills (18 registered investment companies consisting of 37 portfolios); Mr. Mintz (18 registered investment companies consisting of 37 portfolios); Mr. Salomon (18 registered investment companies consisting of 37 portfolios); Mr. Seiden (18 registered investment companies consisting of 38 portfolios); and Mr. Swensrud (24 registered investment companies consisting of 52 portfolios). 13 Mr. Zeikel and the officers of the Company owned on March 31, 1997 in the aggregate less than 1% of the outstanding Common Stock of Merrill Lynch & Co., Inc. The Company has an Audit Committee consisting of all of the directors of the Company who are not interested persons of the Company. Pursuant to the terms of the Investment Advisory Agreements, the Investment Adviser pays all compensation of officers and employees of the Company as well as the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries. The fees payable by the Company to non-interested directors are $5,000 per year plus $1,250 per quarterly meeting of the Board of Directors attended, $5,000 per year for serving on the Audit Committee of the Board of Directors plus $1,250 per meeting of the Audit Committee attended if such meeting is held on a day other than a day on which the Board of Directors meets, and reimbursement of out-of-pocket expenses. For the year ended December 31, 1996, such fees and expenses aggregated $88,545. 14 INVESTMENT ADVISORY ARRANGEMENTS The Company has entered into seven separate investment advisory agreements (the "Investment Advisory Agreements") relating to the Funds with the Investment Adviser, which is a wholly owned subsidiary of Merrill Lynch & Co., Inc. The principal business address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536. The Investment Adviser and FAM currently act as the investment adviser to over 110 other registered investment companies. The principal executive officers and directors of the Investment Adviser are Arthur Zeikel, President; Terry K. Glenn, Executive Vice President; Vincent R. Giordano, Senior Vice President; Elizabeth Griffin, Senior Vice President; Norman R. Harvey, Senior Vice President; Michael J. Hennewinkel, Senior Vice President; N. John Hewitt, Senior Vice President; Philip L. Kirstein, Senior Vice President, General Counsel, Director and Secretary; Ronald M. Kloss, Senior Vice President and Controller; Richard L. Reller, Senior Vice President; Stephen M. M. Miller, Senior Vice President; Joseph T. Monagle, Senior Vice President; Michael L. Quinn, Senior Vice President; Gerald M. Richard, Senior Vice President and Treasurer; Ronald L. Welburn, Senior Vice President; and Anthony Wiseman, Senior Vice President. Securities held by any Fund may also be held by other funds for which the Investment Adviser or FAM acts as an adviser or by investment advisory clients of the Investment Adviser. Because of different investment objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for any Fund or other funds for which the Investment Adviser or FAM acts as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or FAM during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Advisory Fee. As compensation for its services to the Company and its Funds, the Investment Adviser receives a fee from the Company at the end of each month at an annual rate of 0.75% of the average daily net assets of the Equity Growth Fund and International Equity Focus Fund, 0.65% of the average daily net assets of each of the Natural Resources Focus Fund and Global Strategy Focus Fund, 0.55% of the average daily net assets of the American Balanced Fund, 0.50% of the average daily net assets of the Domestic Money Market Fund and Government Bond Fund, 0.60% of the average daily net assets of the Basic Value Focus Fund, Global Bond Focus Fund and Global Utility Focus Fund, 1.00% of the average daily net assets of the Developing Capital Markets Focus Fund, 0.30% of the average daily net assets of the Index 500 Fund and at the following annual rates with respect to the other Funds: RESERVE ASSETS FUND Portion of average daily value of net assets of the Fund:
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%
15 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 BOND INCOME FUND FUND ------------ ---------- Not exceeding $250 million............................ 0.55% 0.50% In excess of $250 million but not more than $500 mil- lion................................................. 0.50% 0.45% In excess of $500 million but not more than $750 mil- lion................................................. 0.45% 0.40% In excess of $750 million............................. 0.40% 0.35%
These fee rates are applied to the average daily net assets of each Fund, with the reduced rates shown below applicable to portions of each Fund to the extent that the aggregate of the average daily net assets of the combined Fund exceed $250 million, $300 million, $400 million and $800 million (each such amount being a "breakpoint level"). The portion of the assets of a Fund to which the rate at each breakpoint level applies will be determined on a "uniform percentage" basis. The uniform percentage applicable to a breakpoint level is determined by dividing the amount of the aggregate of the average daily net assets of the combined Fund that falls within that breakpoint level by the aggregate of the average daily net assets of the combined Fund. The amount of the fee for a Fund at each breakpoint level is determined by multiplying the average daily net assets of that Fund by the uniform percentage applicable to that breakpoint level and multiplying the product by the advisory fee rate. The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") entered into two reimbursement agreements, dated April 30, 1985 and February 11, 1992 (the "Reimbursement Agreements"), that provide that the expenses paid by each Fund (excluding interest, taxes, brokerage fees and commissions and extraordinary charges such as litigation costs) will be limited to 1.25% of its average net assets. Any expenses in excess of this percentage will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. The Reimbursement Agreements may be amended or terminated by the parties thereto upon prior written notice to the Company. For the fiscal year ended December 31, 1994, the Investment Adviser earned fees of $16,313,767 from the Company and reimbursed $8,915 for the Developing Capital Markets Focus Fund, $55,475 for the International Bond Fund (now part of the Global Bond Focus Fund) and $50,942 for the Government Bond Fund. For the fiscal year ended December 31, 1995, the Investment Adviser earned fees of $21,376,742 and reimbursed $49,477 for the Developing Capital Markets Focus Fund, $190,005 for the Government Bond Fund, and $112,261 for the International Bond Fund (now part of the Global Bond Focus Fund). Except to the extent required pursuant to the aforementioned agreements, the Investment Adviser does not intend to reimburse the Global Bond Focus Fund for such Fund's operating expenses. For the fiscal year ended December 31, 1996, the Investment Adviser earned fees of $765,718 for the Developing Capital Markets Focus Fund of which $52,388 was voluntarily waived, $297,926 for the Government Bond Fund of which $264,214 was voluntarily waived, and $1,638 for the Index 500 Fund, all of which was voluntarily waived. In addition, the Investment Adviser has also reimbursed the Index 500 Fund $1,651 in additional expenses. The Investment Advisory Agreements relating to the Company's Funds, unless earlier terminated as described below, will continue in effect from year to year if approved annually (a) by the Board of Directors of the Company or by a majority of the outstanding shares of the respective Funds, and (b) by a majority of the directors who are not parties to such contracts or interested persons (as defined in the Investment Company Act of 1940) of any such party. The Board of Directors of the Company approved the continuation of the Investment 16 Advisory Agreements relating to all Funds, other than the Index 500 Fund, at a meeting held on March 26, 1997. The Board of Directors of the Company approved the Investment Advisory Agreement relating to the Index 500 Fund at a meeting held on October 16, 1996. The Investment Advisory Agreements are not assignable and may be terminated without penalty on 60 days' written notice at the option of either party or by the vote of the shareholders of the respective Funds. The Investment Adviser has entered into a sub-advisory agreement (the "Sub- Advisory Agreement") with MLAM U.K., an indirect wholly owned subsidiary of ML & Co., and an affiliate of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing investment advisory services to the Investment Adviser with respect to the Funds in an amount to be determined from time to time by the Investment Adviser and MLAM U.K. but in no event in excess of the amount that the Investment Adviser actually receives for providing services to the Funds pursuant to the Investment Advisory Agreement. The Investment Adviser has entered into administrative services agreements with certain Insurance Companies, including MLLIC and ML of New York, pursuant to which the Investment Adviser compensates such companies for administrative responsibilities relating to the Company which are performed by such Insurance Companies. Payment of Expenses. The Investment Advisory Agreements obligate the Investment Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Company connected with investment and economic research, trading and investment management of the Funds, as well as the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co., Inc. or any of its subsidiaries. Each Fund will pay all other expenses incurred in its operation, including a portion of the Company's general administrative expenses allocated on the basis of the Fund's asset size. Expenses that will be borne directly by the Funds include redemption expenses, expenses of portfolio transactions, shareholder servicing costs, expenses of registering the shares under federal and state securities laws, pricing costs (including the daily calculation of net asset value), interest, certain taxes, charges of the Custodian and Transfer Agent and other expenses attributable to a particular Fund. Expenses which will be allocated on the basis of size of the respective Funds include directors' fees, legal expenses, state franchise taxes, auditing services, costs of printing proxies and stock certificates, Securities and Exchange Commission fees, accounting costs and other expenses properly payable by the Company and allocable on the basis of size of the respective Funds. Accounting services are provided for the Company by the Investment Adviser, and the Company reimburses the Investment Adviser for its costs in connection with such services. For the fiscal year ended December 31, 1996, the amount of such reimbursement was $903,975. Depending upon the nature of the lawsuit, litigation costs may be directly applicable to the Funds or allocated on the basis of the size of the respective Funds. The Board of Directors has determined that this is an appropriate method of allocation of expenses. DETERMINATION OF NET ASSET VALUE As set forth in the Prospectus, since the net investment income of the Domestic Money Market and Reserve Assets Funds (including realized gains and losses on its portfolio securities) is declared as a dividend each time the net income of the Funds are determined (see "Dividends, Distributions and Taxes"), the net asset value per share of the Funds normally remains at $1.00 per share immediately after each such determination and dividend declaration. The Board of Directors of the Company expects that the Domestic Money Market and Reserve Assets Funds will have a positive net income at the time of each determination. If for any reason the net income of either Fund is a negative amount (i.e., net realized and unrealized losses and expenses exceed interest income), that Fund will reduce the number of its outstanding shares. This reduction will be effected by having the Separate Accounts of the Insurance Companies proportionately contribute to the capital of the Fund the necessary shares that represent the amount of the excess upon such determination. It is anticipated that the Insurance Companies will agree to such contribution in these circumstances. Any such contribution will be treated as a negative dividend for purposes of the Net Investment Factor under the Contracts described in the Prospectus for the Contracts. See "Dividends, Distributions and Taxes" for a discussion of the tax effect of such a reduction. This procedure will permit the net asset value per share of the Domestic Money Market and Reserve Assets Funds to be maintained at a constant value of $1.00 per share. 17 If in the view of the Board of Directors of the Company it is inadvisable to continue the practice of maintaining the net asset value of the Domestic Money Market and Reserve Assets Funds at $1.00 per share, the Board of Directors of the Company reserves the right to alter the procedure. The Company will notify the Insurance Companies of any such alteration. Each of the International Equity Focus Fund, Global Utility Focus Fund, Global Bond Focus Fund and Developing Capital Markets Focus Fund may invest a substantial portion of its assets in foreign securities which are traded on days on which such Fund's net asset value is not computed. On any such day, shares of such a Fund may not be purchased or redeemed since shares of a Fund may only be purchased or redeemed on days on which the Fund's net asset value is computed. As set forth in the Prospectus, securities held by the Domestic Money Market and Reserve Assets Funds with a remaining maturity of 60 days or less are valued on an amortized cost basis, unless particular circumstances dictate otherwise. Under this method of valuation, the security is initially valued at cost on the date of purchase (or in the case of securities purchased with more than 60 days remaining to maturity, the market value on the 61st day prior to maturity); and thereafter the Domestic Money Market and Reserve Assets Funds assume a constant proportionate amortization in value until maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the security. For purposes of this method of valuation, the maturity of a variable rate certificate of deposit is deemed to be the next coupon date on which the interest rate is to be adjusted. If, due to the impairment of the creditworthiness of the issuer of a security held by either Fund or to other factors with respect to such security, the fair value of such security is not fairly reflected through the amortized cost method of valuation, such security will be valued at fair value as determined in good faith by the Board of Directors. PORTFOLIO TRANSACTIONS AND BROKERAGE If the securities in which a particular Fund of the Company invests are traded primarily in the over-the-counter market, where possible, the Fund will deal directly with the dealers who make a market in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principals for their own account. On occasions, securities may be purchased directly from the issuer. Bonds and money market securities are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. The cost of executing portfolio securities transactions of each Fund will primarily consist of brokerage commissions or underwriter or dealer spreads. Under the Investment Company Act of 1940, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Since over-the-counter transactions are usually principal transactions, affiliated persons of the Company, including Merrill Lynch Government Securities Inc. ("GSI"), Merrill Lynch Money Markets Inc. ("MMI") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), may not serve as the Company's dealer in connection with such transactions except pursuant to exemptive orders from the Securities and Exchange Commission, such as the one described below. However, affiliated persons of the Company may serve as its broker in over-the-counter transactions conducted on an agency basis, subject to the Company's policy of obtaining best price and execution. The Company may not purchase securities from any underwriting syndicate of which Merrill Lynch is a member except in accordance with rules and regulations under the Investment Company Act of 1940. The Securities and Exchange Commission has issued an exemptive order permitting the Company to conduct principal transactions with respect to the Domestic Money Market and Reserve Assets Funds with GSI and MMI in U.S. Government and government agency securities, and certain other money market securities, subject to a number of conditions, including conditions designed to insure that the prices to the Funds available from GSI and MMI are equal to or better than those available from other sources. GSI and MMI have informed the Company that they will in no way, at any time, attempt to influence or control the activities of the Company or the Investment Adviser in placing such principal transactions. The exemptive order allows GSI and MMI to receive a dealer spread on any transaction with the Company no greater than their customary dealer spreads for 18 transactions of the type involved. Certain court decisions have raised questions as to whether investment companies should seek to "recapture" brokerage commissions and underwriting and dealer spreads by effecting their purchases and sales through affiliated entities. In order to effect such an arrangement, the Company would be required to seek an exemption from the Investment Company Act so that it could engage in principal transactions with affiliates. The Board of Directors has considered the possibilities of seeking to recapture spreads for the benefit of the Company and, after reviewing all factors deemed relevant, has made a determination not to seek such recapture at this time. The Board will reconsider this matter from time to time. The Company will take such steps as may be necessary to effect recapture, including the filing of applications for exemption under the Investment Company Act of 1940, if the Directors should determine that recapture is in the best interests of the Company or otherwise required by developments in the law. While the Investment Adviser seeks to obtain the most favorable net results in effecting transactions in the Funds' portfolio securities, dealers who provide supplemental investment research of the Investment Adviser may receive orders for transactions by the Funds. Such supplemental research services ordinarily consist of assessments and analysis of the business or prospects of a company, industry or economic sector. If, in the judgement of the Investment Adviser, a particular Fund or Funds will be benefited by such supplemental research services, the Investment Adviser is authorized to pay spreads or commissions to brokers or dealers furnishing such services which are in excess of spreads or commissions which another broker or dealer may charge for the same transaction. Information so received will be in addition to and not in lieu of the services required to be performed by the Investment Adviser under the Investment Advisory Agreements. The expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. In some cases, the Investment Adviser may use such supplemental research in providing investment advice to its other investment advisory accounts. For the fiscal year ended December 31, 1995, the Company paid brokerage commissions of $5,789,335, of which $264,999 was paid to Merrill Lynch. For the fiscal year ended December 31, 1996, the Company paid brokerage commissions of $6,656,814 of which $266,405 was paid to Merrill Lynch. PORTFOLIO TURNOVER Each Fund has a different expected rate of portfolio turnover; however, rate of portfolio turnover will not be a limiting factor when management of the Company deems it appropriate to purchase or sell securities for a Fund. Because of the short-term nature of the securities in which the Domestic Money Market and Reserve Assets Funds will invest, and because such Funds' investments will be constantly changing in response to market conditions, no portfolio turnover rate may be accurately stated for the Domestic Money Market and Reserve Assets Funds. Below are portfolio turnover rates for each of the Funds for the fiscal years ended December 31, 1996 and December 31, 1995:
1996 1995 ------- ------- American Balanced Fund..................................... 236.50% 38.40% Basic Value Focus Fund..................................... 68.41% 74.10% Developing Capital Markets Focus Fund...................... 87.33% 62.53% Equity Growth Fund......................................... 80.84% 96.79% Global Bond Focus Fund*.................................... 267.13% 132.57% Global Strategy Focus Fund*................................ 173.44% 27.23% Global Utility Focus Fund.................................. 11.39% 11.05% Government Bond Fund*...................................... 21.23% 45.39% High Current Income Fund................................... 48.92% 41.60% International Equity Focus Fund............................ 49.87% 100.02% Natural Resources Focus Fund............................... 31.11% 30.15% Prime Bond Fund............................................ 91.88% 90.12% Quality Equity Fund........................................ 88.30% 140.32% Index 500 Fund............................................. .04%** --
19 - -------- * In connection with a reorganization on December 6, 1996 conducted by the Company with respect to certain of its Funds, the Company, with the approval of the affected shareholders of the Funds, caused (i) Global Bond Focus Fund (a) to acquire substantially all of the assets and assume substantially all the liabilities of the International Bond Fund, a separate Fund of the Company, (b) to implement a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (c) to change its name from the World Income Focus Fund to its current name; (ii) the Government Bond Fund (x) to implement a change in its investment objective so that the Fund may invest in any debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities without regard to remaining maturity and (y) to change its name from the Intermediate Government Bond Fund to its current name; and (iii) the Global Strategy Focus Fund to acquire substantially all of the assets and assume substantially all the liabilities of the Flexible Strategy Fund, a separate Fund of the Company. As a result, the portfolio turnover rates for the fiscal years set forth in the table for the Global Bond Focus Fund, the Global Strategy Focus Fund and the Government Bond Fund may not be indicative of future portfolio turnover rates of such Funds. ** For the period from December 13, 1996 (commencement of operations) to December 31, 1996. REDEMPTION OF SHARES The right to redeem shares or to receive payment with respect to any redemption may only be suspended for any period during which trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission or such Exchange is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Securities and Exchange Commission as a result of which disposal of portfolio securities or determination of the net asset value of each Fund is not reasonably practicable, and for such other periods as the Securities and Exchange Commission may by order permit for the protection of shareholders of each Fund. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS Reference is made to "Dividends, Distributions and Taxes" in the Prospectus. FEDERAL INCOME TAXES Under the Internal Revenue Code of 1986, as amended (the "Code"), each Fund of the Company will be treated as a separate corporation for federal income tax purposes and, thus, each Fund is required to satisfy the qualification requirements under the Code for treatment as a regulated investment company. There will be no offsetting of capital gains and losses among the Funds. Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Code. Under such provisions, a Fund will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. To qualify for treatment as a regulated investment company, a Fund must, among other things, derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of securities and derive less than 30% of its gross income in each taxable year from the gains (without deduction for losses) from the sale or other disposition of stocks, securities, certain options, futures or forward contracts and certain foreign currencies held for less than three months. In addition, the Code requires that each Fund meet certain diversification requirements, including the requirement that not more than 25% of the value of a Fund's total assets be invested in the securities (other than U.S. Government securities or the securities of other regulated investment companies) of any one issuer. 20 Each of the Company's Funds, including the Natural Resources Focus Fund, intends to comply with the above-described requirements. On occasion, some amount of the distributions of the Domestic Money Market Fund or the Reserve Assets Fund for a fiscal year may constitute a return of capital, in which case such amount would be applied against and reduce the Separate Account's tax basis in shares of such Fund. If such amount were to exceed the Separate Account's tax basis for shares of the Domestic Money Market Fund or the Reserve Assets Fund, the excess would be treated as gain from the sale or exchange of such shares. On occasion the net income of the Domestic Money Market Fund or the Reserve Assets Fund may be a negative amount as a result of a net decline in the value of the portfolio securities of the Fund which is in excess of the interest earned. Consequently, the Fund will reduce the number of its outstanding shares to reflect the negative net income. The adjustment may result in gross income to shareholders in excess of the net dividend credited to such shareholders for a period. In such a case, such shareholders' tax basis in the shares of the Domestic Money Market Fund or the Reserve Assets Fund may be adjusted to reflect the difference between taxable income and net dividends actually distributed. Such difference may be realized as a capital loss when the shares are liquidated. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury Regulations promulgated thereunder. The Code and these Regulations are subject to change by legislative or administrative action, and such change may apply retroactively. DISTRIBUTION ARRANGEMENTS The Company has entered into a distribution agreement (the "Distribution Agreement") with Merrill Lynch Funds Distributor, Inc. with respect to the sale of the Company's shares to the Distributor for resale to Insurance Companies' accounts. Such shares will be sold at their respective net asset values and therefore will involve no sales charge. The Distributor is a wholly owned subsidiary of the Investment Adviser. The continuation of the Distribution Agreement was approved by the Company's Board of Directors at a meeting held on March 26, 1997 and will continue in effect until June 30, 1998. The Distribution Agreement is subject to the same renewal requirements and termination provisions as the Investment Advisory Agreements described above. PERFORMANCE DATA From time to time the average annual total return and other total return data, as well as yield, of one or more of the Company's Funds may be included in advertisements or information furnished to present or prospective Contract Owners. Total return and yield figures are based on the Fund's historical performance and are not intended to indicate future performance. Average annual total return and yield are determined in accordance with formulas specified by the Securities and Exchange Commission. In connection with its reorganization on December 6, 1996, the Global Bond Focus Fund (i) acquired substantially all of the assets and assumed substantially all the liabilities of the International Bond Fund, a separate Fund of the Company, (ii) implemented a change in its investment objective and policies from seeking high current income from a global portfolio of fixed income securities, including non-investment grade securities, to seeking a high total investment return by investing in a global portfolio of investment grade fixed income securities and (iii) changed its name from the World Income Focus Fund to its current name. For the period from the commencement of the World Income Focus Fund's operations through its reorganization on December 6, 1996, the portfolio of the Fund included debt securities rated below investment grade (i.e., junk bonds). On December 6, 1996, the Government Bond Fund (i) implemented a change in its investment objective so that the Fund may invest in any debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities without regard to remaining maturity and (ii) changed its name from the Intermediate Government Bond Fund to its current name. 21 For the period from the commencement of the Fund's operations through December 6, 1996, the portfolio of the Intermediate Government Bond Fund consisted primarily of intermediate-term debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities with a maximum maturity not to exceed fifteen years. As a result of the foregoing changes in the investment objective of each of the Global Bond Focus Fund and the Government Bond Fund, the performance information set forth herein and in the Prospectus for the period prior to December 6, 1996 may not be indicative of future performance of each Fund. Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses. The Reserve Assets Fund normally computes its annualized yield by determining the net change for a seven-day base period, exclusive of capital changes, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, dividing the net change in account value by the value of the account at the beginning of the base period to obtain the base period return, and multiplying the base period return by 365 and then dividing by seven. Under this calculation, the yield does not reflect realized and unrealized gains and losses on portfolio securities. The Fund may also include its yield in advertisements, calculated in the same manner as set forth above but including realized and unrealized gains and losses. The Securities and Exchange Commission also permits the calculation of a standardized effective or compounded yield. This is computed by compounding the unannualized base period return by dividing the base period by seven, adding one to the quotient, raising the sum to the 365th power, and subtracting one from the result. This compounded yield calculation also excludes realized or unrealized gains or losses on portfolio securities. Set forth below is average annual total return information for the shares of each of the Company's Funds, other than the Reserve Assets Fund and Domestic Money Market Fund. The total return quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease total return. AVERAGE ANNUAL TOTAL RETURN
REDEEMABLE VALUE EXPRESSED AS A OF A HYPOTHETICAL PERCENTAGE BASED $1,000 INVESTMENT ON A HYPOTHETICAL AT THE END $1,000 INVESTMENT OF THE PERIOD ----------------- ----------------- PRIME BOND FUND: One Year Ended December 31, 1996............ 2.21% $1,022.10 Five Years Ended December 31, 1996.......... 7.04 1,404.90 Ten Years Ended December 31, 1996........... 7.68 2,095.50 HIGH CURRENT INCOME FUND: One Year Ended December 31, 1996............ 11.27% $1,112.70 Five Years Ended December 31, 1996.......... 12.21 1,778.70 Ten Years Ended December 31, 1996........... 11.42 2,948.00 QUALITY EQUITY FUND: One Year Ended December 31, 1996............ 17.90% $1,179.00 Five Years Ended December 31, 1996.......... 10.94 1,680.20 Ten Years Ended December 31, 1996........... 12.50 3,246.10 EQUITY GROWTH FUND: One Year Ended December 31, 1996............ 8.11% $1,081.10 Five Years Ended December 31, 1996.......... 11.38 1,713.80 Ten Years Ended December 31, 1996........... 7.83 2,124.80
22
REDEEMABLE VALUE EXPRESSED AS A OF A HYPOTHETICAL PERCENTAGE BASED $1,000 INVESTMENT ON A HYPOTHETICAL AT THE END $1,000 INVESTMENT OF THE PERIOD ----------------- ----------------- INDEX 500 FUND: December 13, 1996 (commencement of opera- tions)* thru Year Ending December 31, 1996......... 1.70% $1,017.00 NATURAL RESOURCES FOCUS FUND: One Year Ended December 31, 1996........... 13.52% $1,135.20 Five Years Ended December 31, 1996......... 7.76 1,452.80 Inception* Through December 31, 1996....... 5.35 1,564.10 AMERICAN BALANCED FUND: One Year Ended December 31, 1996........... 9.73% $1,097.30 Five Years Ended December 31, 1996......... 8.79 1,524.10 Inception* Through December 31, 1996....... 10.12 2,288.30 GLOBAL STRATEGY FOCUS FUND: One Year Ended December 31, 1996........... 13.17% $1,131.70 Inception* Through December 31, 1996....... 9.21 1,532.00 BASIC VALUE FOCUS FUND: One Year Ended December 31, 1996........... 20.69% $1,206.90 Inception* Through December 31, 1996....... 16.32 1,697.60 GLOBAL BOND FOCUS FUND: One Year Ended December 31, 1996........... 8.02% $1,080.20 Inception* Through December 31, 1996....... 7.27 1,278.70 GLOBAL UTILITY FOCUS FUND: One Year Ended December 31, 1996........... 12.96% $1,129.60 Inception* Through December 31, 1996....... 9.47 1,372.90 INTERNATIONAL EQUITY FOCUS FUND: One Year Ended December 31, 1996........... 6.62% $1,066.20 Inception* Through December 31, 1996....... 6.51 1,247.20 DEVELOPING CAPITAL MARKETS FOCUS FUND: One Year Ended December 31, 1996........... 10.59% $1,105.90 Inception* Through December 31, 1996....... 1.49 1,040.30 GOVERNMENT BOND FUND: One Year Ended December 31, 1996........... 2.86% $1,028.60 Inception* Through December 31, 1996....... 7.15 1,202.30
- -------- * Inception for Natural Resources Focus Fund is June 1, 1988; American Balanced Fund is June 1, 1988; and Global Strategy Focus Fund is February 28, 1992; Basic Value Focus Fund is July 1, 1993; Global Bond Focus Fund is July 1, 1993; Global Utility Focus Fund is July 1, 1993; International Equity Focus Fund is July 1, 1993; Developing Capital Markets Focus Fund is May 2, 1994; Government Bond Fund is May 2, 1994; and Index 500 Fund is December 13, 1996. 23 ADDITIONAL INFORMATION Under a separate agreement Merrill Lynch has granted the Company the right to use the "Merrill Lynch" name and has reserved the right to withdraw its consent to the use of such name by the Company at any time, or to grant the use of such name to any other company, and the Company has granted Merrill Lynch, under certain conditions, the use of any other name it might assume in the future, with respect to any corporation organized by Merrill Lynch. 24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Variable Series Funds, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of American Balanced, Basic Value Focus, Developing Capital Markets Focus, Domestic Money Market, Equity Growth, Global Bond Focus, Global Strategy Focus, Global Utility Focus, Government Bond, High Current Income, Index 500, International Equity Focus, Natural Resources Focus, Prime Bond, Quality Equity, and Reserve Assets Funds of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1996, the related statements of operations for the periods then ended and changes in net assets for each of the periods in the two-year period then ended, and the financial highlights for each of the periods presented. These financial statements and the financial highlights are the responsibility of the Funds's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at December 31, 1996, by correspondence with the custodians and brokers or other alternative procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial positions of American Balanced, Basic Value Focus, Developing Capital Markets Focus, Domestic Money Market, Equity Growth, Global Bond Focus, Global Strategy Focus, Global Utility Focus, Government Bond, High Current Income, Index 500, International Equity Focus, Natural Resources Focus, Prime Bond, Quality Equity, and Reserve Assets Funds of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1996, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche llp Princeton, New Jersey February 21, 1997 25 - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--American Balanced Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Aerospace 24,000 Northrop Grumman Corp. ..... $ 1,590,745 $ 1,986,000 0.9% 22,460 United Technologies Corp. .................... 721,552 1,482,360 0.7 ------------ ------------ ------ 2,312,297 3,468,360 1.6 - --------------------------------------------------------------------------------------------------------------------- Auto & Truck 26,000 General Motors Corp. ....... 1,421,298 1,449,500 0.7 - --------------------------------------------------------------------------------------------------------------------- Automobile Parts 61,000 +Lear Corporation........... 2,043,500 2,081,625 1.0 - --------------------------------------------------------------------------------------------------------------------- Banking 58,500 Bank of New York, Co., Inc. ..................... 1,383,399 1,974,375 0.9 8,500 BankAmerica Corporation..... 869,637 847,875 0.4 18,800 Citicorp.................... 1,441,474 1,936,400 0.9 ------------ ------------ ------ 3,694,510 4,758,650 2.2 - --------------------------------------------------------------------------------------------------------------------- Building & Construction 35,900 Oakwood Homes Corp. ........ 817,893 821,213 0.4 - --------------------------------------------------------------------------------------------------------------------- Building Products 59,500 Spieker Properties, Inc. ... 1,580,921 2,142,000... 1.0 - --------------------------------------------------------------------------------------------------------------------- Chemicals 25,000 +FMC Corporation............ 1,771,815 1,753,125 0.8 33,000 PPG Industries, Inc. ....... 1,634,499 1,852,125 0.9 ------------ ------------ ------ 3,406,314 3,605,250 1.7 - --------------------------------------------------------------------------------------------------------------------- Computer 24,000 +Compaq Computer Corporation............... 1,774,301 1,782,000 0.8 - --------------------------------------------------------------------------------------------------------------------- Computer Services 29,000 +cisco Systems, Inc. ....... 1,300,503 1,845,125 0.9 12,000 International Business Machines Corp. ........... 1,318,751 1,812,000 0.8 ------------ ------------ ------ 2,619,254 3,657,125 1.7 - --------------------------------------------------------------------------------------------------------------------- Computer Software 39,750 +Oracle Corp. .............. 1,251,044 1,654,594 0.8 - --------------------------------------------------------------------------------------------------------------------- Computer Technology 41,000 +Gulfstream Aerospace Corporation............... 1,012,865 994,250 0.5 - --------------------------------------------------------------------------------------------------------------------- Congolomerates 12,000 AlliedSignal Inc. .......... 882,039 804,000 0.4 - --------------------------------------------------------------------------------------------------------------------- Consumer Goods 12,000 Philip Morris Companies, Inc. ..................... 1,190,498 1,351,500 0.6 - --------------------------------------------------------------------------------------------------------------------- Diversified 43,500 Corning, Inc. .............. 1,231,615 2,011,875 0.9 - --------------------------------------------------------------------------------------------------------------------- Electric & Gas 83,100 Edison International........ 1,548,607 1,651,612 0.8 - --------------------------------------------------------------------------------------------------------------------- Electronic Equipment 15,000 General Electric Co. ....... 1,161,154 1,483,125 0.7 9,400 Linear Technology Corporation............... 385,494 411,250 0.2 ------------ ------------ ------ 1,546,648 1,894,375 0.9 - --------------------------------------------------------------------------------------------------------------------- Engineering & Construction 42,400 Foster Wheeler Corp. ....... 1,786,990 1,574,100 0.7 - --------------------------------------------------------------------------------------------------------------------- Financial Services 36,500 American Express Company.... 1,707,587 2,062,250 1.0 49,000 First Data Corp. ........... 1,732,206 1,788,500 0.8 ------------ ------------ ------ 3,439,793 3,850,750 1.8 - --------------------------------------------------------------------------------------------------------------------- Food 52,000 Heinz (H.J.) Company........ 1,702,574 1,859,000 0.9 - --------------------------------------------------------------------------------------------------------------------- Hospital Management 62,600 +Health Management Associates, Inc. (Class A)........................ 1,414,154 1,408,500 0.7 - --------------------------------------------------------------------------------------------------------------------- Industrial Equipment 34,000 +American Standard Companies, Inc. .......... 1,109,533 1,300,500 0.6 - --------------------------------------------------------------------------------------------------------------------- Insurance 16,000 Aetna Inc. ................. 1,190,736 1,280,000 0.6 33,300 Allstate Corp. ............. 1,363,042 1,927,238 0.9 28,000 UNUM Corporation............ 1,787,306 2,023,000 1.0 ------------ ------------ ------ 4,341,084 5,230,238 2.5 - --------------------------------------------------------------------------------------------------------------------- Leisure/Tourism 64,000 Brunswick Corporation....... 1,583,557 1,536,000 0.7 11,105 TCI Pacific Communications (Convertible Preferred)... 1,054,744 1,007,779 0.5 ------------ ------------ ------ 2,638,301 2,543,779 1.2 - ---------------------------------------------------------------------------------------------------------------------
-26- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--American Balanced Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Machinery 49,900 Deere & Co. ................ $ 2,076,934 $ 2,027,188 1.0% - --------------------------------------------------------------------------------------------------------------------- Natural Gas 44,000 Enron Corp. ................ 1,698,696 1,897,500 0.9 - --------------------------------------------------------------------------------------------------------------------- Natural Gas Pipelines 22,000 IMC Global, Inc............. 852,715 860,750 0.4 - --------------------------------------------------------------------------------------------------------------------- Oil Services 60,300 Dresser Industries, Inc..... 1,197,521 1,869,300 0.9 - --------------------------------------------------------------------------------------------------------------------- Paper 20,300 Kimberly-Clark Corporation............... 1,560,117 1,933,575 0.9 - --------------------------------------------------------------------------------------------------------------------- Petroleum 35,400 Pennzoil Co................. 1,462,787 2,000,100 0.9 49,000 Unocal Corp. ............... 1,649,549 1,990,625 0.9 ------------ ------------ ------ 3,112,336 3,990,725 1.8 - --------------------------------------------------------------------------------------------------------------------- Pharmaceuticals 34,900 Abbott Laboratories......... 1,110,169 1,771,175 0.8 23,900 Merck & Co., Inc. .......... 734,284 1,894,075 0.9 ------------ ------------ ------ 1,844,453 3,665,250 1.7 - --------------------------------------------------------------------------------------------------------------------- Railroads 18,500 Burlington Northern Santa Fe Inc....................... 1,499,672 1,597,937 0.8 - --------------------------------------------------------------------------------------------------------------------- Real Estate Investment Trust 41,300 Prentiss Properties Trust... 844,062 1,032,500 0.5 - --------------------------------------------------------------------------------------------------------------------- Recreation 58,746 +Viacom, Inc. (Class B)..... 2,151,340 2,048,767 1.0 - --------------------------------------------------------------------------------------------------------------------- Retail 48,000 Sears, Roebuck & Co. ....... 2,003,303 2,214,000 1.0 - --------------------------------------------------------------------------------------------------------------------- Retail--Drug Stores 32,760 Rite Aid Corporation........ 976,203 1,302,210 0.6 - --------------------------------------------------------------------------------------------------------------------- Retail Specialty 67,500 +Toys 'R' Us, Inc. ......... 2,100,037 2,025,000 1.0 - --------------------------------------------------------------------------------------------------------------------- Scientific Equipment 25,000 Fisher Scientific International, Inc. ...... 783,673 1,178,125 0.6 - --------------------------------------------------------------------------------------------------------------------- Software--Computer 45,000 +BMC Software, Inc. ........ 1,677,378 1,861,875 0.9 - --------------------------------------------------------------------------------------------------------------------- Steel 52,000 AK Steel Holding Corp. ..... 2,145,624 2,060,500 1.0 - --------------------------------------------------------------------------------------------------------------------- Telecommunications 75,000 +AirTouch Communications, Inc. ..................... 2,147,192 1,893,750 0.9 20,000 Bell Atlantic Corp. ........ 1,043,470 1,295,000 0.6 ------------ ------------ ------ 3,190,662 3,188,750 1.5 - --------------------------------------------------------------------------------------------------------------------- Travel & Lodging 60,000 Carnival Corp. (Class A).... 1,697,029 1,980,000 0.9 - --------------------------------------------------------------------------------------------------------------------- Utilities--Gas 18,000 El Paso Natural Gas Company................... 882,267 909,000 0.4 - --------------------------------------------------------------------------------------------------------------------- Total Common Stocks 77,060,055 89,537,748 42.2 - --------------------------------------------------------------------------------------------------------------------- Face Amount US Government & Agency Obligations --------------------------------------------------------------------------------------------------------------------- US Government & Federal National Agency Obligations Mortgage Association: $ 4,352,547 6.00% due 6/01/2001......... 4,309,022 4,299,500 2.0 9,546,755 6.00% due 6/06/2001......... 9,449,796 9,416,979 4.5 5,818,867 6.00% due 2/01/2004......... 5,749,767 5,729,765 2.7 US Treasury Notes: 18,550,000 5.00% due 1/31/1998......... 18,386,238 18,419,593 8.7 24,225,000 6.25% due 4/30/2001......... 24,540,891 24,278,053 11.4 30,000,000 7.25% due 5/15/2004......... 31,727,344 31,565,700 14.9 24,075,000 7.00% due 7/15/2006......... 25,060,930 25,011,758 11.8 - --------------------------------------------------------------------------------------------------------------------- Total US Government & Agency Obligations 119,223,988 118,721,348 56.0 - ---------------------------------------------------------------------------------------------------------------------
-27- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--American Balanced Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Face Value Percent of Amount Short-Term Securities Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Commercial Paper* $ 262,000 General Motors Acceptance Corp., 7.50% due 1/02/1997................. $ 261,891 $ 261,891 0.1% 2,029,000 Preferred Receivable Funding Corp., 5.65% due 1/15/1997................. 2,024,223 2,024,223 1.0 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Securities 2,286,114 2,286,114 1.1 - --------------------------------------------------------------------------------------------------------------------- Total Investments........... $198,570,157 210,545,210 99.3 ============ Other Assets Less Liabilities............... 1,501,804 0.7 ------------ ------ Net Assets.................. $212,047,014 100.0% ============ ====== - ---------------------------------------------------------------------------------------------------------------------
* Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. + Non-income producing security. See Notes to Financial Statements. -28- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Basic Value Focus Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Low Price to Book Value - --------------------------------------------------------------------------------------------------------------------- Metals--Non Ferrous 375,000 ASARCO Inc. ................ $ 10,204,510 $ 9,328,125 1.8% Software--Computer 400,000 +Advanced Micro Devices, Inc....................... 5,528,488 10,300,000 2.0 Banking 125,000 Bankers Trust New York Corp. .................... 7,946,060 10,781,250 2.0 Home--Builders 350,000 +Beazer Homes USA, Inc. (b)....................... 5,392,282 6,475,000 1.2 Retail 1,700,000 +Charming Shoppes, Inc. .... 7,011,954 8,500,000 1.6 Savings & Loans 753,100 Greater N.Y. Savings Bank (b).................. 7,674,112 10,072,713 1.9 Conglomerates 808,200 Hanson PLC (ADR) (a)........ 6,795,411 5,455,350 1.0 Retail 1,200,000 Hechinger Company (Class A)................. 5,038,275 2,400,000 0.5 Entertainment 105,900 +ITT Corporation............ 4,710,982 4,593,412 0.9 Software 622,700 +Mentor Graphics Corporation............... 6,403,414 6,071,325 1.2 Airlines 800,000 +Mesa Airlines, Inc. ....... 6,790,323 5,400,000 1.0 Technology 1,150,000 +Micronics Computers, Inc. (b).................. 4,168,442 2,228,125 0.4 Chemicals 297,700 +Millennium Chemicals Inc. ..................... 6,093,804 5,284,175 1.0 Savings and Loans 500,000 +PFF Bancorp, Inc. ......... 5,715,000 7,312,500 1.4 Metals--Non Ferrous 116,000 Phelps Dodge Corporation.... 6,867,280 7,830,000 1.5 Computer Services 801,800 Scitex Corp. Ltd. (ADR) (a)....................... 11,364,879 7,617,100 1.4 Beverage & Entertainment 200,000 Seagram Company Ltd. (The)................ 6,791,149 7,750,000 1.5 Technology 150,000 +Storage Technology Corp. .................... 5,098,314 7,143,750 1.4 Oil--Refiners 700,000 Total Petroleum Ltd. ....... 7,941,281 7,262,500 1.4 Healthcare 900,000 +Transitional Hospitals Co. ...................... 7,924,083 8,662,500 1.6 Steel 809,300 +WHX Corp................... 8,623,208 7,182,537 1.4 ------------ ------------ ------ 144,083,251 147,650,362 28.1 - --------------------------------------------------------------------------------------------------------------------- Below-Average Price/Earnings Ratio - --------------------------------------------------------------------------------------------------------------------- Oil--Domestic 450,000 +American Exploration Co. ...................... 5,028,426 7,200,000 1.4 Technology 950,000 +Computervision Corp. ...... 9,196,567 8,787,500 1.7 Retail 300,000 Dillard Department Stores Inc. ..................... 9,320,727 9,262,500 1.8 Automotive 200,000 General Motors Corp. ....... 9,267,984 11,150,000 2.1 Banking 650,000 Hibernia Corporation (Class A)........................ 7,468,466 8,612,500 1.6 Machinery 300,000 ITT Industries Inc. ........ 6,899,739 7,350,000 1.4 Forest Products & Paper 220,000 International Paper Co. .... 8,418,780 8,882,500 1.7 Electronics 200,000 Micron Technology, Inc. .... 4,888,098 5,825,000 1.1 Auto-Related 581,000 National Auto Credit, Inc. ..................... 5,918,046 6,972,000 1.3 Athletic Footwear 175,000 Reebok International Ltd. ..................... 4,847,939 7,350,000 1.4 Information Processing 900,000 +Tandem Computers, Inc...... 10,279,044 12,375,000 2.4 Steel 350,000 +USX-US Steel Group......... 10,551,925 10,981,250 2.1 ------------ ------------ ------ 92,085,741 104,748,250 20.0 - --------------------------------------------------------------------------------------------------------------------- Above-Average Yield - --------------------------------------------------------------------------------------------------------------------- Pharmaceuticals 70,000 Bristol-Myers Squibb Co. ... 5,315,433 7,612,500 1.4 Real Estate Investment Trust 253,500 Evans Withycombe Residential, Inc. ........ 5,128,207 5,323,500 1.0 Automotive 275,000 Ford Motor Co. ............. 8,244,320 8,765,625 1.7 Telecommunications 150,000 GTE Corporation............. 6,366,750 6,825,000 1.3 Retail 800,000 +Kmart Corporation.......... 8,463,269 8,300,000 1.6 Forest Products & Paper 300,000 Louisiana-Pacific Corp. .... 7,657,924 6,337,500 1.2 Oil--Domestic 450,000 Occidental Petroleum Corp. .................... 9,447,997 10,518,750 2.0 Financial Services 90,000 Student Loan Marketing Association............... 4,439,450 8,381,250 1.6 Oil--International 450,000 Yacimientos Petroliferos Fiscales S.A. (ADR)(a).... 8,832,840 11,362,500 2.2 ------------ ------------ ------ 63,896,190 73,426,625 14.0 - ---------------------------------------------------------------------------------------------------------------------
-29- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Basic Value Focus Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Special Situations - --------------------------------------------------------------------------------------------------------------------- Environmental Services 1,025,000 +Allwaste, Inc. ............ $ 5,187,397 $ 5,253,125 1.0% Information Processing 500,000 +Apple Computer, Inc. ...... 11,412,685 10,375,000 2.0 Household Products 400,000 Black & Decker Corporation (The)..................... 13,217,404 12,050,000 2.3 Photography 80,000 Eastman Kodak Co. .......... 4,672,300 6,420,000 1.2 Technology 500,000 +Exabyte Corp. ............. 6,796,977 6,687,500 1.3 Health Maintenance Organization 375,000 +Humana, Inc. .............. 7,062,358 7,171,875 1.4 Information Processing 70,000 International Business Machines Corp............. 6,661,756 10,570,000 2.0 Semiconductors 350,000 +National Semiconductor Corp. .................... 6,214,269 8,531,250 1.6 Medical Services 450,000 +Pharmaceutical Product Development, Inc. ........ 7,292,590 11,250,000 2.1 Electronics 150,000 Texas Instruments Inc. ..... 7,316,356 9,562,500 1.8 Telecommunications 450,000 +US West Media Group, Inc. ..................... 7,815,940 8,325,000 1.6 Retail 500,000 +Woolworth Corp. ........... 6,339,630 10,937,500 2.1 ------------ ------------ ------ 89,989,662 107,133,750 20.4 - --------------------------------------------------------------------------------------------------------------------- Total Stocks 390,054,844 432,958,987 82.5 - --------------------------------------------------------------------------------------------------------------------- Face Amount Short-Term Securities --------------------------------------------------------------------------------------------------------------------- Commercial Paper* $10,000,000 Eureka Securitization, Inc., 5.38% due 1/30/1997....... 9,955,167 9,955,167 1.9 20,045,000 General Electric Capital Corp., 7.10% due 1/02/1997................. 20,037,093 20,037,093 3.8 10,000,000 Lehman Brothers Holdings, Inc., 5.45% due 2/14/1997................. 9,931,875 9,931,875 1.9 10,000,000 Three Rivers Funding, Corp., 5.60% due 1/15/1997....... 9,976,667 9,976,667 1.9 ------------ ------------ ------ 49,900,802 49,900,802 9.5 - --------------------------------------------------------------------------------------------------------------------- US Government & 7,000,000 Federal Home Loan Bank, Agency Obligations* 5.22% due 1/09/1997....... 6,990,865 6,990,865 1.3 Federal National Mortgage Association: 10,000,000 5.24% due 2/03/1997....... 9,950,511 9,950,511 1.9 23,000,000 5.26% due 2/10/1997....... 22,862,217 22,862,217 4.4 ------------ ------------ ------ 39,803,593 39,803,593 7.6 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Securities 89,704,395 89,704,395 17.1 - --------------------------------------------------------------------------------------------------------------------- Total Investments........... $479,759,239 522,663,382 99.6 ============ Other Assets Less Liabilities............... 2,266,782 0.4 ------------ ------ Net Assets.................. $524,930,164 100.0% ============ ====== - --------------------------------------------------------------------------------------------------------------------- + Non-income producing security. * Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. (a) American Depositary Receipts (ADR). (b) Investment in companies 5% or more of whose outstanding securities are held by the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) are as follows: --------------------------------------------------------------------------------------------------------------------- Net Share Net Dividend Industry Affiliate Activity Cost Income - --------------------------------------------------------------------------------------------------------------------- Home--Builders Beazer Homes USA, Inc. .............................. 50,000 $ 665,558 -- Savings & Loans Greater N.Y. Savings Bank............................ 328,100 3,770,476 $37,500 Technology Micronics Computers, Inc. ........................... 257,500 206,942 -- - --------------------------------------------------------------------------------------------------------------------- Total $4,642,976 ========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -30- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Developing Capital Markets Focus Fund Schedule of Investments as of December 31, 1996 (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of AFRICA Industries Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Morocco Banking 7,050 Wafa Bank................... $ 337,444 $ 445,329 0.4% - --------------------------------------------------------------------------------------------------------------------- Total Investments in Morocco 337,444 445,329 0.4 - --------------------------------------------------------------------------------------------------------------------- South Africa Beverage & 15,241 South African Breweries Ltd....................... 352,755 386,240 0.4 14,688 South African Breweries Ltd. (ADR) (a)................. 467,719 370,872 0.4 ----------- ------ 820,474 757,112 0.8 ------------------------------------------------------------------------------------------------------ Coal 120,300 Ingwe Coal Corporation Ltd....................... 909,851 861,858 0.9 ------------------------------------------------------------------------------------------------------ Entertainment 574,700 Sun International, Ltd. .... 789,589 460,891 0.5 ------------------------------------------------------------------------------------------------------ Financial Services 6,200 Anglo American Corp. of South Africa, Ltd. (ADR) (a)....................... 389,005 336,350 0.3 39,785 Nedcor Ltd. (Ordinary)...... 483,190 544,534 0.6 ----------- ------ 872,195 880,884 0.9 ------------------------------------------------------------------------------------------------------ Mining 78,700 Beatrix Mines Ltd........... 679,625 492,296 0.5 23,300 De Beers Centenary AG....... 619,984 667,707 0.7 4,687 Vaal Reefs Exploration & Mining Co. Ltd............ 403,774 300,706 0.3 24,238 +Western Areas Gold Mining Company Ltd............... 384,854 334,335 0.4 ----------- ------ 2,088,237 1,795,044 1.9 ------------------------------------------------------------------------------------------------------ Total Investments in South Africa 5,480,346 4,755,789 5.0 - --------------------------------------------------------------------------------------------------------------------- Zimbabwe Beverage & Tobacco 327,843 Delta Corporation Ltd....... 781,291 1,152,988 1.2 ------------------------------------------------------------------------------------------------------ Total Investments in Zimbabwe 781,291 1,152,988 1.2 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Africa 6,599,081 6,354,106 6.6 - --------------------------------------------------------------------------------------------------------------------- EUROPE --------------------------------------------------------------------------------------------------------------------- Czech Republic Broadcast--Media 17,500 +Central European Media Enterprises Ltd. (Class A)(GDR) (b)............... 481,250 546,875 0.6 ------------------------------------------------------------------------------------------------------ Total Investments in the Czech Republic 481,250 546,875 0.6 - --------------------------------------------------------------------------------------------------------------------- France Utilities--Water 14,700 Compagnie Generale des Eaux S.A....................... 1,607,353 1,821,916 1.9 ------------------------------------------------------------------------------------------------------ Total Investments in France 1,607,353 1,821,916 1.9 - --------------------------------------------------------------------------------------------------------------------- Greece Banking 13,680 Ergo Bank S.A. (Ordinary)... 611,797 694,102 0.7 ------------------------------------------------------------------------------------------------------ Beverage 11,010 Hellenic Bottling Co. S.A....................... 215,402 353,137 0.4 ------------------------------------------------------------------------------------------------------ Telecommunications 23,400 Hellenic Telecommunication Organization S.A.......... 387,013 400,191 0.4 ------------------------------------------------------------------------------------------------------ Total Investments in Greece 1,214,212 1,447,430 1.5 - --------------------------------------------------------------------------------------------------------------------- Hungary Health/Personal 31,600 Gedeon Richter Ltd. (GDR) Care (b)....................... 724,600 1,832,800 1.9 1,000 Gedeon Richter Ltd. (GDR) (b)(e).................... 40,875 58,000 0.1 ----------- ------ 765,475 1,890,800 2.0 ------------------------------------------------------------------------------------------------------ Telecommunications 1,100 +Magyar TarKozlesi Reszvenytarsasag (Ordinary) (e)............ 174,885 238,243 0.2 ------------------------------------------------------------------------------------------------------ Total Investments in Hungary 940,360 2,129,043 2.2 - ---------------------------------------------------------------------------------------------------------------------
-31- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
EUROPE Shares Value Percent of (concluded) Industries Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Italy Automobiles 300,000 Fiat S.p.A.................. 884,110 906,965 0.9 ------------------------------------------------------------------------------------------------------ Broadcast--Media 168,000 Mediaset S.p.A.............. 805,116 774,576 0.8 ------------------------------------------------------------------------------------------------------ Total Investments in Italy 1,689,226 1,681,541 1.7 - --------------------------------------------------------------------------------------------------------------------- Netherlands Electronics 11,250 Philips Electronics N.V..... 457,905 456,257 0.5 11,250 Philips Electronics N.V. (NY Registered Shares)........ 438,600 450,000 0.4 ------------------------------------------------------------------------------------------------------ Total Investments in the Netherlands 896,505 906,257 0.9 - --------------------------------------------------------------------------------------------------------------------- Poland Automotive 10,000 +T.C. Debica S.A............ 211,943 223,339 0.2 ------------------------------------------------------------------------------------------------------ Banking 58,118 Wielkopolsky Bank Kredytowy S.A....................... 350,009 393,457 0.4 ------------------------------------------------------------------------------------------------------ Electrical & 4,400 Elektrim Towarzystow Electronics Handlowe S.A.............. 25,742 39,922 0.1 ------------------------------------------------------------------------------------------------------ Financial Services 9,207 Bank Rozwoju Eksportu S.A. (BRE)..................... 247,903 276,313 0.3 ------------------------------------------------------------------------------------------------------ Multi-Industry 114,551 Mostostal-Export S.A........ 302,975 271,827 0.3 ------------------------------------------------------------------------------------------------------ Total Investments in Poland 1,138,572 1,204,858 1.3 - --------------------------------------------------------------------------------------------------------------------- Portugal Building Products 45,000 Cimpor-Cimentos de Portugal S.A....................... 916,303 969,097 1.0 ------------------------------------------------------------------------------------------------------ Multi-Industry 35,100 Sonae Investimentos-SGPS S.A....................... 866,343 1,111,877 1.2 ------------------------------------------------------------------------------------------------------ Total Investments in Portugal 1,782,646 2,080,974 2.2 - --------------------------------------------------------------------------------------------------------------------- Russia Energy Sources 56,100 A.O. Mosenergo (ADR) (a).... 1,567,968 1,697,025 1.8 1,980,000 +Irkutskenergo (GDR) (b).... 249,592 261,360 0.2 ----------- ------ 1,817,560 1,958,385 2.0 ------------------------------------------------------------------------------------------------------ Multi-Industry 7,600 Templeton Russia Fund, Inc....................... 115,344 167,200 0.2 ------------------------------------------------------------------------------------------------------ Natural Gas 27,000 +RAO Gazprom (ADR) (a)(e)... 425,250 479,250 0.5 ------------------------------------------------------------------------------------------------------ Oil & Related 8,000 Lukoil Oil Company (ADR) (a)....................... 331,050 368,000 0.4 ------------------------------------------------------------------------------------------------------ Telecommunications 16,500 +Vimpel-Communications (ADR) (a)....................... 395,943 389,813 0.4 ------------------------------------------------------------------------------------------------------ Total Investments in Russia 3,085,147 3,362,648 3.5 - --------------------------------------------------------------------------------------------------------------------- Turkey Metal Fabricating 7,800,000 Eregli Demir Ve Celik Fabrikalari T.A.S......... 983,792 936,288 1.0 ------------------------------------------------------------------------------------------------------ Total Investments in Turkey 983,792 936,288 1.0 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Europe 13,819,063 16,117,830 16.9 - --------------------------------------------------------------------------------------------------------------------- LATIN AMERICA --------------------------------------------------------------------------------------------------------------------- Argentina Banking 64,384 Banco Frances del Rio de la Plata S.A. (ADR) (a)...... 1,346,566 1,770,557 1.8 60,500 +Bansud S.A. (Class B)...... 710,916 724,935 0.8 ----------- ------ 2,057,482 2,495,492 2.6 ------------------------------------------------------------------------------------------------------ Oil & Related 236,390 Companhia Naviera Perez Companc S.A.C.F.I.M.F.A. (Class B)................. 1,156,335 1,662,154 1.7 ------------------------------------------------------------------------------------------------------ Telecommunications 17,354 Telefonica de Argentina S.A. (Class B) (ADR) (a)....... 497,806 449,035 0.5 ------------------------------------------------------------------------------------------------------ Total Investments in Argentina 3,711,623 4,606,681 4.8 - ---------------------------------------------------------------------------------------------------------------------
-32- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
LATIN AMERICA Shares Value Percent of (continued) Industries Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Brazil Banking 103,086,523 Banco Bradesco S.A. (Preferred)............... 696,489 747,176 0.8 ------------------------------------------------------------------------------------------------------ Beverage 2,452,525 Companhia Cervejaria Brahma S.A. PN (Preferred)....... 993,758 1,340,874 1.4 ------------------------------------------------------------------------------------------------------ Mining 10,296 Companhia Vale do Rio Doce S.A. (Preferred).......... 227,523 198,210 0.2 ------------------------------------------------------------------------------------------------------ Oil & Related 11,658,000 Petroleo Brasileiro S.A. (Preferred)............... 1,641,531 1,857,156 2.0 ------------------------------------------------------------------------------------------------------ Steel 8,410,000 Companhia Siderurgica Nacional S.A.............. 202,969 238,805 0.2 1,256,100,000 Usinas Siderurgicas de Minas Gerais - Usiminas S.A. (Preferred)............... 1,313,468 1,281,611 1.4 ----------- ------ 1,516,437 1,520,416 1.6 ------------------------------------------------------------------------------------------------------ Telecommuni- 29,685 Telecomunicacoes Brasileiras cations S.A.--Telebras PN (ADR)(a).................. 1,629,450 2,270,903 2.4 13,972,227 Telecomunicacoes Brasileiras S.A.--Telebras PN (Preferred)............... 737,840 1,075,925 1.1 7,227,925 Telecomunicacoes de Minas Gerais S.A.--TELEMIG (Class B) (Preferred)..... 652,510 894,011 0.9 ----------- ------ 3,019,800 4,240,839 4.4 ------------------------------------------------------------------------------------------------------ Utilities--Electrical 1,060,000 Centrais Eletricas & Gas Brasileiras S.A.--Eletrobras.......... 367,723 379,555 0.4 155,000 Centrais Eletricas Brasileiras S.A.--Eletrobras 'B' (Preferred)............... 54,645 57,590 0.1 7,513 Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR)(a).................. 169,798 253,564 0.2 20,000 Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR)(a)(e)............... 426,315 675,000 0.7 ----------- ------ 1,018,481 1,365,709 1.4 ------------------------------------------------------------------------------------------------------ Total Investments in Brazil 9,114,019 11,270,380 11.8 - --------------------------------------------------------------------------------------------------------------------- Mexico Banking 10,650 Grupo Financiero Banamex --Accival, S.A. de C.V. (BANACCI) (Class L)................. 18,179 20,973 0.0 ------------------------------------------------------------------------------------------------------ Beverage & Tobacco 16,100 Panamerican Beverages, Inc. (Class A)................. 644,974 754,687 0.8 ------------------------------------------------------------------------------------------------------ Building & 126,000 Apasco, S.A. de C.V......... 458,715 864,439 0.9 Construction ------------------------------------------------------------------------------------------------------ Building Materials 154,000 Cementos Mexicanos, S.A. de C.V....................... 665,660 600,661 0.6 ------------------------------------------------------------------------------------------------------ Financial Services 77,000 +Banca Quadrum, S.A. de C.V. (ADR)(a).................. 510,125 279,125 0.3 355,000 Banco Nacional de Mexico, S.A. de C.V. (Class B) (BANAMEX)................. 660,134 749,600 0.8 ----------- ------ 1,170,259 1,028,725 1.1 ------------------------------------------------------------------------------------------------------ Health/Personal 100,000 Kimberly-Clark de Mexico, Care S.A. de C.V............... 1,333,327 1,975,607 2.1 ------------------------------------------------------------------------------------------------------ Leisure 445,787 Grupo Carso, S.A. de C.V. 'A1'...................... 2,700,380 2,350,421 2.5 ------------------------------------------------------------------------------------------------------
-33- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
LATIN AMERICA Shares Value Percent of (concluded) Industries Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Mexico Retail 30,000 +Cifra, S.A. de C.V. 'B' (concluded) (ADR)(a).................. 40,599 35,400 0.0 996,200 +Cifra, S.A. de C.V. 'C'.... 1,558,437 1,215,032 1.3 ----------- ------ 1,599,036 1,250,432 1.3 ------------------------------------------------------------------------------------------------------ Telecommunications 35,979 Telefonos de Mexico, S.A. de C.V. (ADR) (a)............ 1,145,507 1,187,307 1.2 ------------------------------------------------------------------------------------------------------ Total Investments in Mexico 9,736,037 10,033,252 10.5 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Latin America 22,561,679 25,910,313 27.1 - --------------------------------------------------------------------------------------------------------------------- MIDDLE EAST --------------------------------------------------------------------------------------------------------------------- Egypt Banking 2,962 +Commercial International Bank (Egypt) S.A.E........ 350,673 447,622 0.5 ------------------------------------------------------------------------------------------------------ Cement 7,375 Tora Portland Cement Co..... 149,085 149,111 0.1 ------------------------------------------------------------------------------------------------------ Total Investments in Egypt 499,758 596,733 0.6 - --------------------------------------------------------------------------------------------------------------------- Israel Banking 6,000 +Bank Hapoalim Ltd. ........ 8,651 9,518 0.0 653,600 +Bank Leumi Israel.......... 894,162 899,625 0.9 ----------- ------ 902,813 909,143 0.9 ------------------------------------------------------------------------------------------------------ Merchandising 72,000 +Blue Square Chain Stores Properties & Investments Ltd. ..................... 522,937 564,392 0.6 4,800 +Blue Square Chain Stores Properties & Investments Ltd. (ADR)(a)............. 66,380 68,400 0.1 ----------- ------ 589,317 632,792 0.7 ------------------------------------------------------------------------------------------------------ Multi-Industry 10,578 Koor Industries Ltd. ....... 968,604 922,812 1.0 3,500 Koor Industries Ltd. (ADR)(a).................. 67,069 59,500 0.1 ----------- ------ 1,035,673 982,312 1.1 ------------------------------------------------------------------------------------------------------ Total Investments in Israel 2,527,803 2,524,247 2.7 - --------------------------------------------------------------------------------------------------------------------- Total Investments in the Middle East 3,027,561 3,120,980 3.3 - --------------------------------------------------------------------------------------------------------------------- PACIFIC BASIN/ASIA --------------------------------------------------------------------------------------------------------------------- Australia Merchandising 19,740 Amway Asia Pacific Ltd.(GDR) (b)....................... 690,260 836,482 0.9 ------------------------------------------------------------------------------------------------------ Total Investments in Australia 690,260 836,482 0.9 - --------------------------------------------------------------------------------------------------------------------- China Telecommunications 622,000 +Eastern Communications Co., Ltd. (Class B)............ 502,576 553,580 0.6 ------------------------------------------------------------------------------------------------------ Total Investments in China 502,576 553,580 0.6 - --------------------------------------------------------------------------------------------------------------------- Hong Kong Automotive 377,000 Sime Darby (Hong Kong) Ltd. ..................... 448,773 475,272 0.5 ------------------------------------------------------------------------------------------------------ Banking 440,000 JCG Holdings, Ltd. ......... 400,979 429,532 0.4 65,000 +Wing Hang Bank Ltd......... 239,973 294,996 0.3 ----------- ------ 640,952 724,528 0.7 ------------------------------------------------------------------------------------------------------ Food 2,659,000 C.P. Pokphand Co. Ltd. (Ordinary)................ 1,024,250 1,040,015 1.1 7,991,000 +Tingyi (Cayman Islands) Holdings Co............... 2,041,042 2,092,291 2.2 ----------- ------ 3,065,292 3,132,306 3.3 ------------------------------------------------------------------------------------------------------ Industrial 5,066,000 Sinocan Holdings Ltd. ...... 1,328,338 2,489,113 2.6 ------------------------------------------------------------------------------------------------------ Real Estate 3,699,000 China Overseas Land & Investment................ 1,047,051 1,877,240 2.0 ------------------------------------------------------------------------------------------------------ Total Investments in Hong Kong 6,530,406 8,698,459 9.1 - ------------------------------------------------------------------------------------------------------------
-34- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
PACIFIC BASIN/ASIA Shares Held/ Value Percent of (continued) Industries Face Amount Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- India Automotive 89,000 Ashok Leyland Ltd. (GDR)(b).................. 947,250 825,475 0.8 39,000 Ashok Leyland Ltd. (GDR)(b)(e)............... 532,185 361,725 0.4 ----------- ------ 1,479,435 1,187,200 1.2 ------------------------------------------------------------------------------------------------------ Building Materials 71,600 Larsen & Toubro Ltd. (GDR)(b)(e)............... 1,124,562 1,031,040 1.1 ------------------------------------------------------------------------------------------------------ Energy Sources 37,900 Bombay Suburban Electric Supply Co. Ltd.(GDR)(b)... 694,175 776,950 0.8 ------------------------------------------------------------------------------------------------------ Leisure 51,800 East India Hotels Ltd. (GDR)(b)(e)............... 820,294 1,217,300 1.3 ------------------------------------------------------------------------------------------------------ Total Investments in India 4,118,466 4,212,490 4.4 - --------------------------------------------------------------------------------------------------------------------- Indonesia Broadcasting & US$ 750,000 P.T. Surya Citra Television, Publishing 4% due 7/01/1997 (Convertible)............. 785,697 750,452 0.8 US$ 15,000 P.T. Surya Citra Television, 4% due 7/01/1997 (Convertible)(e).......... 15,000 15,009 0.0 ----------- ------ 800,697 765,461 0.8 ------------------------------------------------------------------------------------------------------ Food 208,000 P.T. Indofood Sukses Makmur.................... 434,008 414,062 0.4 ------------------------------------------------------------------------------------------------------ Multi--Industry 632,000 P.T. Bimantara Citra........ 822,513 843,202 0.9 ------------------------------------------------------------------------------------------------------ Real Estate 1,008,000 P.T. Ciputra Development.... 899,550 1,045,997 1.1 ------------------------------------------------------------------------------------------------------ Telecommunications 164,000 P.T. Telekomunikasi Indonesia................. 246,872 283,058 0.3 4,000 P.T. Telekomunikasi Indonesia (ADR)(a)........ 126,560 138,000 0.1 ----------- ------ 373,432 421,058 0.4 ------------------------------------------------------------------------------------------------------ Telecommunications 21,000 P.T. Kabelmetal Indonesia & Equipment (Rights)(d)............... 0 0 0.0 ------------------------------------------------------------------------------------------------------ Total Investments in Indonesia 3,330,200 3,489,780 3.6 - --------------------------------------------------------------------------------------------------------------------- Malaysia Airlines 151,000 Malaysian Airline System BHD....................... 426,861 391,703 0.4 ------------------------------------------------------------------------------------------------------ Banking 66,000 Commerce Asset Holdings BHD....................... 422,451 496,634 0.5 360,000 Public Bank BHD 'Foreign'... 507,714 762,772 0.8 ----------- ------ 930,165 1,259,406 1.3 ------------------------------------------------------------------------------------------------------ Broadcasting & 110,000 New Straits Times Press Publishing BHD....................... 579,672 636,040 0.7 134,000 Sistem Televisyen Malaysia BHD (Class A)............. 195,771 248,364 0.2 ----------- ------ 775,443 884,404 0.9 ------------------------------------------------------------------------------------------------------ Building Materials US$ 455,000 Aokam Perdana BHD, 3.50% due 6/13/2004 (Convertible)... 365,816 277,550 0.3 82,000 Hume Industries (Malaysia) BHD (Class A)............. 435,693 516,356 0.5 ----------- ----------- ------- 801,509 793,906 0.8 ------------------------------------------------------------------------------------------------------ Chemicals 135,000 Nylex (Malaysia) BHD........ 354,841 304,752 0.3 ------------------------------------------------------------------------------------------------------ Consumer Products & 8,500 +Amway (Malaysia) Holdings Services BHD (GDR)(b).............. 50,682 48,139 0.1 ------------------------------------------------------------------------------------------------------ Diversified 42,300 OYL Industries BHD.......... 438,242 443,941 0.5 Holdings ------------------------------------------------------------------------------------------------------ Engineering & 125,000 Malaysian Resources Corp. Construction BHD....................... 437,809 492,574 0.5 ------------------------------------------------------------------------------------------------------ Food 54,000 Nestle (Malaysia) BHD....... 420,759 434,139 0.5 ------------------------------------------------------------------------------------------------------
-35- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
PACIFIC BASIN/ASIA Shares Held/ Value Percent of (continued) Industries Face Amount Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Malaysia Multi-Industry 96,000 Ekran BHD................... 429,945 403,010 0.4 (concluded) 427,000 Renong BHD.................. 723,102 757,608 0.8 130,000 Sime Darby BHD.............. 432,179 512,277 0.6 98,000 Sungei Way Holdings BHD..... 255,634 291,089 0.3 ----------- ----------- ---------- 1,840,860 1,963,984 2.1 ------------------------------------------------------------------------------------------------------ Natural Gas 103,000 Petronas Gas BHD............ 425,739 428,317 0.4 ------------------------------------------------------------------------------------------------------ Oil & Related 78,000 Petronas Dagangan BHD....... 227,916 200,792 0.2 ------------------------------------------------------------------------------------------------------ Telecommunications 341,400 +Technology Resources Industries BHD (TRI)...... 1,233,355 673,335 0.7 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Malaysia 8,364,181 8,319,392 8.7 - --------------------------------------------------------------------------------------------------------------------- Pakistan Chemicals--Fertilizers 15,000 Fauji Fertilizer Co. Ltd. ..................... 31,246 25,262 0.0 ------------------------------------------------------------------------------------------------------ Telecommunications 2,800 +Pakistan Telecommunications Corp...................... 258,800 175,350 0.2 ------------------------------------------------------------------------------------------------------ Total Investments in Pakistan 290,046 200,612 0.2 - --------------------------------------------------------------------------------------------------------------------- Philippines International Trade 637,500 International Container Terminal Services, Inc.... 278,784 333,801 0.3 ------------------------------------------------------------------------------------------------------ Total Investments in the Philippines 278,784 333,801 0.3 - --------------------------------------------------------------------------------------------------------------------- South Korea Automotive 6,940 +Dong Ah Tire Industries.... 581,436 485,182 0.5 ------------------------------------------------------------------------------------------------------ Banking 69,330 Cho Hung Bank Co. Ltd....... 746,446 559,413 0.6 2,740 Shinhan Bank................ 50,472 44,881 0.1 ----------- ----------- ---------- 796,918 604,294 0.7 ------------------------------------------------------------------------------------------------------ Telecommunications 127,967 Korea Mobile Telecom- munications Corp.(ADR)(a)(e).......... 1,993,680 1,641,179 1.7 ------------------------------------------------------------------------------------------------------ Total Investments in South Korea 3,372,034 2,730,655 2.9 - --------------------------------------------------------------------------------------------------------------------- Thailand Banking 132,000 Krung Thai Bank Public Co. Ltd....................... 623,254 254,767 0.3 93,400 Phatra Thanakit Public Co. Ltd....................... 893,341 265,848 0.3 11,000 Siam Commercial Bank Public Co. Ltd. "Foreign"........ 175,656 79,775 0.1 140,000 +Thai Farmers Bank Co., Ltd....................... 1,521,890 873,396 0.9 17,500 Thai Farmers Bank Co., Ltd. "Foreign" (Warrants)(c)... 17,292 16,547 0.0 ----------- ----------- ---------- 3,231,433 1,490,333 1.6 ------------------------------------------------------------------------------------------------------ Finance 148,400 Finance One Public Company Ltd. "Foreign"............ 1,045,477 300,885 0.3 ------------------------------------------------------------------------------------------------------ Merchandising 19,300 Siam Makro Public Co. Ltd....................... 92,578 81,273 0.1 ------------------------------------------------------------------------------------------------------ Real Estate Chf 1,300,000 Bangkok Land Public Co. Ltd., 3.125% due 3/31/2001 (Convertible)............. 456,864 388,408 0.4 US$ 184,000 Bangkok Land Public Co., Ltd., 4.50% due 10/13/2003 (Convertible)............. 135,825 115,920 0.1 US$ 433,000 Hemaraj Land and Development Public Co., Ltd., 3.50% due 9/09/2003............. 425,104 441,660 0.5 US$ 163,000 Tanayong Public Co. Ltd., 3.50% due 3/01/2004 (Convertible)............. 148,167 145,477 0.1 ----------- ----------- ---------- 1,165,960 1,091,465 1.1 ------------------------------------------------------------------------------------------------------
-36- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund Schedule of Investments as of December 31, 1996 (concluded) (in US dollars) - ------------------------------------------------------------------------------
PACIFIC BASIN/ASIA Shares Value Percent of (concluded) Industries Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Thailand Telecommunications 62,900 Advanced Info Service Public (concluded) Company Ltd. 'Foreign'.... 1,150,003 534,651 0.6 454,000 +TelecomAsia Corporation Public Company Ltd. 'Foreign'................. 859,481 947,050 1.0 ----------- ----------- ---------- 2,009,484 1,481,701 1.6 ------------------------------------------------------------------------------------------------------ Total Investments in Thailand 7,544,932 4,445,657 4.7 - --------------------------------------------------------------------------------------------------------------------- Total Investments in the Pacific Basin/Asia 35,021,885 33,820,908 35.4 - --------------------------------------------------------------------------------------------------------------------- Face Amount Short-Term Securities --------------------------------------------------------------------------------------------------------------------- Commercial US$1,000,000 American Brands, Inc., 5.30% Paper* due 1/06/1997............. 999,117 999,117 1.0 2,884,000 General Motors Acceptance Corp., 7.50% due 1/02/1997................. 2,882,798 2,882,798 3.0 3,000,000 Riverwoods Funding Corp., 5.40% due 1/15/1997....... 2,993,250 2,993,250 3.2 ----------- ----------- ---------- 6,875,165 6,875,165 7.2 - --------------------------------------------------------------------------------------------------------------------- US Government & 2,000,000 Federal Home Loan Mortgage Agency Corp., 5.60% due Obligations* 1/07/1997................. 1,997,822 1,997,822 2.1 2,000,000 Federal National Mortgage Association, 5.55% due 1/16/1997................. 1,995,067 1,995,067 2.1 ----------- ----------- ---------- 3,992,889 3,992,889 4.2 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Short- Term Securities 10,868,054 10,868,054 11.4 - --------------------------------------------------------------------------------------------------------------------- Total Investments........... $91,897,323 96,192,191 100.6 =========== Liabilities in Excess of Other Assets.............. (593,289) (0.6) ----------- ---------- Net Assets.................. $95,598,902 100.0 =========== =========== - --------------------------------------------------------------------------------------------------------------------- * Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase of the Fund. + Non-income producing security. (a) American Depositary Receipts (ADR). (b) Global Depositary Receipts (GDR). (c) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and the number of shares are subject to adjustment under certain conditions until the expiration date. (d) The rights may be exercised until 2/14/1997. (e) Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $5,717,000 representing 6.0% of net assets. - ------------------------------------------------------------------------------ Acquisition Value Issue Date(s) Cost (Note 1a) - --------------------------------------------------------------------------------------------------------------------- Ashok Leyland Ltd. (GDR)............................................. 3/09/1995-5/22/1996 $ 532,185 $ 361,725 Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR).............. 7/20/1995-8/01/1995 426,315 675,000 East India Hotels Ltd. (GDR)......................................... 12/12/1994-7/10/1995 820,294 1,217,300 RAO Gazprom (ADR).................................................... 10/21/1996 425,250 479,250 Gedeon Richter Ltd. (GDR)............................................ 7/03/1996 40,875 58,000 Korea Mobile Telecommunications Corp.(ADR)........................... 1/18/1996 1,993,680 1,641,179 Larsen & Toubro Ltd. (GDR)........................................... 3/22/1996-3/26/1996 1,124,562 1,031,040 Magyar TarKozlesi Reszvenytarsasag (Ordinary)........................ 12/01/1995 174,885 238,243 P.T. Surya Citra Television, 4% due 7/01/1997 (Convertible).......... 6/24/1994 15,000 15,009 - --------------------------------------------------------------------------------------------------------------------- Total $5,553,046 $5,716,746 ========== ========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -37- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Domestic Money Market Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Face Interest Maturity Value Amount Issue Rate* Date (Note 1a) --------------------------------------------------------------------------------------------------------------------- Certificate of Deposit--1.8% $ 5,000,000 Chase Manhattan Bank USA (Delaware)... 5.60 % 4/01/97 $ 5,001,002 - --------------------------------------------------------------------------------------------------------------------- Total Certificate of Deposit (Cost--$5,000,000) 5,001,002 - --------------------------------------------------------------------------------------------------------------------- Commercial Paper--46.9% 6,338,000 Allomon Funding Corp. ................ 5.31 2/10/97 6,301,094 7,691,000 Bear Stearns Companies, Inc. ......... 5.35 1/31/97 7,657,699 5,000,000 Beta Finance Inc. .................... 5.44 3/28/97 4,936,014 4,500,000 Beta Finance Inc. .................... 5.32 5/01/97 4,419,675 4,649,000 CSW Credit, Inc. ..................... 5.35 1/22/97 4,635,311 5,000,000 CSW Credit, Inc. ..................... 5.45 3/14/97 4,946,553 5,000,000 Eureka Securitization Inc. ........... 5.33 1/17/97 4,988,958 4,188,000 Eureka Securitization Inc. ........... 5.35 1/28/97 4,171,969 7,815,000 Finova Capital Corp. ................. 5.38 2/24/97 7,752,756 5,096,000 Finova Capital Corp. ................. 5.48 3/20/97 5,036,923 10,000,000 Ford Motor Credit Co. ................ 5.30 2/07/97 9,946,250 4,000,000 General Electric Capital Corp. ....... 5.55 1/10/97 3,995,271 2,000,000 General Electric Capital Corp. ....... 5.50 3/03/97 1,981,933 6,665,000 General Electric Capital Corp. ....... 5.64 3/05/97 6,602,786 426,000 General Motors Acceptance Corp. ...... 5.33 1/13/97 425,310 4,600,000 General Motors Acceptance Corp. ...... 5.34 1/23/97 4,585,778 5,402,000 General Motors Acceptance Corp. ...... 5.32 2/05/97 5,374,577 2,000,000 General Motors Acceptance Corp. ...... 5.34 5/14/97 1,960,400 2,500,000 Goldman Sachs Group, L.P. ........... 5.68 1/06/97 2,498,522 1,857,000 International Securitization Corp. ... 5.35 1/29/97 1,849,514 5,000,000 International Securitization Corp. ... 5.58 2/28/97 4,957,171 7,000,000 Lehman Brothers Holdings Inc. ........ 5.75 1/31/97 6,967,576 4,000,000 Lehman Brothers Holdings Inc. ........ 5.40 3/03/97 3,963,867 2,000,000 Morgan Stanley Group, Inc. ........... 5.41 1/27/97 1,992,639 6,000,000 New Center Asset Trust................ 5.43 1/29/97 5,975,813 7,000,000 New Center Asset Trust................ 5.40 2/07/97 6,962,375 4,000,000 Transamerica Finance Corp. ........... 5.60 3/11/97 3,959,049 - --------------------------------------------------------------------------------------------------------------------- Total Commercial Paper (Cost--$128,841,542) 128,845,783 - --------------------------------------------------------------------------------------------------------------------- Bank Notes--1.3% 3,500,000 Bank of America, Illinois............. 5.63 12/30/97 3,498,247 - --------------------------------------------------------------------------------------------------------------------- Total Bank Notes (Cost--$3,499,667) 3,498,247 - --------------------------------------------------------------------------------------------------------------------- Corporate Notes--7.6% 7,000,000 Asset Backed Securities Investment Trust 1996-M+....................... 5.605 10/15/97 7,000,000 5,000,000 CIT Group Holdings, Inc. (The)+....... 5.36 10/27/97 4,997,158 9,000,000 SMM Trust 1995-Q+..................... 5.605 1/08/97 9,000,000 - --------------------------------------------------------------------------------------------------------------------- Total Corporate Notes (Cost--$20,997,144) 20,997,158 - --------------------------------------------------------------------------------------------------------------------- Funding Agreements--1.8% 5,000,000 Jackson National Life Insurance Co.+................................ 5.41 4/08/97 5,000,000 - --------------------------------------------------------------------------------------------------------------------- Total Funding Agreements (Cost--$5,000,000) 5,000,000 - --------------------------------------------------------------------------------------------------------------------- Master Notes--1.1% 3,000,000 Goldman Sachs Group L.P.+............. 5.88 8/01/97 3,000,000 - --------------------------------------------------------------------------------------------------------------------- Total Master Notes (Cost--$3,000,000) 3,000,000 - --------------------------------------------------------------------------------------------------------------------- US Government, Agency & 32,000 Federal Home Loan Mortgage Corp. ..... 5.35 2/03/97 31,851 Instrumentality Obligations-- 115,000 Federal National Mortgage Discount--0.2% Association......................... 5.35 2/11/97 114,332 380,000 Federal National Mortgage Association......................... 5.33 3/27/97 375,239 - --------------------------------------------------------------------------------------------------------------------- Total US Government, Agency & Instrumentality Obligations--Discount (Cost--$521,438) 521,422 - ---------------------------------------------------------------------------------------------------------------------
-38- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Domestic Money Market Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Face Interest Maturity Value Amount Issue Rate* Date (Note 1a) --------------------------------------------------------------------------------------------------------------------- US Government, Agency & 1,500,000 Federal Farm Credit Bank.............. 5.85 % 10/01/97 $ 1,502,580 Instrumentality Obligations-- 5,000,000 Federal Farm Credit Bank+............. 5.38 11/25/97 4,999,062 Non-Discount--38.7% 4,000,000 Federal Home Loan Bank+............... 5.41 12/10/97 3,998,191 1,040,000 Federal Home Loan Bank+............... 5.60 1/26/98 1,040,299 1,500,000 Federal Home Loan Bank................ 6.12 4/15/98 1,499,530 1,000,000 Federal Home Loan Bank................ 6.17 11/06/98 999,375 5,000,000 Federal National Mortgage Association+........................ 5.85 2/14/97 5,002,473 12,000,000 Federal National Mortgage Association+........................ 5.44 2/21/97 12,000,000 2,000,000 Federal National Mortgage Association+........................ 5.385 5/14/97 1,999,365 9,500,000 Federal National Mortgage Association+........................ 5.521 5/22/97 9,497,525 5,000,000 Federal National Mortgage Association+........................ 5.40 7/16/97 4,998,194 2,000,000 Federal National Mortgage Association+........................ 5.42 8/01/97 1,999,497 2,000,000 Federal National Mortgage Association+........................ 5.405 9/03/97 1,999,022 1,000,000 Federal National Mortgage Association+........................ 5.41 9/09/97 999,533 1,000,000 Federal National Mortgage Association+........................ 5.41 9/29/97 999,559 3,200,000 Federal National Mortgage Association*........................ 5.47 12/30/97 3,196,016 2,000,000 Federal National Mortgage Association*........................ 5.19 1/08/98 1,991,380 5,500,000 Federal National Mortgage Association+........................ 5.46 4/24/98 5,497,250 5,000,000 Student Loan Marketing Association+... 5.62 1/23/97 5,000,249 2,000,000 Student Loan Marketing Association+... 5.54 3/03/97 2,000,038 6,500,000 Student Loan Marketing Association+... 5.57 10/30/97 6,501,136 2,000,000 US Treasury Notes..................... 6.625 3/31/97 2,005,624 2,000,000 US Treasury Notes..................... 8.50 4/15/97 2,017,186 1,750,000 US Treasury Notes..................... 6.50 4/30/97 1,756,563 1,750,000 US Treasury Notes..................... 6.50 5/15/97 1,757,109 1,500,000 US Treasury Notes..................... 6.125 5/31/97 1,503,750 1,800,000 US Treasury Notes..................... 6.00 8/31/97 1,805,062 4,800,000 US Treasury Notes..................... 5.75 9/30/97 4,808,621 3,500,000 US Treasury Notes..................... 5.625 10/31/97 3,502,188 3,800,000 US Treasury Notes..................... 5.375 11/30/97 3,792,278 2,200,000 US Treasury Notes..................... 5.25 12/31/97 2,192,951 1,170,000 US Treasury Notes..................... 5.00 1/31/98 1,161,773 1,200,000 US Treasury Notes..................... 5.625 11/30/98 1,194,937 1,000,000 US Treasury Notes..................... 5.75 12/31/98 998,359 - --------------------------------------------------------------------------------------------------------------------- Total US Government, Agency & Instrumentality Obligations--Non-Discount (Cost--$106,239,960) 106,216,675 - --------------------------------------------------------------------------------------------------------------------- Repurchase Agreements**--2.1% 5,780,000 Lehman Brothers Inc., purchased on 12/31/1996 to yield 7.10% to 1/02/1997........................... 5,780,000 - --------------------------------------------------------------------------------------------------------------------- Total Repurchase Agreement (Cost--$5,780,000) 5,780,000 - --------------------------------------------------------------------------------------------------------------------- Total Investments (Cost-- $278,879,751)--101.5%................. 278,860,287 Liabilities in Excess of Other Assets--(1.5%)........................ (4,104,273) ------ Net Assets--100.0%.................... $274,756,014 ====== - ---------------------------------------------------------------------------------------------------------------------
* Commercial Paper and certain US Government Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. Other securities bear interest at the rates shown, payable at fixed dates or upon maturity. The interest rates on variable rate securities are adjusted periodically based upon appropriate indexes; the interest rates shown are the rates in effect at December 31, 1996. ** Repurchase Agreements are fully collateralized by US Government Obligations. + Variable Rate Notes. See Notes to Financial Statements. -39- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Advertising 75,000 +Outdoor Systems Inc. ...... $ 1,725,000 $ 2,100,000 0.5% 50,000 +Universal Outdoor Holdings Inc. ..................... 1,850,000 1,150,000 0.2 ------------ ------------ ------ 3,575,000 3,250,000 0.7 - --------------------------------------------------------------------------------------------------------------------- Automotive 57,000 +United Auto Group, Inc. ... 1,710,000 1,467,750 0.3 - --------------------------------------------------------------------------------------------------------------------- Banking 159,300 TCF Financial Corp. ........ 4,274,782 6,929,550 1.5 - --------------------------------------------------------------------------------------------------------------------- Biotechnology 75,000 +CN Biosciences Inc. ....... 937,500 1,368,750 0.3 350,000 +COR Therapeutics Inc. ..... 3,820,630 3,456,250 0.8 320,000 +Neoprobe Corp. ............ 5,810,262 4,800,000 1.0 ------------ ------------ ------ 10,568,392 9,625,000 2.1 - --------------------------------------------------------------------------------------------------------------------- Broadcast, Radio & TV 197,000 +Jacor Communications, Inc. ......................... 5,516,000 5,392,875 1.2 - --------------------------------------------------------------------------------------------------------------------- Building Materials 150,000 Apogee Enterprises, Inc. ......................... 2,153,512 5,925,000 1.3 265,000 Ply-Gem Industries, Inc. ... 4,750,765 3,279,375 0.7 ------------ ------------ ------ 6,904,277 9,204,375 2.0 - --------------------------------------------------------------------------------------------------------------------- Business Services 240,000 +Accustaff, Inc. ........... 6,340,514 5,070,000 1.1 244,000 Reynolds & Reynolds Co. (The) (Class A)........... 3,386,946 6,344,000 1.4 ------------ ------------ ------ 9,727,460 11,414,000 2.5 - --------------------------------------------------------------------------------------------------------------------- Chemicals 255,000 Crompton & Knowles Corp. ... 4,062,361 4,908,750 1.1 - --------------------------------------------------------------------------------------------------------------------- Commercial Services 155,000 Rollins Inc. ............... 3,898,215 3,100,000 0.7 - --------------------------------------------------------------------------------------------------------------------- Computer Software 265,000 +Activision Inc. ........... 3,858,754 3,312,500 0.7 - --------------------------------------------------------------------------------------------------------------------- Computers & Peripherals 112,500 +3d Systems Corp. .......... 1,988,750 1,434,375 0.3 100,000 +Adtran, Inc. .............. 4,873,162 4,150,000 0.9 90,000 +Cabletron Systems, Inc. ... 2,882,223 2,992,500 0.7 262,500 +MicroAge Inc. ............. 2,860,757 5,217,187 1.1 100,000 +SCI Systems, Inc. ......... 4,467,211 4,462,500 1.0 50,000 +U.S. Robotics Corp. ....... 3,213,125 3,600,000 0.8 ------------ ------------ ------ 20,285,228 21,856,562 4.8 - --------------------------------------------------------------------------------------------------------------------- Diversified 75,400 Harsco Corp. ............... 4,007,056 5,164,900 1.2 150,000 Lancaster Colony Corp. ..... 5,148,124 6,825,000 1.5 ------------ ------------ ------ 9,155,180 11,989,900 2.7 - --------------------------------------------------------------------------------------------------------------------- Drug Stores 100,000 +Revco D.S., Inc. .......... 2,555,874 3,700,000 0.8 185,000 Rite Aid Corporation ....... 5,592,412 7,353,750 1.6 ------------ ------------ ------ 8,148,286 11,053,750 2.4 - --------------------------------------------------------------------------------------------------------------------- Electrical Equipment 190,000 Belden, Inc. ............... 5,864,294 7,030,000 1.6 217,500 Methode Electronics Inc. (Class A)................. 2,705,417 4,295,625 0.9 200,750 +Vishay Intertechnology, Inc. ..................... 5,506,140 4,692,531 1.0 ------------ ------------ ------ 14,075,851 16,018,156 3.5 - --------------------------------------------------------------------------------------------------------------------- Electronic/Instruments 250,500 BMC Industries, Inc. ....... 2,162,900 7,890,750 1.8 - --------------------------------------------------------------------------------------------------------------------- Electronics 170,000 Fisher Scientific International Inc. ..................... 5,111,731 8,011,250 1.8 133,300 +ITI Technologies, Inc. .... 3,796,760 1,999,500 0.4 200,000 +Kemet Corp. ............... 4,131,252 4,575,000 1.0 200,000 +Semitool Inc. ............. 3,381,041 1,900,000 0.4 ------------ ------------ ------ 16,420,784 16,485,750 3.6 - --------------------------------------------------------------------------------------------------------------------- Environmental 186,718 +TETRA Technologies, Inc. .. 2,121,250 3,641,001 0.8 - ---------------------------------------------------------------------------------------------------------------------
-40- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Financial Services 115,000 FINOVA Group, Inc. ......... 4,281,177 7,388,750 1.6 200,000 +Imperial Credit Industries, Inc. ..................... 2,581,376 4,175,000 0.9 240,000 +National Auto Credit, Inc. ..................... 2,690,561 2,880,000 0.7 130,000 +Southern Pacific Funding Corp. .................... 2,266,125 4,046,250 0.9 ------------ ------------ ---------- 11,819,239 18,490,000 4.1 - --------------------------------------------------------------------------------------------------------------------- Healthcare-- 110,000 +Thermedics, Inc. .......... 1,535,333 1,993,750 0.4 Products & Services - --------------------------------------------------------------------------------------------------------------------- Hospital Management 170,000 +Emcare Holdings Inc........ 4,693,754 3,846,250 0.9 190,500 +Health Care & Retirement Corp. .................... 4,001,067 5,453,063 1.2 185,000 +OrNda Health Corp. ........ 3,182,121 5,411,250 1.2 ------------ ------------ ---------- 11,876,942 14,710,563 3.3 - --------------------------------------------------------------------------------------------------------------------- Hotels 200,000 +Extended Stay America Inc. ..................... 3,567,050 4,000,000 0.9 200,000 La Quinta Inns, Inc. ....... 3,919,340 3,825,000 0.8 ------------ ------------ ---------- 7,486,390 7,825,000 1.7 - --------------------------------------------------------------------------------------------------------------------- Leisure 167,500 Royal Caribbean Cruises Ltd. ..................... 3,905,376 3,915,313 0.9 - --------------------------------------------------------------------------------------------------------------------- Manufactured Housing 312,812 Clayton Homes, Inc. ........ 3,590,402 4,222,962 0.9 175,000 Oakwood Homes Corporation... 3,867,933 4,003,125 0.9 ------------ ------------ ---------- 7,458,335 8,226,087 1.8 - --------------------------------------------------------------------------------------------------------------------- Medical 200,000 +Paracelsus Healthcare Corp. .................... 1,700,000 725,000 0.2 - --------------------------------------------------------------------------------------------------------------------- Medical Equipment 435,000 +Angeion Corp. ............. 2,509,688 1,495,313 0.3 175,000 +Physio-Control International Corp. ...... 3,710,000 3,850,000 0.9 ------------ ------------ ---------- 6,219,688 5,345,313 1.2 - --------------------------------------------------------------------------------------------------------------------- Medical Services 100,000 +Collaborative Clinical Research, Inc. .......... 1,414,250 1,075,000 0.2 330,000 +Mariner Health Group, Inc. ..................... 4,886,250 2,722,500 0.6 250,000 +Medpartners/Mullikin Inc. ..................... 4,971,078 5,250,000 1.2 465,000 +North American Biologicals, Inc. ..................... 4,211,875 4,068,750 0.9 ------------ ------------ ---------- 15,483,453 13,116,250 2.9 - --------------------------------------------------------------------------------------------------------------------- Medical Supplies 285,000 +ATS Medical, Inc. ......... 1,845,625 2,208,750 0.5 170,000 Beckman Instruments, Inc. .. 4,949,331 6,523,750 1.5 250,000 +Cholestech Corp. .......... 1,250,000 1,375,000 0.3 165,000 Dentsply International, Inc. ..................... 6,162,500 7,837,500 1.7 320,000 +Healthdyne Technologies Inc. ..................... 3,805,625 2,840,000 0.6 130,000 Meridan Diagnostics, Inc. ..................... 1,315,875 1,690,000 0.4 85,300 +Urologix, Inc. ............ 1,281,050 1,364,800 0.3 ------------ ------------ ---------- 20,610,006 23,839,800 5.3 - --------------------------------------------------------------------------------------------------------------------- Metal Fabricating 112,500 Valmont Industries, Inc. ... 2,398,750 4,584,375 1.0 - --------------------------------------------------------------------------------------------------------------------- Office Equipment 145,000 Danka Business Systems PLC (ADR)*.................... 5,003,689 5,129,375 1.1 - --------------------------------------------------------------------------------------------------------------------- Oil & Gas 135,000 Vintage Petroleum, Inc. .... 3,056,706 4,657,500 1.0 - --------------------------------------------------------------------------------------------------------------------- Oil & Gas Producers 175,000 +Barrett Resources Corp. ... 4,132,342 7,459,375 1.7 200,000 +Belden & Blake Energy Co. ...................... 3,248,647 5,100,000 1.1 125,000 NICOR Inc. ................. 3,068,051 4,468,750 1.0 150,000 +Seagull Energy Corp. ...... 2,956,364 3,300,000 0.7 ------------ ------------ ---------- 13,405,404 20,328,125 4.5 - ---------------------------------------------------------------------------------------------------------------------
-41- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Oil/Gas-- Equipment & Services 300,000 +Pride Petroleum Services, Inc. ..................... 2,347,880 6,900,000 1.5 100,000 +Trico Marine Services, Inc. ..................... 1,600,000 4,800,000 1.1 156,000 +Weatherford Enterra, Inc. ..................... 4,362,012 4,680,000 1.0 ------------ ------------ ---------- 8,309,892 16,380,000 3.6 - --------------------------------------------------------------------------------------------------------------------- Pharmaceuticals 95,000 +Flamel Technologies S.A.(ADR)*................ 1,140,000 688,750 0.2 310,000 Mylan Laboratories Inc. .... 5,551,352 5,192,500 1.2 290,000 +NeXstar Pharmaceuticals, Inc. ..................... 6,138,688 4,241,250 0.9 100,000 +Sano Corporation........... 1,356,875 1,475,000 0.3 ------------ ------------ ---------- 14,186,915 11,597,500 2.6 - --------------------------------------------------------------------------------------------------------------------- Printing & Publishing 122,000 Banta Corp. ................ 2,822,042 2,745,000 0.6 - --------------------------------------------------------------------------------------------------------------------- Railroads 68,000 +Genesee & Wyoming Inc. (Class A)................. 1,209,749 2,227,000 0.5 - --------------------------------------------------------------------------------------------------------------------- Real Estate Investment Trusts 175,000 Brandywine Realty Trust..... 3,010,862 3,412,500 0.8 162,000 Cali Realty Corp. .......... 3,928,250 5,001,750 1.1 115,000 National Golf Properties Inc. ..................... 2,565,430 3,636,875 0.8 120,450 National Health Investors, Inc. ..................... 3,561,600 4,562,044 1.0 ------------ ------------ ---------- 13,066,142 16,613,169 3.7 - --------------------------------------------------------------------------------------------------------------------- Restaurants 150,000 Apple South, Inc. .......... 2,079,375 1,968,750 0.4 260,000 Applebee's International, Inc. ..................... 5,459,375 7,085,000 1.5 100,000 +Boston Chicken, Inc. ...... 3,114,250 3,575,000 0.8 170,000 +Outback Steakhouse, Inc. ..................... 4,681,565 4,505,000 1.0 50,000 +Rainforest Cafe, Inc. ..... 1,741,250 1,175,000 0.3 ------------ ------------ ---------- 17,075,815 18,308,750 4.0 - --------------------------------------------------------------------------------------------------------------------- Retail Specialty 220,000 +Discount Auto Parts, Inc. ..................... 5,463,948 5,142,500 1.1 135,000 +Moovies, Inc. ............. 1,552,500 700,312 0.2 150,000 +Movie Gallery, Inc. ....... 3,620,623 1,950,000 0.4 ------------ ------------ ---------- 10,637,071 7,792,812 1.7 - --------------------------------------------------------------------------------------------------------------------- Retail Stores 180,800 +Barnes & Noble, Inc. ...... 6,046,946 4,881,600 1.1 - --------------------------------------------------------------------------------------------------------------------- Semiconductors 130,000 +Asyst Technologies, Inc. ..................... 4,072,189 2,177,500 0.5 100,000 +Electro Scientific Industries, Inc. ......... 2,437,502 2,600,000 0.6 110,000 +Lattice Semiconductor Corp. .................... 3,002,906 5,032,500 1.1 70,000 +Microchip Technology, Inc. ..................... 1,984,438 3,552,500 0.8 ------------ ------------ ---------- 11,497,035 13,362,500 3.0 - --------------------------------------------------------------------------------------------------------------------- Telecommunications 50,000 +LCC International, Inc. (Class A)................. 800,000 881,250 0.2 - --------------------------------------------------------------------------------------------------------------------- Textiles 138,800 +Galey & Lord, Inc. ........ 1,688,953 2,064,650 0.5 185,000 Unifi, Inc. ................ 4,347,516 5,943,125 1.3 ------------ ------------ ---------- 6,036,469 8,007,775 1.8 - --------------------------------------------------------------------------------------------------------------------- Toys 140,000 +Galoob Toys, Inc. ......... 3,752,652 1,960,000 0.4 - --------------------------------------------------------------------------------------------------------------------- Utilities--Gas 150,000 MCN Corp. .................. 3,004,324 4,331,250 1.0 - --------------------------------------------------------------------------------------------------------------------- Total Common Stocks 336,869,083 389,515,726 86.0 - --------------------------------------------------------------------------------------------------------------------- Face Amount Corporate Bonds --------------------------------------------------------------------------------------------------------------------- Environmental $ 3,500,000 Sanifill, Inc., 5% due 3/01/2006................. 3,500,000 4,410,000 0.9 - --------------------------------------------------------------------------------------------------------------------- Total Corporate Bonds 3,500,000 4,410,000 0.9 - ---------------------------------------------------------------------------------------------------------------------
-42- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Face Value Percent of Amount Short-Term Securities Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Commercial Paper** $10,275,000 General Motors Acceptance Corp., 7.50% due 1/02/1997................. 10,270,719 10,270,719 2.3 15,000,000 Xerox Credit Corporation, 5.28% due 1/10/1997....... 14,978,000 14,978,000 3.3 ------------ ------------ ---------- 25,248,719 25,248,719 5.6 - --------------------------------------------------------------------------------------------------------------------- US Government & 12,755,000 Federal Home Loan Bank: Agency Obligations** 5.20% due 1/08/1997....... 12,740,261 12,740,261 2.8 Federal National Mortgage Association: 10,000,000 5.24% due 2/03/1997....... 9,950,511 9,950,511 2.2 10,000,000 5.26% due 2/10/1997....... 9,940,094 9,940,094 2.2 ------------ ------------ ---------- 32,630,866 32,630,866 7.2 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Securities 57,879,585 57,879,585 12.8 - --------------------------------------------------------------------------------------------------------------------- Total Investments........... $398,248,668 451,805,311 99.7 ============= Other Assets Less Liabilities............... 1,223,954 0.3 ------------ ---------- Net Assets.................. $453,029,265 100.0% ============= =========== - ---------------------------------------------------------------------------------------------------------------------
* American Depositary Receipts (ADR). ** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. + Non-income producing security. See Notes to Financial Statements. -43- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Bond Focus Fund Schedule of Investments as of December 31, 1996 (in US dollars) - ------------------------------------------------------------------------------
Face Value Percent of NORTH AMERICA Industry Amount Fixed-Income Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Canada Foreign Canadian Government Bonds: Government Obligations C$ 550,000 7% due 9/01/2001........... 408,652 426,752 0.5 350,000 7% due 12/01/2006.......... 248,559 266,843 0.3 5,000,000 8% due 6/01/2023........... 4,080,888 4,072,993 4.3 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Canada 4,738,099 4,766,588 5.1 - --------------------------------------------------------------------------------------------------------------------- United States Broadcasting/ US$ 1,011,242 American Telecasting Inc., Cable 12.59%* due 6/15/2004(c)............. 729,105 414,609 0.4 1,000,000 Bell Cablemedia PLC, 12.03%* due 9/15/2005.... 646,110 802,500 0.9 1,000,000 Videotron Holdings PLC, 11.05%* due 7/01/2004.... 731,219 870,000 0.9 ------------ ----------- ------ 2,106,434 2,087,109 2.2 ------------------------------------------------------------------------------------------------------ Communications 1,375,000 PanAmSat L.P., 11.35%* due 8/01/2003................ 1,108,623 1,278,750 1.4 ------------------------------------------------------------------------------------------------------ Energy 250,000 Consolidated-Hydro Inc., 16.05%* due 7/15/2003.... 209,492 80,000 0.1 ------------------------------------------------------------------------------------------------------ Gaming 1,100,000 Greate Bay Properties, Inc., 10.875% due 1/15/2004................ 990,750 924,000 1.0 500,000 +Harrah's Jazz Company, 14.25% due 11/15/2001.... 482,500 245,625 0.2 ------------ ----------- ------ 1,473,250 1,169,625 1.2 ------------------------------------------------------------------------------------------------------ Specialty 500,000 +Bradlees Inc., 11% due Retailing 8/01/2002................ 489,375 52,500 0.1 ------------------------------------------------------------------------------------------------------ US Government 2,000,000 US Treasury Notes, 6.50% Obligations due 10/15/2006........... 2,031,875 2,010,940 2.2 ------------------------------------------------------------------------------------------------------ Utilities 233,382 ++Tucson Electric Power Co., 10.732% due 1/01/2013................ 223,464 228,713 0.2 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in the United States 7,642,513 6,907,637 7.4 - --------------------------------------------------------------------------------------------------------------------- Shares Held Stocks & Warrants - --------------------------------------------------------------------------------------------------------------------- United States Broadcasting & 1 K-III Communications Corp. Publishing (Non-Convertible Preferred)............... 79 80 0.0 9,608 On Command Corporation..... 279,101 152,527 0.2 3,057 On Command Corporation (Warrants)(a)............ 24,456 20,635 0.0 ------------ ----------- ------ 303,636 173,242 0.2 ------------------------------------------------------------------------------------------------------ Broadcasting/Cable 4,700 American Telecasting Inc. (Warrants)(a)............ 11,222 10,575 0.0 ------------------------------------------------------------------------------------------------------ Entertainment 13 Time Warner Inc. (Non- Convertible Preferred) (Series M)............... 13,650 14,105 0.0 ------------------------------------------------------------------------------------------------------ Supermarkets 17,674 Grand Union Co............. 917,438 86,161 0.1 - --------------------------------------------------------------------------------------------------------------------- Total Stocks & Warrants in the United States 1,245,946 284,083 0.3 - --------------------------------------------------------------------------------------------------------------------- Total Investments in North America 13,626,558 11,958,308 12.8 - ---------------------------------------------------------------------------------------------------------------------
-44- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Global Bond Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Face Value Percent of PACIFIC BASIN Industry Amount Fixed-Income Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Australia Foreign Australian Government Government Bonds: Obligations A$ 6,000,000 9.75% due 3/15/2002...... 5,435,527 5,318,773 5.7 353,000 9.50% due 8/15/2003...... 298,116 313,588 0.3 4,200,000 9% due 9/15/2004......... 3,633,191 3,662,566 3.9 3,000,000 Queensland Treasury Corp., 8% due 8/14/2001......... 2,479,656 2,472,162 2.7 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Australia 11,846,490 11,767,089 12.6 - --------------------------------------------------------------------------------------------------------------------- Japan Banking Y 65,000,000 Asian Development Bank, 5.625% due 2/18/2002..... 750,697 662,349 0.7 50,000,000 Export Import Bank of Japan, 4.375% due 10/01/2003............... 503,455 486,399 0.5 225,000,000 IBRD World Bank, 4.75% due 12/20/2004............... 2,336,316 2,258,938 2.4 112,000,000 World Bank, 4.50% due 3/20/2003................ 1,137,254 1,100,850 1.2 ------------ ----------- ---------- 4,727,722 4,508,536 4.8 ------------------------------------------------------------------------------------------------------ Foreign 90,000,000 Federal National Mortgage Government Association, 2% due Obligations 12/20/1999............... 844,636 798,964 0.8 82,600,000 Japanese Government Bond, 3% due 9/20/2005......... 756,992 735,126 0.8 60,000,000 Republic of Finland, 6% due 1/29/2002................ 654,914 619,689 0.7 ------------ ----------- ---------- 2,256,542 2,153,779 2.3 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Japan 6,984,264 6,662,315 7.1 - --------------------------------------------------------------------------------------------------------------------- New Zealand Foreign NZ$ 6,200,000 New Zealand Government Government Bond, 8% due 2/15/2001... 4,523,325 4,536,150 4.8 Obligations - --------------------------------------------------------------------------------------------------------------------- Total Fixed-Income Investments in New Zealand 4,523,325 4,536,150 4.8 - --------------------------------------------------------------------------------------------------------------------- Total Investments in the Pacific Basin 23,354,079 22,965,554 24.5 - --------------------------------------------------------------------------------------------------------------------- WESTERN EUROPE - --------------------------------------------------------------------------------------------------------------------- Denmark Finance Dkr 15,940,000 Nykredit, 6% due 10/01/2026............... 2,306,331 2,348,839 2.5 ------------------------------------------------------------------------------------------------------ Foreign Denmark Government Bonds: Government Obligations 2,800,000 8% due 5/15/2003......... 516,582 526,953 0.6 33,200,000 8% due 3/15/2006......... 6,119,857 6,201,919 6.6 ------------ ----------- ---------- 6,636,439 6,728,872 7.2 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Denmark 8,942,770 9,077,711 9.7 - --------------------------------------------------------------------------------------------------------------------- France Foreign Frf 2,000,000 French Government 'B-Tan', Government 7% due 10/12/2000........ 420,453 422,205 0.5 Obligations 2,300,000 French OAT, 7.25% due 4/25/2006................ 483,739 490,279 0.5 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in France 904,192 912,484 1.0 - ---------------------------------------------------------------------------------------------------------------------
-45- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Global Bond Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
WESTERN EUROPE Face Value Percent of (concluded) Industry Amount Fixed-Income Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Germany Finance DM 2,450,000 KFW International Finance Inc., 6.25% due 10/15/2003............... $ 1,644,147 $ 1,660,936 1.8% ------------------------------------------------------------------------------------------------------ Foreign Bundesrepublik Deutschland: Government 625,000 7.50% due 11/11/2004..... 452,947 453,729 0.5 Obligations 500,000 6.25% due 4/26/2006...... 337,334 335,912 0.3 2,000,000 Deutschland Republic, 6.75% due 4/22/2003............ 1,385,871 1,401,365 1.5 1,900,000 German Unity Fund, 8% due 1/21/2002......... 1,416,586 1,404,407 1.5 ------------ ----------- ---------- 3,592,738 3,595,413 3.8 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Germany 5,236,885 5,256,349 5.6 - --------------------------------------------------------------------------------------------------------------------- Italy Foreign Skr Buoni Poliennali del Tesoro Government (Italian Government Obligations Bonds): Lit 4,000,000,000 9.50% due 5/01/2001...... 2,857,054 2,912,827 3.1 4,000,000,000 8.75% due 7/01/2006...... 2,841,855 2,870,673 3.1 Government of Italy: 2,200,000,000 10.50% due 7/15/2000..... 1,456,374 1,624,080 1.7 750,000,000 8.50% due 4/01/2004...... 515,391 529,261 0.6 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Italy 7,670,674 7,936,841 8.5 - --------------------------------------------------------------------------------------------------------------------- Spain Foreign Government of Spain: Government Pta 75,000,000 10.10% due 2/28/2001..... 650,217 664,414 0.7 Obligations 290,000,000 10.50% due 10/30/2003.... 2,694,264 2,713,544 2.9 135,000,000 8% due 5/30/2004......... 1,094,423 1,127,339 1.2 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Spain 4,438,904 4,505,297 4.8 - --------------------------------------------------------------------------------------------------------------------- Sweden Finance L 4,300,000 Swedish Export Credit Corp., 7.625% due 12/27/2001............... 7,148,129 7,366,739 7.8 ------------------------------------------------------------------------------------------------------ Foreign Government of Sweden: Government Skr 8,500,000 10.25% due 5/05/2000..... 1,411,881 1,438,926 1.5 Obligations 17,500,000 6% due 2/09/2005......... 2,407,211 2,489,545 2.7 18,100,000 8% due 8/15/2007......... 2,854,379 2,899,028 3.1 ------------ ----------- ---------- 6,673,471 6,827,499 7.3 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in Sweden 13,821,600 14,194,238 15.1 - --------------------------------------------------------------------------------------------------------------------- United Kingdom Foreign United Kingdom Treasury Government Gilt: Obligations L 2,000,000 8% due 12/07/2000........ 3,344,163 3,516,763 3.7 2,500,000 7% due 11/06/2001........ 4,113,200 4,230,220 4.5 300,000 8% due 6/10/2003......... 490,794 529,279 0.6 530,000 8.50% due 12/07/2005..... 945,081 965,661 1.0 150,000 9% due 7/12/2011......... 252,238 286,693 0.3 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Investments in the United Kingdom 9,145,476 9,528,616 10.1 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Western Europe 50,160,501 51,411,536 54.8 - --------------------------------------------------------------------------------------------------------------------- Short-Term Securities - --------------------------------------------------------------------------------------------------------------------- Commercial Paper** US$ 4,161,000 General Electric Capital Corp., 7.10% due 1/02/1997................ 4,160,179 4,160,179 4.4 - ---------------------------------------------------------------------------------------------------------------------
-46- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Bond Focus Fund Schedule of Investments as of December 31, 1996 (concluded) (in US dollars) - ------------------------------------------------------------------------------
Face Value Percent of Amount Short-Term Securities Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- US Government & Federal Home Loan Mortgage Agency Obligations** Corp.: US$1,000,000 6.50% due 1/02/1997........ $ 999,819 $ 999,819 1.1% 4,545,000 5.33% due 1/06/1997........ 4,541,635 4,541,635 4.8 Federal National Mortgage Association: 1,000,000 5.25% due 1/10/1997........ 998,688 998,688 1.1 3,000,000 5.37% due 1/22/1997........ 2,990,603 2,990,603 3.2 United States Treasury Bills(b): 125,000 4.82% due 3/13/1997........ 123,812 123,793 0.1 200,000 5.27% due 3/13/1997........ 197,921 198,068 0.2 ------------ ----------- ---------- 9,852,478 9,852,606 10.5 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Short-Term Securities 14,012,657 14,012,785 14.9 - --------------------------------------------------------------------------------------------------------------------- Total Investments................................ $101,153,795 100,348,183 107.0 ============= Variation Margin on Financial Futures Contracts***..................................... (17,464) 0.0 Unrealized Depreciation on Forward Foreign Exchange Contracts****........................... (78,492) (0.1) Liabilities in Excess of Other Assets............ (6,462,317) (6.9) ----------- ---------- Net Assets....................................... $93,789,910 100.0% =========== =========== - ---------------------------------------------------------------------------------------------------------------------
(a) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustments under certain conditions until the expiration date. (b) Security held as collateral in connection with open financial futures contracts. (c) Subject to principal paydowns. * Represents a zero coupon or step bond; the interest rate shown is the effective yield at the time of purchase by the Fund. ** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. *** Financial futures contracts sold as of December 31, 1996 were as follows: - ------------------------------------------------------------------------------
Value Number of Expiration (Notes 1a & Contracts Issue Exchange Date 1b) - -------------------------------------------------------------------------- 15 Italian BTP LIFFE March 1997 $2,556,891 70 UK Gilt LIFFE March 1997 6,582,838 - -------------------------------------------------------------------------- Total Financial Futures Contracts Sold (Total Contract Price-$9,069,181) $ 9,139,729 ========== - -----------------------------------------------------------------------
****Forward foreign exchange contracts as of December 31, 1996 were as follows: - ------------------------------------------------------------------------------
Unrealized Depreciation Foreign Currency Sold Expiration Date (Note 1b) --------------------------------------------------------------------------------------------------------------------- Dkr 10,000,000........................................................... January 1997 $(16,909) DM 5,436,386............................................................ January 1997 (35,279) L 4,000,000............................................................ January 1997 (24,948) Y 500,000,000........................................................... January 1997 (1,356) - --------------------------------------------------------------------------------------------------------------------- Total Unrealized Depreciation--Net on Forward Foreign Exchange Contracts (US$ Commitment--$16,323,461) $(78,492) ======== - ---------------------------------------------------------------------------------------------------------------------
+ Non-income producing security. ++ Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $229,000, representing 0.2% of net assets. - ------------------------------------------------------------------------------
Value Issue Acquisition Date Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Tucson Electric Power Co., 10.732% due 1/01/2013........................ 8/19/1993 $223,464 $228,713 - --------------------------------------------------------------------------------------------------------------------- Total $223,464 $228,713 ======= ======== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -47- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund Schedule of Investments as of December 31, 1996 (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held US Stocks & Warrants Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Aerospace 64,500 Northrop Grumman Corp......... $ 4,288,238 $ 5,337,375 0.6% 55,000 United Technologies Corp...... 2,256,982 3,630,000 0.4 ------------ ------------ ------ 6,545,220 8,967,375 1.0 - --------------------------------------------------------------------------------------------------------------------- Auto & Truck 70,000 General Motors Corp........... 3,775,240 3,902,500 0.4 - --------------------------------------------------------------------------------------------------------------------- Automobile Parts 173,500 +Lear Corporation............. 5,812,250 5,920,688 0.7 - --------------------------------------------------------------------------------------------------------------------- Banking 38,000 Bank of New York Co., Inc. (Warrants)(a)............... 285,875 2,816,750 0.3 115,000 Bank of New York, Co., Inc.... 2,904,748 3,881,250 0.4 28,000 BankAmerica Corp.............. 2,864,806 2,793,000 0.3 57,000 Citicorp...................... 4,452,439 5,871,000 0.7 ------------ ------------ ------ 10,507,868 15,362,000 1.7 - --------------------------------------------------------------------------------------------------------------------- Building Products 15,700 Spieker Properties, Inc....... 432,692 565,200 0.1 - --------------------------------------------------------------------------------------------------------------------- Building & Construction 134,500 Oakwood Homes Corporation..... 3,064,418 3,076,688 0.4 - --------------------------------------------------------------------------------------------------------------------- Business Services 110,375 +Oracle Corp.................. 3,621,396 4,594,359 0.5 - --------------------------------------------------------------------------------------------------------------------- Chemicals 92,000 +FMC Corporation.............. 6,520,585 6,451,500 0.7 107,000 PPG Industries, Inc........... 5,294,623 6,005,375 0.7 ------------ ------------ ------ 11,815,208 12,456,875 1.4 - --------------------------------------------------------------------------------------------------------------------- Computer Services 97,000 +cisco Systems, Inc........... 4,376,411 6,171,625 0.7 142,200 First Data Corp............... 5,031,267 5,190,300 0.6 ------------ ------------ ------ 9,407,678 11,361,925 1.3 - --------------------------------------------------------------------------------------------------------------------- Computer Technology 152,000 +Gulfstream Aerospace Corporation................. 3,756,241 3,686,000 0.4 - --------------------------------------------------------------------------------------------------------------------- Computers 81,000 +Compaq Computer Corp......... 6,008,178 6,014,250 0.7 38,500 International Business Machines Corp............... 4,230,992 5,813,500 0.7 ------------ ------------ ------ 10,239,170 11,827,750 1.4 - --------------------------------------------------------------------------------------------------------------------- Conglomerates 45,800 AlliedSignal Inc.............. 3,366,507 3,068,600 0.4 - --------------------------------------------------------------------------------------------------------------------- Diversified 137,500 Corning, Inc.................. 4,183,441 6,359,375 0.7 - --------------------------------------------------------------------------------------------------------------------- Electrical Equipment 28,300 Linear Technology Corporation................. 1,160,935 1,238,125 0.1 - --------------------------------------------------------------------------------------------------------------------- Electronics 42,000 General Electric Co. ......... 3,325,769 4,152,750 0.5 - --------------------------------------------------------------------------------------------------------------------- Engineering & Construction 155,900 Foster Wheeler Corp. ......... 6,680,398 5,787,788 0.7 - --------------------------------------------------------------------------------------------------------------------- Entertainment 162,399 +Viacom, Inc. (Class B)....... 5,963,826 5,663,665 0.7 - --------------------------------------------------------------------------------------------------------------------- Financial Services 102,500 American Express Company...... 4,852,027 5,791,250 0.7 - --------------------------------------------------------------------------------------------------------------------- Foods 146,000 Heinz (H.J.) Company.......... 4,731,138 5,219,500 0.6 - --------------------------------------------------------------------------------------------------------------------- Hospital Management 234,000 +Health Management Associates, Inc. (Class A).............. 5,276,847 5,265,000 0.6 - --------------------------------------------------------------------------------------------------------------------- Insurance 58,000 Aetna Inc. ................... 4,082,043 4,640,000 0.5 220,000 +Airtouch Communications, Inc. ....................... 6,292,837 5,555,000 0.7 91,200 Allstate Corp. ............... 3,747,599 5,278,200 0.6 81,000 UNUM Corporation.............. 5,157,613 5,852,250 0.7 ------------ ------------ ------ 19,280,092 21,325,450 2.5 - --------------------------------------------------------------------------------------------------------------------- Leisure 240,000 Brunswick Corporation......... 5,938,252 5,760,000 0.7 - --------------------------------------------------------------------------------------------------------------------- Leisure & Entertainment 10,500 +Imax Corporation............. 324,543 322,875 0.0 - --------------------------------------------------------------------------------------------------------------------- Leisure & Tourism 69,177 TCI Pacific Communications (Convertible Preferred)..... 6,473,121 6,277,813 0.7 - --------------------------------------------------------------------------------------------------------------------- Machinery 126,000 +American Standard Companies, Inc. ....................... 4,111,697 4,819,500 0.6 136,200 Deere & Co. .................. 5,770,935 5,533,125 0.6 ------------ ------------ ------ 9,882,632 10,352,625 1.2 - ---------------------------------------------------------------------------------------------------------------------
-48- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held US Stocks & Warrants Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Natural Gas 144,000 Enron Corp.................... $ 5,443,166 $ 6,210,000 0.7% - --------------------------------------------------------------------------------------------------------------------- Natural Gas Pipelines 65,000 IMC Global, Inc. ............. 2,519,391 2,543,125 0.3 - --------------------------------------------------------------------------------------------------------------------- Oil Services 196,000 Dresser Industries, Inc. ..... 4,324,082 6,076,000 0.7 50,000 Schlumberger Ltd. ............ 4,053,012 4,993,750 0.6 ------------ ------------ ------ 8,377,094 11,069,750 1.3 - --------------------------------------------------------------------------------------------------------------------- Paper 64,500 Kimberly-Clark Corp. ......... 4,955,548 6,143,625 0.7 - --------------------------------------------------------------------------------------------------------------------- Petroleum 108,100 Pennzoil Co. ................. 4,485,180 6,107,650 0.7 143,000 Unocal Corp. ................. 4,802,812 5,809,375 0.7 ------------ ------------ ------ 9,287,992 11,917,025 1.4 - --------------------------------------------------------------------------------------------------------------------- Pharmaceuticals 85,700 Abbott Laboratories........... 3,516,941 4,349,275 0.5 59,000 Merck & Co., Inc. ............ 3,072,725 4,675,750 0.5 ------------ ------------ ------ 6,589,666 9,025,025 1.0 - --------------------------------------------------------------------------------------------------------------------- Railroads 69,000 Burlington Northern Santa Fe Inc. ....................... 5,638,407 5,959,875 0.7 - --------------------------------------------------------------------------------------------------------------------- Real Estate Investment Trust 156,000 Prentiss Properties Trust..... 3,189,080 3,900,000 0.4 83,700 Starwood Lodging Trust........ 3,280,230 4,613,962 0.5 ------------ ------------ ------ 6,469,310 8,513,962 0.9 - --------------------------------------------------------------------------------------------------------------------- Retail 126,000 Sears, Roebuck & Co. ......... 5,464,285 5,811,750 0.7 - --------------------------------------------------------------------------------------------------------------------- Retail--Drug Stores 157,105 Rite Aid Corp. ............... 4,914,258 6,244,924 0.7 - --------------------------------------------------------------------------------------------------------------------- Retail Specialty 190,000 +Toys 'R' Us, Inc. ........... 5,934,584 5,700,000 0.7 - --------------------------------------------------------------------------------------------------------------------- Scientific Instruments 110,000 Fisher Scientific International, Inc. ........ 3,579,430 5,183,750 0.6 - --------------------------------------------------------------------------------------------------------------------- Software--Computer 147,500 BMC Software, Inc. ........... 5,509,418 6,102,812 0.7 - --------------------------------------------------------------------------------------------------------------------- Steel 110,000 AK Steel Holding Corp. ....... 4,459,883 4,358,750 0.5 - --------------------------------------------------------------------------------------------------------------------- Telecommunications 95,800 Bell Atlantic Corporation..... 5,396,243 6,203,050 0.7 - --------------------------------------------------------------------------------------------------------------------- Tobacco 44,000 Philip Morris Companies, Inc. ....................... 4,329,124 4,955,500 0.6 - --------------------------------------------------------------------------------------------------------------------- Travel & Lodging 185,100 Carnival Corp. (Class A)...... 5,310,160 6,108,300 0.7 - --------------------------------------------------------------------------------------------------------------------- Utilities--Communications 260,300 Edison International.......... 4,944,918 5,173,462 0.6 - --------------------------------------------------------------------------------------------------------------------- Utilities--Gas 54,000 El Paso Natural Gas Co. ...... 2,646,557 2,727,000 0.3 - --------------------------------------------------------------------------------------------------------------------- Total US Stocks & Warrants 252,186,343 288,257,861 33.2 - --------------------------------------------------------------------------------------------------------------------- Country Foreign Stocks++ --------------------------------------------------------------------------------------------------------------------- Argentina 373,772 Banco de Galicia y Buenos Aires S.A. (ADR)* (3)....... 6,990,318 9,017,249 1.0 305,933 Banco Frances del Rio de la Plata S.A.(ADR)* (3)........ 7,017,779 8,413,144 1.0 355,900 Yacimientos Petroliferos Fiscales S.A.(ADR)* (21).... 8,033,094 8,986,475 1.0 ------------ ------------ ------ 22,041,191 26,416,868 3.0 - --------------------------------------------------------------------------------------------------------------------- Brazil 13,950,000 Companhia Cervejaria Brahma S.A. PN (Preferred) (34).... 7,955,613 7,626,913 0.9 58,400,000 Petroleo Brasileiro S.A.-- Petrobras (Preferred) (46)........................ 7,234,138 9,303,302 1.1 108,700 Telecomunicacoes Brasileiras S.A.--Telebras (ADR)* (27).. 6,472,073 8,315,550 0.9 ------------ ------------ ------ 21,661,824 25,245,765 2.9 - --------------------------------------------------------------------------------------------------------------------- Canada 318,600 Canadian Pacific, Ltd. (52) ....................... 6,091,881 8,442,900 1.0 147,800 Magna International Inc. (Class A) (1)............... 6,830,595 8,239,850 0.9 100,100 Potash Corp. of Saskatchewan, Inc. (35)................... 7,437,257 8,508,500 1.0 ------------ ------------ ------ 20,359,733 25,191,250 2.9 - ---------------------------------------------------------------------------------------------------------------------
-49- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Country Held Foreign Stocks++ Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Finland 132,000 Finnlines OY (36)............. $ 2,486,828 $ 3,241,129 0.4% 121,500 Nokia Corp. (ADR)* (37)....... 4,287,533 7,001,437 0.8 409,900 +UPM-Kymmene OY (38).......... 8,516,525 8,461,463 1.0 ------------ ------------ ------ 15,290,886 18,704,029 2.2 - --------------------------------------------------------------------------------------------------------------------- France 130,600 Michelin (C.G.D.E.) S.A. (Class B) (47).............. 5,794,743 7,051,091 0.8 126,500 +SGS-Thomson Microelectronics N.V. (NY Registered Shares) (51)........................ 4,655,571 8,855,000 1.0 236,000 Scor S.A. (16)................ 8,948,438 8,301,850 1.0 545,000 Usinor-Sacilor S.A. (40)...... 8,643,115 7,931,284 0.9 ------------ ------------ ------ 28,041,867 32,139,225 3.7 - --------------------------------------------------------------------------------------------------------------------- Germany 13,500 +Henkel KGaA (9).............. 600,048 647,579 0.1 121,500 Henkel KGaA (Preferred) (9)... 5,163,053 6,104,615 0.7 16,900 Mannesmann AG (17)............ 4,620,775 7,326,812 0.8 35,800 +Puma AG (48)................. 1,176,806 1,214,664 0.1 176,500 Siemens AG (12)............... 8,419,829 8,317,355 1.0 ------------ ------------ ------ 19,980,511 23,611,025 2.7 - --------------------------------------------------------------------------------------------------------------------- Hong Kong 404,600 HSBC Holdings PLC (3)......... 6,668,545 8,658,042 1.0 4,873,200 Hong Kong Telecommunications, Ltd. (27)................... 8,569,151 7,844,756 0.9 ------------ ------------ ------ 15,237,696 16,502,798 1.9 - --------------------------------------------------------------------------------------------------------------------- Indonesia 313,380 P.T. Indonesian Satellite Corp. (ADR)* (27)........... 9,998,585 8,578,777 1.0 - --------------------------------------------------------------------------------------------------------------------- Italy 1,161,800 Danieli & Company (17)........ 4,276,177 4,859,167 0.5 1,659,000 Societa Finanziara Telefonica S.p.A. (STET) (27).......... 4,931,175 7,539,667 0.9 ------------ ------------ ------ 9,207,352 12,398,834 1.4 - --------------------------------------------------------------------------------------------------------------------- Japan 424,000 Bridgestone Corporation (47)........................ 7,463,165 8,055,268 0.9 314,000 Canon, Inc. (12).............. 5,242,498 6,941,623 0.8 424,000 Eisai Co., Ltd. (22).......... 7,787,610 8,348,187 1.0 803,000 Maeda Corp. (4)............... 7,177,535 5,942,755 0.7 370,000 Matsushita Electric Industries, Ltd. (12)....... 5,646,070 6,038,860 0.7 1,395,000 Mitsubishi Electric Corp. (11)........................ 9,130,689 8,312,176 0.9 1,061,000 Mitsubishi Heavy Industry, Ltd. (8).................... 7,818,945 8,429,361 1.0 809,000 Mitsui-Soko Co., Ltd. (42).... 6,794,019 5,288,541 0.6 512,000 Nomura Securities Co., Ltd. (33)........................ 9,448,726 7,693,264 0.9 906,000 Okumura Corp. (4)............. 6,730,420 5,507,979 0.6 124,000 Rohm Company Ltd. (12)........ 7,059,616 8,138,169 0.9 808,000 Tokio Marine and Fire Insurance Co., Ltd. (16).... 9,454,210 7,605,527 0.9 1,011,000 Toray Industries Ltd. (28).... 6,794,999 6,242,358 0.7 ------------ ------------ ------ 96,548,502 92,544,068 10.6 - --------------------------------------------------------------------------------------------------------------------- Mexico 411,400 Carso Global Telecom, S.A. de C.V. (ADR)*(27)............. 1,954,150 1,851,300 0.2 375,400 Grupo Carso, S.A. de C.V. (ADR)*(18).................. 5,559,251 3,894,775 0.4 5,741 Grupo Financiero Inbursa, S.A. de C.V. (ADR)*(18).......... 115,192 97,597 0.0 436,300 Kimberly-Clark de Mexico, S.A. de C.V. (38)................ 8,018,361 8,619,572 1.0 171,000 Panamerican Beverages, Inc. (Class A) (34).............. 7,114,640 8,015,625 0.9 ------------ ------------ ------ 22,761,594 22,478,869 2.5 - ---------------------------------------------------------------------------------------------------------------------
-50- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Country Held Foreign Stocks++ Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Netherlands 136,000 ABN-AMRO Holdings (3)......... $ 7,835,801 $ 8,856,547 1.0% 466 ABN-AMRO Holdings N.V. (Convertible Preferred) (3)......................... 15,383 28,916 0.0 ------------ ------------ ------ 7,851,184 8,885,463 1.0 - --------------------------------------------------------------------------------------------------------------------- Norway 641,000 Color Line ASA (36)........... 2,499,223 2,984,125 0.4 - --------------------------------------------------------------------------------------------------------------------- Philippines 1,650,000 San Miguel Corp. (Class B) (34)........................ 5,521,217 7,288,652 0.8 - --------------------------------------------------------------------------------------------------------------------- South Korea 180,600 +Hyundai Engineering & Construction Co., Ltd. (GDR)** (44)+++............. 2,353,218 1,128,750 0.1 - --------------------------------------------------------------------------------------------------------------------- Spain 238,000 Repsol S.A.(ADR)* (21)........ 7,749,030 9,073,750 1.0 - --------------------------------------------------------------------------------------------------------------------- Sweden 454,100 Bure Investment Aktiebolaget (45)........................ 3,955,365 5,397,227 0.6 278,000 Sparbanken Sverige AB (Class A) (3)...................... 3,575,154 4,772,707 0.6 ------------ ------------ ------ 7,530,519 10,169,934 1.2 - --------------------------------------------------------------------------------------------------------------------- Switzerland 5,200 BBC Brown Boveri & Cie AG (11)........................ 4,633,631 6,466,985 0.8 7,000 +Novartis AG (22)............. 6,960,585 8,015,387 0.9 ------------ ------------ ------ 11,594,216 14,482,372 1.7 - --------------------------------------------------------------------------------------------------------------------- United Kingdom 801,000 Boots Company PLC (49)........ 7,746,777 8,256,364 0.9 3,085,000 British Steel PLC (50)........ 8,295,968 8,497,287 1.0 1,302,000 General Electric PLC (Ordinary) (12)............. 7,044,453 8,531,178 1.0 517,500 Glaxo Wellcome PLC (22)....... 7,417,612 8,393,014 1.0 1,012,400 Grand Metropolitan PLC (34)... 7,201,806 7,967,264 0.9 783,900 Imperial Chemical Industries PLC (43).................... 10,154,513 10,306,324 1.2 720,500 National Westminster Bank PLC (3)......................... 7,832,617 8,455,851 1.0 2,085,000 Vodafone Group PLC (27)....... 7,541,528 8,810,534 1.0 ------------ ------------ ------ 63,235,274 69,217,816 8.0 - --------------------------------------------------------------------------------------------------------------------- Total Foreign Stocks 389,463,622 427,042,370 49.0 - --------------------------------------------------------------------------------------------------------------------- Face Amount Foreign Bonds++ - --------------------------------------------------------------------------------------------------------------------- Denmark Dkr 66,250,000 Government of Denmark, 8% due 3/15/2006(15)........ 12,133,252 12,375,817 1.4 - --------------------------------------------------------------------------------------------------------------------- Germany DM 6,500,000 Bundesrepublik Deutschland, 7.125% due 12/20/2002(15)... 4,514,124 4,638,934 0.6 - --------------------------------------------------------------------------------------------------------------------- Italy Lit 27,470,000,000 Buoni Poliennali del Tesoro (Italian Government Bonds), 8.50% due 1/01/2004 (15).... 19,448,018 19,380,531 2.2 - --------------------------------------------------------------------------------------------------------------------- Sweden Government of Sweden (15): Skr 41,300,000 10.25% due 5/05/2000........ 7,052,190 6,991,487 0.8 163,000,000 8% due 8/15/2007............ 25,654,854 26,107,266 3.0 ------------ ------------ ---------- 32,707,044 33,098,753 3.8 - --------------------------------------------------------------------------------------------------------------------- United Kingdom United Kingdom Treasury Gilt (15): L 4,000,000 7% due 11/06/2001........... 6,592,392 6,768,352 0.8 7,475,000 7.50% due 12/07/2006........ 12,576,320 12,772,245 1.5 ------------ ------------ ---------- 19,168,712 19,540,597 2.3 - --------------------------------------------------------------------------------------------------------------------- Total Foreign Bonds 87,971,150 89,034,632 10.3 - ---------------------------------------------------------------------------------------------------------------------
-51- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Percent of Face Value Net Amount US Government Obligations Cost (Note 1a) Assets --------------------------------------------------------------------------------------------------------------------- US Treasury Notes: US$ 16,250,000 6.25% due 4/30/2001.................. $ 16,463,906 $ 16,285,587 1.9% 29,750,000 7% due 7/15/2006..................... 31,584,492 30,907,572 3.5 - --------------------------------------------------------------------------------------------------------------------- Total US Government Obligations 48,048,398 47,193,159 5.4 - --------------------------------------------------------------------------------------------------------------------- Short-Term Securities --------------------------------------------------------------------------------------------------------------------- US Government & 15,755,000 Federal Home Loan Mortgage Agency Obligations*** Corp. 5.41% due 1/24/1997............ 15,700,545 15,700,545 1.8 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Securities 15,700,545 15,700,545 1.8 - --------------------------------------------------------------------------------------------------------------------- Total Investments.......................................... $793,370,058 867,228,567 99.7 ============= Unrealized Depreciation on Forward Foreign Exchange Contracts++.............................. (2,598,413) (0.3) Other Assets Less Liabilities.............................. 5,572,664 0.6 ------------ ---------- Net Assets................................................. $870,202,818 100.0% ============= =========== - ---------------------------------------------------------------------------------------------------------------------
* American Depositary Receipts (ADR). ** Global Depositary Receipts (GDR). *** Certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. (a) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date. + Non-income producing security. ++ Corresponding industry groups for foreign stocks and bonds: (1) Automobile--Parts (27) Telecommunications (2) Automotive Equipment (28) Textiles (3) Banking (29) Toys (4) Building & Construction (30) Trading (5) Building Materials (31) Utilities (6) Business & Public Service (32) Utilities--Electric (7) Business Publishing (33) Financial Services (8) Capital Goods (34) Beverages (9) Chemicals (35) Mining (10) Diversified (36) Transportation (11) Electrical Equipment (37) Communications Equipment (12) Electronics (38) Paper & Forest Products (13) Food (39) Industrial Components (14) Glass (40) Metals (15) Government (Bonds) (41) Photography (16) Insurance (42) Warehouse & Storage (17) Machinery & Equipment (43) Oil--Integrated (18) Multi--Industry (44) Engineering & Construction (19) Natural Gas (45) Investment Management (20) Packaging (46) Oil & Related (21) Petroleum (47) Tire & Rubber (22) Pharmaceutical (48) Consumer--Goods (23) Printing & Publishing (49) Merchandising (24) Real Estate (50) Steel (25) Retail Stores (51) Semiconductor Capital Equipment (26) Shipping (52) Natural Resources -52- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund Schedule of Investments as of December 31, 1996 (concluded) (in US dollars) - ------------------------------------------------------------------------------ +++ Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $1,129,000, representing 0.1% of net assets. - ------------------------------------------------------------------------------
Acquisition Value Issue Date Cost (Note 1a) - --------------------------------------------------------------------------------------------------------------------- Hyundai Engineering & Construction Co., Ltd.(GDR)....................... 3/19/1996 $2,353,218 $1,128,750 - --------------------------------------------------------------------------------------------------------------------- Total $2,353,218 $1,128,750 ========== ========== - ---------------------------------------------------------------------------------------------------------------------
++ Forward foreign exchange contracts as of December 31, 1996 were as follows:
--------------------------------------------------------------------------------------------------------------------- Unrealized Foreign Expiration Depreciation Currency Sold Date (Note 1b) --------------------------------------------------------------------------------------------------------------------- CHF 16,000,000 ......................................................... January 1997 $ 246,564 DM 63,822,188 ......................................................... February 1997 554,813 Frf 90,000,000 ......................................................... January 1997 (106,255 ) L 39,555,000 ......................................................... January 1997 (3,135,589 ) Y10,670,000,000 ......................................................... February 1997 (157,946 ) - --------------------------------------------------------------------------------------------------------------------- Total Unrealized Depreciation on Forward Foreign Exchange Contracts (US$ Commitment--$228,531,727) $(2,598,413 ) ============ - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -53- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Global Utility Focus Fund Schedule of Investments as of December 31, 1996 (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Country Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Argentina Telecommunications 7,900 Central Costanera S.A. (ADR)*(a)............ $ 261,847 $ 238,975 0.2% 25,600 Telecom Argentina STET S.A. (ADR)*.......... 1,160,819 1,033,600 0.7 44,800 Telefonica de Argentina S.A. (ADR)*.......... 1,173,168 1,159,200 0.8 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Argentina 2,595,834 2,431,775 1.7 - --------------------------------------------------------------------------------------------------------------------- Australia Utilities--Gas 434,496 Australian Gas & Light Co., Ltd............. 1,238,060 2,470,749 1.8 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Australia 1,238,060 2,470,749 1.8 - --------------------------------------------------------------------------------------------------------------------- Austria Utilities--Gas 13,560 Energie-Versorgung Niederoesterreich AG (EVN).................. 1,388,213 2,041,452 1.4 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Austria 1,388,213 2,041,452 1.4 - --------------------------------------------------------------------------------------------------------------------- Brazil Telecommunications 30,000 Telecomunicacoes Brasileiras S.A.-- Telebras (ADR)*...... 1,523,979 2,295,000 1.6 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Brazil 1,523,979 2,295,000 1.6 - --------------------------------------------------------------------------------------------------------------------- Canada Telecommunications 56,000 BC Telecom, Inc........ 1,052,989 1,211,971 0.8 ------------------------------------------------------------------------------------------------------ Utilities--Gas 70,100 Transcanada Pipeline Co., Ltd. (ADR)*..... 1,045,275 1,226,750 0.9 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Canada 2,098,264 2,438,721 1.7 - --------------------------------------------------------------------------------------------------------------------- Chile Telecommunications 14,400 Compania de Telefonos de Chile S.A. (ADR)*............... 1,254,995 1,456,200 1.0 ------------------------------------------------------------------------------------------------------ Utilities--Electric 20,000 Chilgener S.A. (ADR)*.. 460,000 417,500 0.3 35,100 Distribuidora Chilectra Metropolitana, S.A. (ADR)*(a)......... 1,098,338 1,860,300 1.3 48,300 Enersis S.A. (ADR)*.... 1,026,061 1,340,325 1.0 ----------- ------ 2,584,399 3,618,125 2.6 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Chile 3,839,394 5,074,325 3.6 - --------------------------------------------------------------------------------------------------------------------- Denmark Telecommunications 77,000 Tele Danmark A/S (ADR)*............... 1,826,433 2,098,250 1.5 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Denmark 1,826,433 2,098,250 1.5 - --------------------------------------------------------------------------------------------------------------------- France Utilities--Water 16,731 Generale des Eaux...... 1,907,473 2,073,638 1.4 7,265 Lyonnaise des Eaux- Dumez................ 736,741 676,228 0.5 ------------------------------------------------------------------------------------------------------ Total Common Stocks in France 2,644,214 2,749,866 1.9 - --------------------------------------------------------------------------------------------------------------------- Germany Telecommunications 8,100 +Deutsche Telekom AG... 154,054 170,845 0.1 ------------------------------------------------------------------------------------------------------ Utilities--Electric 40,000 Veba AG................ 1,305,397 2,313,942 1.6 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Germany 1,459,451 2,484,787 1.7 - --------------------------------------------------------------------------------------------------------------------- Hong Kong Utilities--Gas 568,512 The Hong Kong & China Gas Co., Ltd......... 755,615 1,098,947 0.8 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Hong Kong 755,615 1,098,947 0.8 - ---------------------------------------------------------------------------------------------------------------------
-54- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Country Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- India Utilities--Electric 1,000 Tata Electric Companies (GDR)**(a)........... $ 710,000 $ 300,000 0.2% ------------------------------------------------------------------------------------------------------ Total Common Stocks in India 710,000 300,000 0.2 - --------------------------------------------------------------------------------------------------------------------- Indonesia Telecommunications 1,110 P.T. Indonesian Satellite Corp. (ADR)*............... 35,575 30,386 0.0 8,000 P.T. Telekomunikasi Indonesia (PERSERO) (ADR)*....... 144,000 276,000 0.2 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Indonesia 179,575 306,386 0.2 - --------------------------------------------------------------------------------------------------------------------- Italy Telecommunications 761,900 Societa Finanziara Telefonica S.p.A. (STET)................. 1,629,934 2,571,867 1.8 729,600 Telecom Italia Mobile S.p.A................ 684,328 1,842,922 1.3 729,600 Telecom Italia S.p.A................ 950,865 1,893,380 1.3 ----------- ------ 3,265,127 6,308,169 4.4 ------------------------------------------------------------------------------------------------------ Utilities--Gas 513,400 Italgas Torino......... 1,581,576 2,142,196 1.5 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Italy 4,846,703 8,450,365 5.9 - --------------------------------------------------------------------------------------------------------------------- Malaysia Telecommunications 139,000 Telekom Malaysia BHD... 962,438 1,238,614 0.9 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Malaysia 962,438 1,238,614 0.9 - --------------------------------------------------------------------------------------------------------------------- Mexico Telecommunications 29,000 Telefonos de Mexico, S.A. de C.V. (Telemex) (ADR)*....... 1,706,306 957,000 0.7 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Mexico 1,706,306 957,000 0.7 - --------------------------------------------------------------------------------------------------------------------- New Zealand Telecommunications 36,800 Telecom Corporation of New Zealand Ltd. (ADR)*................. 1,680,030 2,980,800 2.1 ------------------------------------------------------------------------------------------------------ Total Common Stocks in New Zealand 1,680,030 2,980,800 2.1 - --------------------------------------------------------------------------------------------------------------------- Peru Telecommunications 73,000 Telefonica del Peru, S.A. (ADR)*.......... 1,496,500 1,377,875 1.0 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Peru 1,496,500 1,377,875 1.0 - --------------------------------------------------------------------------------------------------------------------- Philippines Telecommunications 21,800 Philippine Long Distance Telephone Co. (ADR)*............... 1,270,791 1,111,800 0.8 ------------------------------------------------------------------------------------------------------ Utilities--Electric 74,100 Manila Electric Co. (MERALCO) 'B'........ 518,117 606,683 0.4 ------------------------------------------------------------------------------------------------------ Total Common Stocks in the Philippines 1,788,908 1,718,483 1.2 - --------------------------------------------------------------------------------------------------------------------- Portugal Telecommunications 65,720 Portugal Telecom, S.A. (ADR)*............... 1,417,539 1,856,590 1.3 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Portugal 1,417,539 1,856,590 1.3 - --------------------------------------------------------------------------------------------------------------------- South Korea Utilities--Electric 40,800 Korea Electric Power Corp. (ADR)*......... 821,100 836,400 0.6 ------------------------------------------------------------------------------------------------------ Total Common Stocks in South Korea 821,100 836,400 0.6 - ---------------------------------------------------------------------------------------------------------------------
-55- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Country Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Spain Telecommunications 50,700 Telefonica de Espana S.A. (ADR)*.......... $ 1,942,165 $ 3,510,975 2.5% ------------------------------------------------------------------------------------------------------ Utilities--Electric 36,400 Empresa Nacional de Electricidad, S.A. (Endesa) (ADR)*........ 1,634,684 2,548,000 1.8 15,000 HidroCantabrico, S.A.................. 503,484 572,303 0.4 131,000 Iberdrola I S.A. ...... 879,896 1,856,010 1.3 ----------- ------ 3,018,064 4,976,313 3.5 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Spain 4,960,229 8,487,288 6.0 - --------------------------------------------------------------------------------------------------------------------- Switzerland Utilities--Electric 1,500 Elektrowatt AG......... 588,618 597,177 0.4 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Switzerland 588,618 597,177 0.4 - --------------------------------------------------------------------------------------------------------------------- Thailand Telecommunications 2,000 +TelecomAsia Corporation Public Co., Ltd. (ADR)*..... 43,740 40,000 0.0 ------------------------------------------------------------------------------------------------------ Utilities--Electric 68,000 Electricity Generating Company of Thailand (EGCOMP)............... 60,715 185,597 0.1 ------------------------------------------------------------------------------------------------------ Total Common Stocks in Thailand 104,455 225,597 0.1 - --------------------------------------------------------------------------------------------------------------------- United Telecommunications 57,000 British Telecom- Kingdom munications PLC........ 406,712 385,187 0.3 10,000 British Telecommun- ications PLC (ADR)*.. 741,450 686,250 0.5 87,000 Vodafone Group PLC (ADR)*............... 2,549,289 3,599,625 2.5 ----------- ------ 3,697,451 4,671,062 3.3 ------------------------------------------------------------------------------------------------------ Utilities--Electric 73,714 London Electricity PLC.................. 860,944 858,178 0.6 167,500 National Power PLC..... 1,238,839 1,401,274 1.0 92,690 PowerGen PLC........... 678,633 910,215 0.6 ----------- ------ 2,778,416 3,169,667 2.2 ------------------------------------------------------------------------------------------------------ Total Common Stocks in the United Kingdom 6,475,867 7,840,729 5.5 - --------------------------------------------------------------------------------------------------------------------- United Independent Power 40,000 Enron Global Power & States Producers Pipelines L.L.C. .... 930,101 1,080,000 0.8 ------------------------------------------------------------------------------------------------------ Telecommunications 10,000 AT&T Corp. ............ 405,165 435,000 0.3 36,400 +AirTouch Communications, Inc.................. 879,157 919,100 0.6 25,800 Ameritech Corp. ....... 1,030,404 1,564,125 1.1 8,000 Bell Atlantic Corp. ... 447,000 518,000 0.4 37,400 BellSouth Corp. ....... 1,138,507 1,510,025 1.1 42,000 Frontier Corp. ........ 969,520 950,250 0.7 33,500 GTE Corp. ............. 1,124,815 1,524,250 1.1 3,240 Lucent Technologies.... 159,185 149,850 0.1 20,000 MCI Communications Corp. ............... 602,500 652,500 0.4 31,000 NYNEX Corp. ........... 1,184,107 1,491,875 1.0 29,300 SBC Communications, Inc.................. 1,233,299 1,516,275 1.1 30,000 Sprint Corp............ 864,273 1,196,250 0.8 24,900 U S West Com- munications Group.... 606,619 803,025 0.6 ----------- ------ 10,644,551 13,230,525 9.3 ------------------------------------------------------------------------------------------------------ Utilities--Electric 65,600 Allegheny Power System, Inc.................. 1,689,846 1,992,600 1.4 25,000 American Electric Power Company, Inc......... 1,092,125 1,028,125 0.7 72,500 Boston Edison Co....... 2,012,799 1,948,437 1.4 84,192 CINergy Corp........... 2,052,668 2,809,908 2.0
-56- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of Country Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- United Utilities-- 49,300 Consolidated Edison States Electric Co. of New York........ $ 1,597,050 $ 1,442,025 1.0% (concluded) (concluded) 31,500 DTE Energy............. 989,953 1,019,812 0.7 26,400 Dominion Resources, Inc.................. 1,242,516 1,016,400 0.7 31,000 Duke Power Co.......... 1,172,492 1,433,750 1.0 97,000 Edison International... 1,800,212 1,927,875 1.3 50,000 Enova Corporation Holding Co........... 1,184,750 1,137,500 0.8 54,300 Entergy Corp........... 1,905,240 1,506,825 1.1 30,000 FPL Group, Inc......... 1,374,501 1,380,000 1.0 85,200 GPU, Inc............... 2,559,840 2,864,850 2.0 146,200 Houston Industries, Inc.................. 3,215,466 3,307,775 2.3 56,000 NIPSCO Industries, Inc.................. 1,787,890 2,219,000 1.5 50,700 New York State Electric & Gas Corp........... 1,537,761 1,096,387 0.8 93,800 PECO Energy Co......... 2,719,313 2,368,450 1.7 72,800 PacifiCorp............. 1,401,416 1,492,400 1.0 44,000 Public Service Co. of Colorado............. 1,312,146 1,710,500 1.2 86,200 Southern Co............ 1,846,654 1,950,275 1.4 55,000 Texas Utilities Co..... 2,237,675 2,241,250 1.6 ----------- ------ 36,732,313 37,894,144 26.6 ------------------------------------------------------------------------------------------------------ Utilities--Gas 33,100 AGL Resources Inc...... 619,896 699,237 0.5 33,000 The Brooklyn Union Gas Co................... 855,855 994,125 0.7 52,000 The Coastal Corp....... 1,509,758 2,541,500 1.8 24,800 El Paso Natural Gas Co................... 895,148 1,252,400 0.9 55,000 MDU Resources Group, Inc.................. 1,171,945 1,265,000 0.9 26,100 National Fuel Gas Company.............. 788,314 1,076,625 0.7 25,000 New Jersey Resources Corp................. 656,623 731,250 0.5 53,500 Questar Corp........... 1,908,628 1,966,125 1.4 72,200 Sonat, Inc............. 2,342,585 3,718,300 2.6 49,800 Washington Gas Light Co................... 1,046,197 1,126,725 0.8 117,900 Williams Co., Inc...... 2,298,643 4,421,250 3.1 ----------- ------ 14,093,592 19,792,537 13.9 ------------------------------------------------------------------------------------------------------ Utilities--Water 38,000 American Water Works Co., Inc............. 714,875 783,750 0.5 ------------------------------------------------------------------------------------------------------ Total Common Stocks in the United States 63,115,432 72,780,956 51.1 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Common Stocks 110,223,157 135,138,132 94.9 - ---------------------------------------------------------------------------------------------------------------------
-57- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund Schedule of Investments as of December 31, 1996 (concluded) (in US dollars) - ------------------------------------------------------------------------------
Face Fixed-Income Value Percent of Country Industry Amount Securities Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Australia Telecommunications US$1,040,000 Telstra Corp. Ltd., 6.50% due 7/31/2003(a)....... $ 1,084,062 $ 1,020,240 0.7% ------------------------------------------------------------------------------------------------------ Total Fixed-Income Securities in Australia 1,084,062 1,020,240 0.7 - --------------------------------------------------------------------------------------------------------------------- Korea Utilities--Electric 1,000,000 Korea Electric Power Corp., 6.375% due 12/01/2003......... 985,510 971,750 0.7 ------------------------------------------------------------------------------------------------------ Total Fixed-Income Securities in Korea 985,510 971,750 0.7 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Fixed-Income Securities 2,069,572 1,991,990 1.4 - --------------------------------------------------------------------------------------------------------------------- Short-Term Securities --------------------------------------------------------------------------------------------------------------------- Commercial Paper*** 5,049,000 General Electric Capital Corp., 7.10% due 1/02/1997.......... 5,047,008 5,047,008 3.5 ------------------------------------------------------------------------------------------------------ Total Investments in Short-Term Securities 5,047,008 5,047,008 3.5 - --------------------------------------------------------------------------------------------------------------------- Total Investments.... $117,339,737 142,177,130 99.8 ============= Other Assets Less Liabilities........ 260,671 0.2 ------------ ---------- Net Assets........... $142,437,801 100.0% ============= =========== - ---------------------------------------------------------------------------------------------------------------------
* American Depositary Receipts (ADR). ** Global Depositary Receipts (GDR). *** Commercial Paper is traded on a discount basis; the interest rate shown is the discount rate paid at the time of purchase by the Fund. + Non-income producing security. (a) Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $3,420,000, representing 2.4% of net assets. - ------------------------------------------------------------------------------
Value Issue Acquisition Date(s) Cost (Note 1a) - --------------------------------------------------------------------------------------------------------------------- Central Costanera S.A. (ADR)........................................ 12/17/1993 $ 261,847 $ 238,975 Distribuidora Chilectra Metropolitana, S.A. (ADR)................... 8/06/1993-12/21/1993 1,098,338 1,860,300 Tata Electric Companies (GDR)....................................... 2/22/1994 710,000 300,000 Telestra Corp. Ltd., 6.50% due 7/31/2003............................ 7/26/1993-9/29/1993 1,084,062 1,020,240 - --------------------------------------------------------------------------------------------------------------------- Total $3,154,247 $3,419,515 ========== ========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -58- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Government Bond Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Face Value Amount Issue Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- US Government & Agency Obligations - --------------------------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage $ 3,000,000 Federal Home Loan Mortgage Corp., Corporation--3.4% 7.14% due 9/13/2006.......................... $ 3,064,440 $ 3,082,019 - --------------------------------------------------------------------------------------------------------------------- Total Federal Home Loan Mortgage Corp. 3,064,440 3,082,019 - --------------------------------------------------------------------------------------------------------------------- Federal National Mortgage Federal National Mortgage Association: Association--14.8% 2,000,000 8.90% due 6/12/2000........................ 2,171,480 2,161,880 1,045,000 7.50% due 2/11/2002........................ 1,088,232 1,093,007 4,000,000 7.40% due 7/01/2004........................ 4,157,540 4,191,880 500,000 7.85% due 9/10/2004........................ 499,297 511,720 2,000,000 7.65% due 3/10/2005........................ 2,091,140 2,125,320 3,000,000 7.375% due 3/28/2005....................... 3,158,430 3,138,750 - --------------------------------------------------------------------------------------------------------------------- Total Federal National Mortgage Association 13,166,119 13,222,557 - --------------------------------------------------------------------------------------------------------------------- US Treasury Notes--72.4% US Treasury Notes: 2,000,000 7.125% due 2/29/2000....................... 2,004,375 2,059,060 1,000,000 6.875% due 3/31/2000....................... 1,019,375 1,022,500 5,000,000 7.50% due 11/15/2001....................... 5,140,469 5,263,300 11,500,000 6.375% due 8/15/2002....................... 11,488,545 11,575,440 2,000,000 6.25% due 2/15/2003........................ 1,992,656 1,997,500 3,000,000 5.75% due 8/15/2003........................ 2,835,781 2,910,000 12,000,000 7.25% due 5/15/2004........................ 12,468,047 12,626,280 3,000,000 7.25% due 8/15/2004........................ 3,219,375 3,157,500 4,000,000 7.875% due 11/15/2004...................... 4,440,000 4,365,000 8,000,000 6.50% due 5/15/2005........................ 7,732,480 8,053,760 3,000,000 6.875% due 5/15/2006....................... 3,082,187 3,091,410 6,000,000 7.00% due 7/15/2006........................ 6,079,687 6,233,460 2,500,000 6.50% due 10/15/2006....................... 2,488,359 2,513,675 - --------------------------------------------------------------------------------------------------------------------- Total US Treasury Notes 63,991,336 64,868,885 - --------------------------------------------------------------------------------------------------------------------- Total US Government & Agency Obligations--90.6% 80,221,895 81,173,461 - --------------------------------------------------------------------------------------------------------------------- Short-Term Securities - --------------------------------------------------------------------------------------------------------------------- Repurchase Agreements*--5.2% 4,661,000 UBS Securities Funding, Inc. purchased on 12/31/1996 to yield 6.75% to 1/02/1997..... 4,661,000 4,661,000 - --------------------------------------------------------------------------------------------------------------------- US Government US Treasury Bills: Obligations**--2.2% 1,000,000 4.55% due 1/09/1997........................ 998,863 998,863 1,000,000 4.60% due 1/16/1997........................ 997,956 997,956 ----------- 1,996,819 1,996,819 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Securities 6,657,819 6,657,819 - --------------------------------------------------------------------------------------------------------------------- Total Investments--98.0%..................... $86,879,714 87,831,280 =========== Other Assets Less Liabilities--2.0%.......... 1,749,512 Net Assets--100.0%........................... $89,580,792 - ------------------------------------------------------------------------------
* Repurchase Agreements are fully collateralized by US Government Obligations. ** Certain US Government Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. See Notes to Financial Statements. -59- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--High Current Income Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Issue Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Airlines--1.0% B+ B1 $4,000,000 USAir, Inc., 10.375% due 3/01/2013.................... $ 3,935,000 $ 4,180,000 - --------------------------------------------------------------------------------------------------------------------- Automotive--0.9% B B3 2,000,000 Collins & Aikman Corp., 11.50% due 4/15/2006................ 2,000,000 2,180,000 B B2 2,000,000 Exide Corp., 11.64% due 12/15/2004(d)................ 1,817,902 1,840,000 ------------ ------------ 3,817,902 4,020,000 - --------------------------------------------------------------------------------------------------------------------- Broadcasting & BB Ba3 4,000,000 Grupo Televisa S.A., 11.375% Publishing--4.4% due 5/15/2003................ 4,025,000 4,295,000 BB- B1 5,000,000 Hollinger, International Inc., 9.25% due 2/01/2006.......... 4,961,250 4,950,000 BB- Ba3 1,000,000 K-III Communications Corp., 10.25% due 6/01/2004......... 995,000 1,040,000 B Caa 4,300,000 NWCG Holding Corp., 13.50% due 6/15/1999(d)................. 3,121,269 3,547,500 Sinclair Broadcasting Group Inc.: B B2 2,500,000 10% due 12/15/2003............. 2,436,250 2,537,500 B B2 2,000,000 10% due 9/30/2005.............. 1,993,750 2,030,000 ------------ ------------ 17,532,519 18,400,000 - --------------------------------------------------------------------------------------------------------------------- Broadcasting/ CCC+ Caa 5,023,939 American Telecasting, Inc., Cable--11.3% 14.38% due 6/15/2004(d)(e)... 3,531,401 2,059,815 B- B2 1,500,000 Argyle Television Inc., 9.75% due 11/01/2005............... 1,447,500 1,522,500 CCC+ Caa 8,000,000 Australis Media Ltd., 14.59% due 5/15/2003(d)............. 4,978,793 4,200,000 BB- B2 9,000,000 Bell Cablemedia PLC, 11.74% due 9/15/2005(d)................. 5,917,159 7,222,500 BB- Ba3 3,000,000 Century Communications Corp., 9.50% due 3/01/2005.......... 2,953,750 3,075,000 CCC+ Caa 5,500,000 Echostar Satellite Broadcasting, 13.15% due 3/15/2004(d)................. 3,654,874 4,207,500 NR* NR* 2,000,000 +Globo Communicacoes Participacoes, 10.50% due 12/20/2006................... 2,006,250 2,012,500 B B2 4,000,000 +Intermedia Capital Partners, 11.25% due 8/01/2006......... 3,997,500 4,160,000 BB+ Ba3 5,000,000 Lenfest Communications, Inc., 8.375% due 11/01/2005........ 4,627,500 4,831,250 B B1 4,000,000 +Olympus Communications L.P., 10.625% due 11/15/2006....... 4,000,000 4,095,000 B- B3 2,000,000 SFX Broadcasting Inc., 10.75% due 5/15/2006................ 1,990,000 2,110,000 Videotron Holdings PLC: B+ B3 5,500,000 11.77% due 7/01/2004(d)........ 4,029,842 4,785,000 BB+ Ba3 2,500,000 10.625% due 2/15/2005.......... 2,559,375 2,750,000 ------------ ------------ 45,693,944 47,031,065 - --------------------------------------------------------------------------------------------------------------------- Building BB B1 2,500,000 +Cemex S.A., 12.75% due Materials--1.5% 7/15/2006.................... 2,500,000 2,793,750 B B3 3,340,000 Pacific Lumber Co., 10.50% due 3/01/2003.................... 3,252,088 3,390,100 ------------ ------------ 5,752,088 6,183,850 - --------------------------------------------------------------------------------------------------------------------- Capital Goods--1.6% B+ B1 1,660,000 Essex Group, Inc., 10% due 5/01/2003.................... 1,668,925 1,701,500 B- B3 4,500,000 International Wire Group Inc., 11.75% due 6/01/2005......... 4,490,625 4,815,000 ------------ ------------ 6,159,550 6,516,500 - --------------------------------------------------------------------------------------------------------------------- Chemicals -- 1.9% B+ Ba3 4,100,000 Agricultural Minerals & Chemicals Co., L.P., 10.75% due 9/30/2003................ 4,123,188 4,458,750 B+ Ba3 3,500,000 +ISP Holdings Inc., 9.75% due 2/15/2002.................... 3,500,000 3,587,500 ------------ ------------ 7,623,188 8,046,250 - ---------------------------------------------------------------------------------------------------------------------
-60- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--High Current Income Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Issue Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Communications-- NR* NR* $3,000,000 +Comtel Brasileira Ltd., 10.75% 8.7% due 9/26/2004................ $ 3,000,000 $ 3,082,500 B- B3 8,000,000 Millicom International Celular S.A., 13.31% due 6/01/2006(d)................. 4,555,660 4,960,000 CCC- B3 6,000,000 Nextel Communications, Inc., 14.11% due 8/15/2004(d)...... 3,722,677 4,095,000 B B2 3,000,000 +Paging Network, Inc., 10% due 10/15/2008................... 3,003,750 3,041,250 B B3 3,000,000 Panamsat L.P., 12.16% due 8/01/2003(d)................. 2,413,727 2,790,000 BB- B2 3,000,000 Rogers Communications Inc., 10.875% due 4/15/2004........ 3,042,500 3,150,000 BB- B1 4,000,000 Telefonica de Argentina S.A., 11.875% due 11/01/2004....... 3,917,780 4,420,000 BB B1 7,000,000 TeleWest Communications PLC, 11.45% due 10/01/2007(d)..... 4,520,553 4,882,500 B- B2 3,000,000 USA Mobile Communications Holdings, Inc., 9.50% due 2/01/2004.................... 2,710,000 2,850,000 B+ B1 1,500,000 Vanguard Cellular Systems, 9.375% due 4/15/2006......... 1,500,000 1,522,500 B- B3 1,000,000 Western Wireless Corp., 10.50% due 2/01/2007................ 990,000 1,046,250 ------------ ------------ 33,376,647 35,840,000 - --------------------------------------------------------------------------------------------------------------------- Computer Services-- B- B3 3,000,000 Dictaphone Corp., 11.75% due 0.7% 8/01/2005.................... 2,943,750 2,760,000 - --------------------------------------------------------------------------------------------------------------------- Congolomerates-- CCC+ B3 2,125,000 Interlake Corp., 12.125% due 2.0% 3/01/2002.................... 2,000,750 2,199,375 B+ B2 2,000,000 JB Poindexter & Co., 12.50% due 5/15/2004.................... 2,000,000 1,950,000 NR* NR* 890,000 MacAndrews & Forbes Group, Inc.,13% due 3/01/1999....... 868,373 890,000 Sequa Corp.: B+ B1 750,000 9.625% due 10/15/1999.......... 740,625 772,500 B+ B3 2,500,000 9.375% due 12/15/2003.......... 2,512,813 2,550,000 ------------ ------------ 8,122,561 8,361,875 - --------------------------------------------------------------------------------------------------------------------- Consumer-- B NR* 5,000,000 Coleman Holdings, Inc., Products--5.7% 11.39% due 5/27/1998(d)........ 4,254,825 4,150,000 B+ Ba3 1,250,000 Coty Inc., 10.25% due 5/01/2005.................... 1,250,000 1,356,250 B+ Ba2 7,000,000 International Semi-Tech Microelectronics, Inc., 13.13% due 8/15/2003(d)...... 4,229,935 4,515,000 B- B2 3,619,000 Polymer Group Inc., 12.25% due 7/15/2002.................... 3,678,048 3,953,758 B- B2 4,500,000 Samsonite Corp., 11.125% due 7/15/2005.................... 4,348,750 4,927,500 B+ B1 4,500,000 Sealy Corp., 9.50% due 5/01/2003.................... 4,453,125 4,545,000 ------------ ------------ 22,214,683 23,447,508 - --------------------------------------------------------------------------------------------------------------------- Defense--0.7% B+ B1 3,000,000 +Newport News Ship, 9.25% due 12/01/2006................... 3,000,000 3,090,000 - --------------------------------------------------------------------------------------------------------------------- Diversified--0.6% Foamex L.P.: B+ B1 530,000 9.50% due 6/01/2000............ 517,413 537,950 B B1 1,950,000 11.25% due 10/01/2002.......... 1,936,375 2,067,000 ------------ ------------ 2,453,788 2,604,950 - ---------------------------------------------------------------------------------------------------------------------
-61- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--High Current Income Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Issue Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Energy--6.2% B B2 $4,500,000 Benton Oil & Gas Co, 11.625% due 05/01/2003............... $ 4,500,000 $ 4,983,750 B+ B1 1,750,000 +Parker Drilling Co., 9.75% due 11/15/2006................... 1,758,750 1,846,250 NR* NR* 3,000,000 +Petroleo Brasileiro S.A.-- Petrobras, 10% due 10/17/2006................... 3,000,313 3,033,750 NR* NR* 4,000,000 +Transamerican Exploration Corp., 14% due 9/19/1998..... 3,960,000 4,040,000 CCC+ Caa 3,400,000 Transamerican Refining Corp., 19.11% due 2/15/2002(d)...... 2,731,372 2,805,000 BB- B2 4,500,000 TransTexas Gas Corp., 11.50% due 6/15/2002................ 4,498,750 4,860,000 BB- B1 4,500,000 Yacimientos Petroliferos Fiscales S.A., 8% due 2/15/2004.................... 3,694,375 4,342,500 ------------ ------------ 24,143,560 25,911,250 - --------------------------------------------------------------------------------------------------------------------- Entertainment--1.1% B B2 5,000,000 Six Flags Theme Parks Corp., 12.25% due 6/15/2005(d)...... 4,237,019 4,700,000 - --------------------------------------------------------------------------------------------------------------------- Financial Services--1.0% BB- B1 4,000,000 Reliance Group Holdings Inc., 9.75% due 11/15/2003......... 3,898,750 4,160,000 - --------------------------------------------------------------------------------------------------------------------- Food & B+ B1 4,500,000 Chiquita Brands International Beverage--3.5% Inc., 9.125% due 3/01/2004..... 4,448,750 4,545,000 NR* NR* 1,893,000 Cumberland Farms, Inc., 10.50% due 10/01/2003............... 1,852,774 1,807,815 CCC+ Caa 2,500,000 Del Monte Corp., 10% due 5/01/2003.................... 2,310,000 2,387,500 B- B3 1,500,000 Envirodyne Industries, Inc., 10.25% due 12/01/2001........ 1,528,125 1,436,250 B B3 4,500,000 Specialty Foods Corp., 11.125% due 10/01/2002............... 4,444,375 4,275,000 ------------ ------------ 14,584,024 14,451,565 - --------------------------------------------------------------------------------------------------------------------- Foreign Government BB- B1 4,000,000 Republic of Argentina, 8.375% Obligations--0.9% due 12/20/2003............... 3,175,000 3,765,000 - --------------------------------------------------------------------------------------------------------------------- Gaming--2.5% B B3 4,000,000 Greate Bay Properties, Inc., 10.875% due 1/15/2004........ 3,590,000 3,360,000 D Caa 4,500,000 Harrah's Jazz Company, 14.25% due 11/15/2001(c)............ 4,468,750 2,210,625 BB- B1 5,000,000 Trump Atlantic City Association, 11.25% due 5/01/2006.................... 4,961,250 4,950,000 ------------ ------------ 13,020,000 10,520,625 - --------------------------------------------------------------------------------------------------------------------- Health Services--2.1% B+ B1 4,000,000 Beverly Enterprises, Inc., 9% due 2/15/2006................ 3,740,000 4,020,000 B+ B2 3,000,000 Quest Diagnostic Inc., 10.75% due 12/15/2006............... 3,000,000 3,150,000 B B3 2,000,000 Unilab Corp., 11% due 4/01/2006.................... 1,995,000 1,350,000 ------------ ------------ 8,735,000 8,520,000 - --------------------------------------------------------------------------------------------------------------------- Home-Builders--0.6% B- B2 2,500,000 Del Webb Corporation, 9% due 2/15/2006.................... 2,497,500 2,437,500 - --------------------------------------------------------------------------------------------------------------------- Hotels--1.1% BB- Ba3 4,500,000 HMC Acquisition Properties, 9% due 12/15/2007............... 4,202,500 4,567,500 - --------------------------------------------------------------------------------------------------------------------- Independent Power BB- Ba3 2,750,000 AES China Generating Co. Ltd. Producers--2.1% (Class A), 10.125% due 12/15/2006................... 2,747,360 2,860,000 BB B2 2,500,000 California Energy Company, Inc., 9.875% due 6/30/2003... 2,518,750 2,625,000 NR* NR* 1,500,000 Consolidated Hydro, Inc., 11.80% due 7/15/2003(d)...... 1,256,950 480,000 Midland Cogeneration Venture L.P.: BB Ba3 2,327,454 10.33% due 7/23/2002(e)........ 2,367,215 2,478,739 B- B2 250,000 11.75% due 7/23/2005........... 250,000 276,790 ------------ ------------ 9,140,275 8,720,529 - ---------------------------------------------------------------------------------------------------------------------
-62- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--High Current Income Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Issue Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Metals & Mining-- B- B2 $4,500,000 Kaiser Aluminum Corp., 12.75% 1.8% due 2/01/2003................ $ 4,770,000 $ 4,837,500 B- B3 3,000,000 Maxxam Group, Inc., 12.25% due 8/01/2003(d)................. 2,484,169 2,557,500 ------------ ------------ 7,254,169 7,395,000 - --------------------------------------------------------------------------------------------------------------------- Packaging--2.1% Owens-Illinois, Inc.: B+ B2 2,000,000 10% due 8/01/2002............ 2,000,000 2,090,000 BB Ba3 2,000,000 11% due 12/01/2003........... 2,145,312 2,225,000 B B2 4,000,000 Portola Packaging Inc., 10.75% due 10/01/2005............... 4,000,000 4,170,000 ------------ ------------ 8,145,312 8,485,000 - --------------------------------------------------------------------------------------------------------------------- Paper--4.6% B B3 4,000,000 Crown Paper Co., 11% due 9/01/2005.................... 3,663,750 3,760,000 B B2 3,000,000 Fort Howard Corp., 9% due 2/01/2006.................... 2,895,000 3,030,000 BB- B2 3,000,000 Repap Wisconsin Finance, Inc., 9.25% due 2/01/2002.......... 2,760,000 3,022,500 B B3 4,000,000 Riverwood International Corp., 10.875% due 4/01/2008........ 3,978,750 3,700,000 B+ B1 2,000,000 S.D. Warren Co., 12% due 12/15/2004................... 2,000,000 2,160,000 Stone Container Corp.: B+ B1 1,950,000 9.875% due 2/01/2001......... 1,869,375 1,969,500 BB- B1 1,300,000 10.75% due 10/01/2002........ 1,287,000 1,369,875 ------------ ------------ 18,453,875 19,011,875 - --------------------------------------------------------------------------------------------------------------------- Real Estate--0.5% NR* NR* 3,000,000 Rockefeller Center Properties, 11.09% Inc., due 12/31/2000 (Convertible)(d)............. 1,965,742 1,852,500 - --------------------------------------------------------------------------------------------------------------------- Restaurants--1.5% Foodmaker, Inc.: B B1 4,000,000 9.25% due 3/01/1999.......... 4,010,000 4,090,000 CCC+ B1 2,000,000 9.75% due 11/01/2003......... 1,972,075 1,965,000 ------------ ------------ 5,982,075 6,055,000 - --------------------------------------------------------------------------------------------------------------------- Retail Specialty--0.1% D Caa 4,500,000 Bradlees, Inc., 11% due 8/01/2002(c)................. 4,466,562 472,500 - --------------------------------------------------------------------------------------------------------------------- Steel--0.8% B B2 3,500,000 Weirton Steel Corp., 10.75% due 6/01/2005.................... 3,346,250 3,430,000 - --------------------------------------------------------------------------------------------------------------------- Supermarkets--1.5% B B2 3,500,000 Penn Traffic American Corp., 8.625% due 12/15/2003........ 2,888,750 2,878,750 B B1 1,000,000 Ralph's Grocery Co., 10.45% due 6/15/2004.................... 962,500 1,063,750 B B1 2,000,000 Ralph's Grocery Co. (New), 10.45% due 6/15/2004......... 1,897,358 2,125,000 ------------ ------------ 5,748,608 6,067,500 - --------------------------------------------------------------------------------------------------------------------- Textiles--2.3% B- Caa 3,000,000 Decorative Home Accents, Inc. (Class F), 13% due 6/30/2002.................... 2,977,008 1,950,000 BB- Ba3 3,500,000 Tultex Corp., 10.625% due 3/15/2005.................... 3,500,000 3,815,000 B+ B2 3,500,000 Westpoint Stevens Industries, Inc., 9.375% due 12/15/2005.. 3,291,250 3,605,000 ------------ ------------ 9,768,258 9,370,000 - --------------------------------------------------------------------------------------------------------------------- Transportation--2.5% BB- B1 4,000,000 Sea Containers Ltd., 12.50% due 12/01/2004................... 4,380,000 4,400,000 B- B3 3,700,000 Transtar Holdings Inc., 11.02% due 12/15/2003(d)............ 2,720,132 2,960,000 BB Ba2 3,000,000 Viking Star Shipping Co., 9.625% due 7/15/2003......... 2,905,937 3,138,750 ------------ ------------ 10,006,069 10,498,750 - ---------------------------------------------------------------------------------------------------------------------
-63- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--High Current Income Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Issue Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Utilities--4.8% B+ B1 $3,453,000 Beaver Valley Funding Corp., 9% due 6/01/2017................ $ 3,252,225 $ 3,297,580 CTC Mansfield Funding Corp.: B+ Ba3 995,000 10.25% due 3/30/2003......... 978,850 1,009,686 B+ Ba3 2,300,000 11.125% due 9/30/2016........ 2,402,500 2,426,500 BB Ba2 2,000,000 Cleveland Electric Illuminating Co., 9.50% due 5/15/2005..... 1,996,160 2,108,760 BB- B1 4,000,000 Metrogas S.A., 12% due 8/15/2000.................... 3,935,000 4,390,000 BBB- NR* 3,000,000 +Trans Gas de Occidente S.A., 9.79% due 11/01/2010......... 3,000,000 3,105,000 +Tucson Electric & Power Co.: NR* NR* 3,070,687 10.21% due 1/01/2009......... 2,948,074 2,990,357 NR* NR* 500,000 10.732% due 1/01/2013........ 461,050 489,995 ------------ ------------ 18,973,859 19,817,878 - --------------------------------------------------------------------------------------------------------------------- Waste D Ca 3,500,000 Mid-American Waste Systems, Management--0.3% Inc., 12.25% due 2/15/2003... 3,555,000 1,225,000 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Corporate Bonds--84.9% 347,925,027 351,916,970 - --------------------------------------------------------------------------------------------------------------------- Shares Held Preferred Stocks --------------------------------------------------------------------------------------------------------------------- Broadcasting & 15,259 K-III Communications Corp. Publishing--1.8% (Series B)(a)................ 1,513,108 1,533,622 5,375 Time Warner Inc. (Series M)(a)........................ 5,376,812 5,831,875 ------------ ------------ 6,889,920 7,365,497 - --------------------------------------------------------------------------------------------------------------------- Communications--0.7% 3,000 +Paxson Communications(a)...... 2,835,000 2,857,500 - --------------------------------------------------------------------------------------------------------------------- Industrials--0.7% 30,000 Cablevision Systems Corp., (Series M)(a)................ 2,617,500 2,760,000 - --------------------------------------------------------------------------------------------------------------------- Packaging--0.6% 2,578 +Silgan Holdings Inc.(a)....... 2,581,120 2,758,460 - --------------------------------------------------------------------------------------------------------------------- Steel--0.7% 120,000 USX Capital Corp............... 3,000,000 3,045,000 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Preferred Stocks--4.5% 17,923,540 18,786,457 - --------------------------------------------------------------------------------------------------------------------- Common Stocks --------------------------------------------------------------------------------------------------------------------- Broadcasting & 93,747 On Command Corporation (c)..... 2,744,654 1,488,234 Publishing--0.3% - --------------------------------------------------------------------------------------------------------------------- Food & Beverage--0.0% 4,300 FoodBrands America, Inc.(c).... 240,909 59,125 - --------------------------------------------------------------------------------------------------------------------- Gaming--0.0% 2,500 Goldriver Hotel & Casino Finance Corp. (Class B) (c).. 18,603 0 - --------------------------------------------------------------------------------------------------------------------- Hotel--0.0% 107 Buckhead America Corp.(c)...... 575 642 - --------------------------------------------------------------------------------------------------------------------- Industrial Services--0.0% 311 Thermadyne Industries, Inc.(c)...................... 4,495 8,242 - --------------------------------------------------------------------------------------------------------------------- Supermarkets--0.1% 53,022 Grand Union Co.(c)............. 3,090,000 258,482 - --------------------------------------------------------------------------------------------------------------------- Textiles--0.0% 3,000 +Decorative Home Accents, Inc. (Class F)(c)................. 22,992 16,500 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Common Stocks--0.4% 6,122,228 1,831,225 - --------------------------------------------------------------------------------------------------------------------- Trusts and Warrants --------------------------------------------------------------------------------------------------------------------- Broadcasting & 29,830 On Command Corporation Publishing--0.1% (Warrants)(b)................ 238,640 201,353 - --------------------------------------------------------------------------------------------------------------------- Broadcasting/Cable--0.0% 23,350 American Telecasting, Inc. (Warrants)(b)................ 4,776 52,537 - --------------------------------------------------------------------------------------------------------------------- Energy--0.0% 42,733 Transamerican Refining Corp. (Warrants) (b)............... 99,622 85,466 - ---------------------------------------------------------------------------------------------------------------------
-64- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--High Current Income Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Shares Value Industry Held Trusts and Warrants Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Gaming--0.0% 250 +Goldriver Hotel & Casino Finance Corp., (Liquidating Trust)(c)................... $ 6,000 $ 2,141 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Trusts and Warrants--0.1% 349,038 341,497 - --------------------------------------------------------------------------------------------------------------------- Face Amount Short-Term Securities --------------------------------------------------------------------------------------------------------------------- Commercial Paper**--3.5% $14,421,000 General Electric Capital Corp., 7.10% due 1/02/1997................... 14,415,312 14,415,312 - --------------------------------------------------------------------------------------------------------------------- US Government & Agency Federal Home Loan Bank: Obligations**--5.7% 8,000,000 5.21% due 1/02/1997......... 7,997,684 7,997,684 8,000,000 5.49% due 1/23/1997......... 7,971,940 7,971,940 2,618,000 Federal Home Loan Mortgage Corp., 6.50% due 1/02/1997.. 2,617,055 2,617,055 5,000,000 Federal National Mortgage Association, 5.45% due 1/14/1997................... 4,989,403 4,989,403 ------------ ------------ 23,576,082 23,576,082 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Short- Term Securities--9.2% 37,991,394 37,991,394 - --------------------------------------------------------------------------------------------------------------------- Total Investments--99.1%...... $410,311,227 410,867,543 ============= Other Assets Less Liabilities--0.9%........... 3,747,375 ------------ Net Assets--100.0%............ $414,614,918 ============= - ---------------------------------------------------------------------------------------------------------------------
* Not Rated. ** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. (a) Represents a pay-in-kind security which may pay interest/dividend in additional face/shares. (b) Warrants entitle the portfolio to purchase a predetermined number of shares of common stock/face amount of bonds. The purchase price and number of shares/face amount are subject to adjustment under certain conditions until the expiration date. (c) Non-income producing security. (d) Represents a zero coupon or step bond; the interest rate shown is the effective yield at the time of purchase by the Fund. (e) Subject to principal paydowns. + Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $47,002,000, representing 11.3% of net assets.
----------------------------------------------------------------------------------------------------------------- Value Issue Acquisition Date(s) Cost (Note 1a) ----------------------------------------------------------------------------------------------------------------- Cemex S.A., 12.75% due 7/15/2006....................... 7/16/1996 $ 2,500,000 $ 2,793,750 Comtel Brasileira Ltd., 10.75% due 9/26/2004........... 9/18/1996 3,000,000 3,082,500 Decorative Home Accents, Inc. (Class F)................ 6/30/1995-9/21/1995 22,992 16,500 Globo Communicacoes Participacoes, 10.50% due 12/20/2006........................................... 12/10/1996-12/12/1996 2,006,250 2,012,500 Goldriver Hotel & Casino Finance Corp. (Liquidating Trust)............................................... 8/31/1992 6,000 2,141 ISP Holdings Inc., 9.75% due 2/15/2002................. 10/21/1996 3,500,000 3,587,500 Intermedia Capital Partners, 11.25% due 8/01/2006...... 10/30/1996-11/20/1996 3,997,500 4,160,000 Newport News Ship, 9.25% due 12/01/2006................ 11/21/1996 3,000,000 3,090,000 Olympus Communications L.P. 10.625% due 11/15/2006..... 11/06/1996 4,000,000 4,095,000 Paging Network, Inc., 10% due 10/15/2008............... 11/25/1996-1/26/1996 3,003,750 3,041,250 Parker Drilling Co., 9.75% due 11/15/2006.............. 11/6/1996 1,758,750 1,846,250 Paxson Communications.................................. 12/19/1996 2,835,000 2,857,500 Petroleo Brasileiro S.A. -- Petrobras, 10% due 10/17/2006................................... 10/21/1996-11/25/1996 3,000,313 3,033,750 Silgan Holdings Inc. .................................. 7/17/1996-10/3/1996 2,581,120 2,758,460 Trans Gas de Occidente S.A., 9.79% due 11/01/2010...... 11/02/1995 3,000,000 3,105,000 Transamerican Exploration Corp., 14% due 9/19/1998..... 9/19/1996 3,960,000 4,040,000 Tucson Electric & Power Co., 10.21% due 1/01/2009...... 6/16/1993-4/01/1996 2,948,074 2,990,357 Tucson Electric & Power Co., 10.732% due 1/01/2013..... 3/01/1993 461,050 489,995 ----------------------------------------------------------------------------------------------------------------- Total $45,580,799 $47,002,453 =========== =========== ----------------------------------------------------------------------------------------------------------------- Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. -65- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- General Electric Co.++ ...... 2,758 $ 272,697 Coca-Cola Co................. 4,168 219,341 Exxon Corp................... 2,080 203,840 Intel Corp. ................. 1,375 179,953 +Microsoft Corporation....... 2,000 165,250 Merck & Co., Inc. ........... 2,019 160,006 Philip Morris Companies, Inc. ...................... 1,364 153,620 Royal Dutch Petroleum Co. ... 898 153,333 International Business Machines Corp. ............ 867 130,917 Procter & Gamble Co. ........ 1,143 122,872 American Telephone & Telegraph Co. ............. 2,714 118,059 Johnson & Johnson Co. ....... 2,231 110,992 Bristol-Myers Squibb Co. .... 839 91,241 Pfizer, Inc. ................ 1,080 89,505 duPont (E.I.) de Nemours & Co. ....................... 943 88,996 Wal-Mart Companies, Inc. .... 3,843 87,909 Hewlett-Packard Co. ......... 1,703 85,576 American International Group, Inc. ............... 787 85,193 Citicorp..................... 788 81,164 Mobil Corp. ................. 660 80,685 Disney (Walt) Company (The) ..................... 1,136 79,094 PepsiCo, Inc. ............... 2,603 76,138 GTE Corp. ................... 1,611 73,301 Gillette Co. ................ 927 72,074 Chevron Corp. ............... 1,093 71,045 General Motors Corp. ........ 1,266 70,580 +cisco Systems, Inc. ........ 1,100 69,988 Federal National Mortgage Association................ 1,829 68,130 Lilly (Eli) & Co. ........... 924 67,452 BellSouth Corp. ............. 1,664 67,184 Amoco Corp. ................. 833 67,057 Abbott Laboratories.......... 1,301 66,026 Chase Manhattan Corp. ....... 735 65,599 Boeing Co. .................. 600 63,825 Ford Motor Co. .............. 1,986 63,304 American Home Products Corp. ..................... 1,070 62,729 Motorola, Inc. .............. 993 60,945 BankAmerica Corp. ........... 601 59,950 Minnesota Mining & Manufacturing Co........... 700 58,012 Ameritech Corporation........ 920 55,775 McDonald's Corp. ............ 1,169 52,897 SBC Communications, Inc. .... 1,011 52,319 Lucent Technologies, Inc. ... 1,067 49,349 Travelers Corporation........ 1,073 48,687 Bell Atlantic Corp. ......... 733 47,462 NationsBank Corp. ........... 482 47,115 Unilever N.V. ............... 268 46,967 Columbia/HCA Healthcare Corp. ..................... 1,125 45,844 +Oracle Corporation.......... 1,100 45,787 Kimberly-Clark Corp. ........ 473 45,053 American Express Co. ........ 794 44,861 Eastman Kodak Co. ........... 558 44,780 Texaco Inc. ................. 443 43,469 Allstate Corporation ........ 745 43,117 Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- Wells Fargo & Co. ........... 155 41,811 Schlumberger, Ltd. .......... 413 41,248 Home Depot, Inc. ............ 805 40,351 Chrysler Corp................ 1,221 40,293 Schering-Plough Corp. ....... 619 40,080 Monsanto Co. ................ 985 38,292 MCI Communications Corp. .... 1,150 37,519 +WorldCom, Inc. ............. 1,435 37,310 Emerson Electric Co. ........ 376 36,378 Time Warner, Inc. ........... 953 35,737 Atlantic Richfield Co. ...... 269 35,643 NYNEX Corp. ................. 737 35,468 First Union Corp. ........... 475 35,150 Warner-Lambert Co. .......... 454 34,050 Pharmacia & Upjohn Inc. ..... 851 33,721 +Compaq Computer Corp. ...... 454 33,710 Anheuser-Busch Companies, Inc. ........... 837 33,480 Federal Home Loan Mortgage Corp. ..................... 300 33,038 Dow Chemical Co. ............ 407 31,899 AlliedSignal Inc. ........... 474 31,758 Campbell Soup Co. ........... 392 31,458 BancOne Corp. ............... 716 30,788 Morgan (J.P.) & Co., Inc. ... 312 30,459 Computer Associates International, Inc. ....... 611 30,397 Sears, Roebuck & Co. ........ 656 30,258 Sara Lee Corporation......... 811 30,210 Lockheed Martin Corp. ....... 323 29,554 Nike, Inc. (Class B) ........ 483 28,859 Sprint Corp. ................ 721 28,750 First Chicago Corp. ......... 534 28,702 Xerox Corp. ................. 544 28,628 First Data Corporation....... 750 27,375 Medtronic, Inc. ............. 401 27,268 Norwest Corp. ............... 620 26,970 Northern Telecom Ltd. ....... 433 26,792 United Technologies Corp. ... 403 26,598 WMX Technologies, Inc. ...... 813 26,524 Pacific Telesis Group........ 718 26,386 US West Communications Group...................... 800 25,800 Southern Co. ................ 1,129 25,544 Union Pacific Corp. ......... 410 24,651 +Amgen, Inc. ................ 450 24,469 Seagram Co. Ltd. ............ 625 24,219 Caterpillar, Inc. ........... 321 24,155 Kellogg Co. ................. 353 23,166 McDonnell Douglas Corp. ..... 355 22,720 Colgate-Palmolive Co. ....... 246 22,694 Merrill Lynch & Co., Inc. ... 276 22,494 +Rockwell International Corp. ..................... 366 22,280 Bank of New York Co., Inc. ...................... 657 22,174 Burlington Northern Santa Fe Inc. ...................... 256 22,112 Heinz (H.J.) Company......... 616 22,022 +3Com Corp. ................. 300 21,975 Fleet Financial Group, Inc. ...................... 439 21,895 General Re Corp. ............ 138 21,770 PNC Bank Corp. .............. 571 21,484
-66- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- +Airtouch Communications, Inc. ...................... 840 21,210 Automatic Data Processing, Inc............ 486 20,837 Westinghouse Electric Corp....................... 1,046 20,789 +Viacom, Inc. (Class B)...... 593 20,681 International Paper Co. ..... 503 20,309 Texas Instruments, Inc. ..... 318 20,272 Aetna Inc. .................. 252 20,160 ConAgra, Inc. ............... 403 20,049 Archer-Daniels-Midland Co. ....................... 911 20,042 May Department Stores Co. ... 422 19,728 Phillips Petroleum Co. ...... 441 19,514 +US West Media Group, Inc. ...................... 1,046 19,351 CoreStates Financial Corp. ..................... 373 19,349 KeyCorp...................... 378 19,089 Raytheon Co. ................ 395 19,009 Penney (J.C.) Co. ........... 387 18,866 Baxter International, Inc. ...................... 457 18,737 CPC International, Inc. ..... 241 18,678 Aluminum Co. of America...... 291 18,551 Sun Trust Banks, Inc. ....... 374 18,419 Norfolk & Southern Corp. .... 210 18,375 Enron Corp. ................. 426 18,371 Loews Corporation............ 193 18,190 +Boston Scientific Corp. .... 298 17,880 Dean Witter, Discover & Co. ....................... 269 17,821 Corning, Inc. ............... 385 17,806 Gannett Co., Inc. ........... 236 17,671 Deere & Co. ................. 433 17,591 PPG Industries, Inc. ........ 307 17,230 CIGNA Corp. ................. 126 17,215 Barrick Gold Corporation..... 598 17,193 Unocal Corp. ................ 420 17,062 National City Corporation.... 372 16,693 General Mills, Inc. ......... 263 16,668 +Seagate Technology, Inc. ... 420 16,590 Illinois Tool Works Inc. .... 207 16,534 Walgreen Co. ................ 412 16,480 Bank of Boston Corp. ........ 256 16,448 Boatmen's Bancshares, Inc. ...................... 250 16,094 +Dell Computer Corp. ........ 300 15,938 Weyerhaeuser Co. ............ 332 15,728 Chubb Corp. ................. 292 15,695 +CUC International, Inc. .... 659 15,651 Wachovia Corp. .............. 277 15,650 Duke Power Company........... 338 15,633 MBNA Corp. .................. 373 15,479 Mellon Bank Corp. ........... 217 15,407 +Sun Microsystems, Inc. ..... 600 15,375 First Bank Systems, Inc. .... 225 15,356 CSX Corp. ................... 363 15,337 Texas Utilities Company...... 376 15,322 Albertson's, Inc. ........... 422 15,034 Household International, Inc. ...................... 162 14,945 Morgan Stanley Group, Inc. ...................... 255 14,567 Pacific Gas and Electric Co. ....................... 691 14,511 Edison International......... 726 14,429 Gap, Inc. ................... 475 14,309 +TCI Communications, Inc. (Class A).................. 1,100 14,300 Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- Dayton Hudson Corporation (Class A).................. 363 14,248 American Brands, Inc. ....... 285 14,143 AMP, Inc. ................... 368 14,122 FPL Group, Inc. ............. 307 14,122 Honeywell, Inc. ............. 212 13,939 American General Corp. ...... 341 13,938 United Healthcare Corporation................ 308 13,860 Tyco International, Ltd. .... 262 13,853 +Toys 'R' Us, Inc. .......... 459 13,770 Pitney Bowes, Inc. .......... 249 13,570 Barnett Banks, Inc. ......... 327 13,448 +AMR Corp. .................. 152 13,395 Goodyear Tire & Rubber Co. ....................... 260 13,357 Conrail, Inc. ............... 134 13,350 ITT Hartford Group Inc. ..... 197 13,297 Textron Inc. ................ 139 13,101 Ralston Purina Co. .......... 177 12,987 Air Products and Chemicals, Inc. ...................... 187 12,926 +EMC Corporation............. 390 12,919 American Electric Power Company, Inc. ............. 314 12,913 +HFS Inc. ................... 216 12,906 +Tenneco, Inc. .............. 286 12,906 Occidental Petroleum Corp. ..................... 551 12,880 Alcan Aluminium, Ltd. ....... 379 12,744 Avon Products, Inc. ......... 223 12,739 Halliburton Co. ............. 210 12,653 Mattel, Inc. ................ 455 12,626 Fifth Third Bank............. 200 12,550 Marsh & McLennan Companies, Inc. ...................... 120 12,480 Union Pacific Resources Group...................... 418 12,226 Praxair, Inc. ............... 262 12,085 +Federated Department Stores, Inc. .............. 348 11,876 Marriott International, Inc. ...................... 214 11,823 Bankers Trust New York Corp. ..................... 137 11,816 Crown Company, Inc. ......... 215 11,691 Dominion Resources, Inc. .... 302 11,627 Consolidated Edison Company of New York................ 394 11,525 USX Marathon Group, Inc. .... 482 11,508 Panenergy Corporation........ 253 11,385 +Tellabs, Inc. .............. 300 11,287 Alco Standard Corp. ......... 218 11,254 Aon Corporation.............. 181 11,245 Hershey Foods Corporation.... 257 11,244 USBANCORP., Inc. ............ 250 11,219 Service Corporation.......... 395 11,060 International Georgia-Pacific Corp. ..................... 153 11,016 Wrigley (WM) Jr. Co. (Class B)......................... 195 10,969 Public Service Enterprise Group, Inc. ............... 399 10,873 Hilton Hotels Corporation.... 414 10,816 +Applied Materials, Inc. .... 300 10,763 Entergy Corp. ............... 387 10,739 TRW Inc. .................... 213 10,543
-67- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- Burlington Resources Inc. ... 209 10,528 +Computer Sciences Corporation................ 127 10,430 Thermo Electron Corporation................ 249 10,271 Lowe's Companies, Inc. ...... 289 10,259 Micron Technology, Inc. ..... 350 10,194 PacifiCorp................... 494 10,127 UST, Inc. ................... 312 10,101 ALLTEL Corp. ................ 318 9,977 American Stores Company...... 244 9,974 Williams Companies, Inc. .... 262 9,844 +Kroger Co. ................. 211 9,811 Unicom Corp. ................ 361 9,792 Sysco Corp. ................. 300 9,787 Comcast Corp.--Special (Class A)......................... 550 9,763 Morton International, Inc. ...................... 239 9,739 Masco Corporation............ 269 9,684 Freeport-McMoRan Copper & Gold Inc. (Class B)........ 324 9,680 Pioneer Hi-Bred International, Inc......... 138 9,660 Cognizant Corporation........ 287 9,471 Dover Corp. ................. 188 9,447 Comerica Inc. ............... 180 9,428 +Digital Equipment Corporation................ 259 9,421 Peco Energy Co. ............. 373 9,418 Browning Ferris Industries, Inc. ...................... 356 9,345 Carolina Power & Light Company.................... 254 9,271 Lincoln National Corp. ...... 175 9,187 Dresser Industries, Inc. .... 294 9,114 Becton, Dickinson and Company.................... 209 9,065 Central and South West Corp. ..................... 353 9,046 Amerada Hess Corporation..... 156 9,029 Eaton Corp. ................. 129 8,998 Genuine Parts Company........ 202 8,989 Inco Ltd. ................... 282 8,989 Houston Industries Inc. ..... 393 8,892 UNUM Corporation............. 123 8,887 Greentree Financial Corp. ... 230 8,884 Delta Air Lines, Inc. ....... 125 8,859 CINergy Corporation ......... 264 8,811 +Price/Costco, Inc. ......... 350 8,794 Consolidated Natural Gas Co. ................... 159 8,785 Fluor Corporation............ 140 8,785 Transamerica Corporation..... 111 8,769 Rohm & Haas Co. ............. 107 8,734 Placer Dome Inc. ............ 401 8,722 +Cabletron Systems, Inc. .... 262 8,712 Union Carbide Corp. ......... 213 8,706 Quaker Oats Company.......... 228 8,692 Clorox Company............... 86 8,632 Salomon Inc. ................ 183 8,624 Coastal Corp. ............... 176 8,602 +Federal Express Corp. ...... 191 8,500 +ITT Corp. .................. 195 8,458 +K Mart Corp. ............... 811 8,414 Newell Co. .................. 266 8,379 Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- Baker Hughes, Inc. .......... 242 8,349 Limited, Inc. (The).......... 454 8,342 International Flavors & Fragrances, Inc. .......... 185 8,325 Times Mirror Co. ............ 166 8,258 Rite Aid Corporation......... 205 8,149 St. Paul Companies, Inc. .... 139 8,149 Ingersoll-Rand Company....... 183 8,144 Tribune Co. ................. 103 8,124 Providian Corporation........ 157 8,066 Sherwin-Williams Company..... 144 8,064 Northrop Grumman Corp. ...... 97 8,027 Winn-Dixie Stores, Inc. ..... 253 8,001 +Tenet Healthcare Corp. ..... 364 7,962 Donnelley (R.R.) & Sons Co. ....................... 252 7,907 DTE Energy Holdings Company.................... 243 7,867 SAFECO Corporation........... 200 7,850 Grace (W.R.) & Co. .......... 149 7,711 McGraw-Hill, Inc. ........... 167 7,703 Cooper Industries, Inc. ..... 181 7,625 Republic New York Corporation................ 93 7,591 MGIC Investment Corp. ....... 99 7,524 Nucor Corporation............ 147 7,497 General Dynamics Corporation................ 106 7,473 Newmont Mining Corporation... 167 7,473 +Silicon Graphics, Inc. ..... 293 7,471 Sonat, Inc. ................. 145 7,467 Hercules Inc. ............... 171 7,396 Phelps Dodge Corporation..... 109 7,357 CVS Corporation.............. 177 7,323 MBIA, Inc. .................. 72 7,290 VF Corp. .................... 107 7,222 Eastman Chemical Co. ........ 130 7,183 Grainger (W.W.) Inc. ........ 89 7,142 Guidant Corp. ............... 124 7,068 Willamette Industries, Inc. ...................... 100 6,962 Champion International Corp. ..................... 160 6,920 +Autozone, Inc. ............. 250 6,875 General Public Utilities Corp.... 202 6,792 +Bay Networks Inc. .......... 325 6,784 Dun & Bradstreet Corp. ...... 285 6,769 Jefferson Pilot Corp. ....... 119 6,738 Allegheny Teledyne Inc. ..... 292 6,716 Case Corp. .................. 123 6,704 Great Western Financial Corp. ..................... 231 6,699 Baltimore Gas & Electric Company........... 247 6,607 Union Electric Company....... 171 6,583 Interpublic Group of Companies, Inc. ........... 136 6,460 +Western Atlas, Inc. ........ 90 6,379 PP&L Resources Inc. ......... 272 6,256 Frontier Corp. .............. 273 6,177 TJX Companies Inc. .......... 130 6,159 New York Times Co. .......... 162 6,156 Avery Dennison Corp. ........ 174 6,155 Golden West Financial Corporation................ 96 6,060 Laidlaw Inc. ................ 526 6,049
-68- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- Reynolds Metals Co. ......... 107 6,032 Raychem Corp. ............... 75 6,009 Knight-Ridder, Inc. ......... 157 6,005 Torchmark Corp. ............. 118 5,959 +Advanced Micro Devices, Inc. ... 229 5,897 Dillard Department Stores Inc. ............... 190 5,866 Columbia Gas System, Inc. ... 92 5,854 Kerr-McGee Corp. ............ 81 5,832 Whirlpool Corp. ............. 125 5,828 Ohio Edison Company.......... 256 5,824 +St. Jude Medical, Inc. ..... 136 5,797 +LSI Logic Corporation....... 216 5,778 Ahmanson (H.F) & Co. ........ 177 5,753 Johnson Controls, Inc. ...... 69 5,718 Rubbermaid Inc. ............. 251 5,710 Beneficial Corp. ............ 90 5,704 +National Semiconductor Corp. ..................... 232 5,655 Hasbro, Inc. ................ 144 5,598 Union Camp Corp. ............ 117 5,587 Dana Corp. .................. 171 5,579 Tupperware Corporation....... 104 5,577 Harcourt General Inc. ....... 119 5,489 Dow Jones & Co. , Inc. ...... 162 5,488 Mallinckrodt Group Inc. ..... 124 5,471 +Novell, Inc. ............... 575 5,427 Southwest Airlines Co. ...... 243 5,376 Northern States Power Co. ... 116 5,321 Brown-Forman Corp. (Class B)......................... 116 5,307 Nordstrom, Inc. ............. 150 5,306 +Andrew Corp. ............... 100 5,300 +Humana, Inc. ............... 272 5,202 Mead Corp. .................. 88 5,115 PACCAR Inc. ................. 75 5,081 Block (H & R), Inc. ......... 174 5,046 Temple-Inland Inc. .......... 93 5,034 Great Lakes Chemical Corporation................ 106 4,956 +General Instrument Corp. ... 229 4,952 Circuit City Stores, Inc. ... 164 4,941 Pall Corp. .................. 193 4,921 Westvaco Corp. .............. 171 4,916 +Woolworth Corp. ............ 224 4,900 +Fruit of the Loom, Inc. .... 129 4,886 ITT Industries Inc. ......... 198 4,851 Parker Hannifin Corp. ....... 125 4,844 Armstrong World Industries, Inc. .......... 69 4,796 James River Corp. of Virginia................... 144 4,770 Ashland Oil Inc. ............ 108 4,739 +Ceridian Corp. ............. 116 4,698 Sigma-Aldrich Corp. ......... 75 4,678 Liz Claiborne, Inc. ......... 120 4,635 Engelhard Corporation........ 241 4,609 Deluxe Corporation........... 138 4,520 Harris Corp. ................ 65 4,461 Wendy's International, Inc. ...................... 217 4,448 Black & Decker Corporation... 147 4,428 USX-US Steel Group, Inc...... 141 4,424 Pennzoil Co. ................ 78 4,407 Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- +Oryx Energy Co. ............ 176 4,356 +FMC Corporation............. 62 4,348 Pacific Enterprises.......... 142 4,313 Tandy Corp. ................. 98 4,312 Perkin-Elmer Corporation..... 72 4,239 +Apple Computer, Inc. ....... 200 4,150 United States Surgical Corp. ..................... 105 4,134 Nalco Chemical Company....... 113 4,082 Ecolab Inc. ................. 108 4,064 USF&G Corp. ................. 194 4,050 Stanley Works................ 149 4,023 Whitman Corp. ............... 174 3,980 Brunswick Corp. ............. 165 3,960 Thomas & Betts Corp. ........ 89 3,949 Harnischfeger Industries, Inc. ...................... 82 3,946 Allergan, Inc. .............. 110 3,919 Reebok International Ltd. ... 93 3,906 Ryder System, Inc. .......... 137 3,853 Louisiana-Pacific Corp. ..... 182 3,845 +ALZA Corp. ................. 142 3,674 Owens-Corning Fiberglass Corp. ..................... 86 3,666 Cyprus Amax Minerals Co. .... 156 3,647 Goodrich (B.F.) Co. ......... 90 3,645 Snap-On, Inc. ............... 102 3,634 General Signal Corporation... 84 3,591 +DSC Communications Corp. ... 200 3,575 American Greetings Corp. (Class A).................. 125 3,547 Noram Energy Corp. .......... 230 3,536 Homestake Mining Company..... 246 3,506 Giant Food, Inc. (Class A)... 100 3,450 +Harrah's Entertainment, Inc. ...................... 172 3,419 Moore Corp. Ltd. ............ 167 3,403 Santa Fe Pacific Gold Corp. ..................... 220 3,382 Maytag Corp. ................ 168 3,318 Polaroid Corp. .............. 76 3,306 Echlin Inc. ................. 104 3,289 Bausch & Lomb, Inc. ......... 93 3,255 Bemis Company, Inc. ......... 88 3,245 +Rowan Companies, Inc. ...... 143 3,235 Pep Boys--Manny, Moe & Jack....................... 105 3,229 Super Valu, Inc. ............ 113 3,206 Mercantile Stores Company, Inc. ............. 62 3,061 Louisiana Land & Exploration Co. ........... 57 3,057 Cummins Engine Company, Inc. ............. 66 3,036 Biomet, Inc. ................ 200 3,025 National Service Industries, Inc. .......... 80 2,990 Millipore Corp. ............. 72 2,979 Sun Company, Inc. ........... 122 2,974 NICOR Inc. .................. 83 2,967 Manor Care, Inc. ............ 105 2,835 Tektronix, Inc. ............. 55 2,819 Cooper Tire & Rubber Co. .... 138 2,726 +Tandem Computers, Inc. ..... 198 2,722 Worthington Industries, Inc. ...................... 150 2,719 ENSERCH Corporation.......... 117 2,691
-69- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- Bard (C.R.), Inc. ........... 96 2,688 Battle Mountain Gold Company.................... 376 2,585 Boise Cascade Corp. ......... 81 2,572 Foster Wheeler Corp. ........ 68 2,525 +USAir Group, Inc. .......... 108 2,524 Stone Container Corp. ....... 166 2,469 +Amdahl Corp. ............... 203 2,461 Shared Medical Systems Corp. ..................... 50 2,456 +Niagara Mohawk Power Corp. ..................... 242 2,390 Timken Co. .................. 52 2,385 Meredith Corp. .............. 45 2,374 +King World Productions, Inc. ...................... 63 2,323 Darden Restaurants, Inc. .... 264 2,310 Alberto-Culver Company (Class B)......................... 47 2,256 Crane Co. ................... 77 2,233 Helmerich & Payne, Inc. ..... 42 2,189 +Beverly Enterprises, Inc. ...................... 166 2,117 Briggs & Stratton Corp. ..... 48 2,112 +Santa Fe Energy Resources, Inc. ........... 152 2,109 Autodesk, Inc. .............. 75 2,100 Potlatch Corp. .............. 48 2,064 Great Atlantic & Pacific Tea Co., Inc. ................. 64 2,040 Peoples Energy Corp. ........ 59 1,999 +Unisys Corp. ............... 293 1,978 Scientific-Atlanta, Inc. .... 130 1,950 USLIFE Corp. ................ 58 1,928 Russell Corp. ............... 64 1,904 Centex Acceptance Corp. ..... 48 1,806 ASARCO, Inc. ................ 72 1,791 Harland John H. Company...... 52 1,716 Trinova Corp. ............... 47 1,710 +Bethlehem Steel Corp. ...... 187 1,683 Fleetwood Enterprises, Inc. ...................... 60 1,650 Inland Steel Co. ............ 82 1,640 Longs Drug Stores Corp. ..... 33 1,621 Safety-Kleen Corp. .......... 98 1,605 EG&G, Inc. .................. 79 1,590 Echo Bay Mines Ltd. ......... 233 1,544 Shares Value Common Stocks Held (Note 1a) ------------------------------------------------------- McDermott International, Inc. ...................... 92 1,529 Cincinnati Milacron, Inc. ... 67 1,466 Springs Industries, Inc. .... 34 1,462 ONEOK, Inc. ................. 46 1,380 Jostens, Inc. ............... 65 1,373 Ball Corp. .................. 51 1,326 Alexander & Alexander Services, Inc. ............ 76 1,321 Caliber Systems, Inc. ....... 66 1,271 Eastern Enterprises.......... 34 1,203 Pulte Corp. ................. 39 1,199 +Navistar International Corp. ..................... 123 1,122 Fleming Companies, Inc. ..... 63 1,087 +Data General Corp. ......... 66 957 Coors (Adolph) Co. (Class B)......................... 50 950 +Charming Shoppes, Inc. ..... 175 875 Kaufman and Broad Home Corp. ..................... 65 837 Stride Rite Corp. ........... 83 830 Nacco Industries, Inc. (Class A)......................... 15 802 +Intergraph Corp. ........... 75 769 +Armco, Inc. ................ 179 738 Giddings & Lewis, Inc. ...... 50 644 - ------------------------------------------------------- Total Common Stocks (Cost--$9,340,272)--88.3%.... 9,488,361 - ------------------------------------------------------- Short-Term Obligations-- US Government Agency Face Obligations* Amount - ------------------------------------------------------- Federal Home Loan Mortgage Corp., 6.50% due 1/02/1997.................. $1,356,000 1,355,755 - ------------------------------------------------------- Total Short-Term Obligations (Cost--$1,355,755)--12.6%.... 1,355,755 - ------------------------------------------------------- Total Investments (Cost--$10,696,027)--100.9%.. 10,844,116 Variation Margin on Stock Index Futures Contracts**--(0.3%)........ (29,200) Liabilities in Excess of Other Assets--(0.6%)....... (63,076) ----------- Net Assets--100.0%........... $10,751,840 =========== - ------------------------------------------------------------------------------
+ Non-income producing security. ++ Portion of holdings pledged as collateral for stock index futures contracts. * Certain US Government Agency Obligations are traded on a discount basis; the interest rate shown is the discount rate paid at the time of purchase by the Fund. ** Stock index futures contracts purchased as of December 31, 1996 were as follows: - ---------------------------------------------------------------- Number of Expiration Value Contracts Issue Date (Note 1b) - ---------------------------------------------------------------- 4 S&P 500 Stock Index March 1997 $ 1,489,000 - ---------------------------------------------------------------- Total Stock Index Futures Contracts Purchased (Contract Price--$1,483,955).................... $ 1,489,000 =========== - ------------------------------------------------------------ See Notes to Financial Statements. -70- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of AFRICA Industry Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- South Africa Banking 14,500 Nedcor Ltd. (ADR)(a)(d).. $ 210,250 $ 194,010 0.1% 102,858 Nedcor Ltd. (GDR)(b)(e).. 1,097,188 1,376,240 0.4 10,072 Nedcor Ltd. (Ordinary)... 148,818 137,855 0.0 ----------- ------ 1,456,256 1,708,105 0.5 ----------------------------------------------------------------------------------------------------- Beverages 138,736 South African Breweries, Ltd.................... 3,702,680 3,515,872 1.0 ----------------------------------------------------------------------------------------------------- Entertainment 496,000 Sun International (South Africa), Ltd........... 613,843 397,776 0.1 ----------------------------------------------------------------------------------------------------- Mining 5,150 Anglo American Corp. of South Africa, Ltd...... 347,236 283,602 0.1 23,800 Anglo American Corp. of South Africa, Ltd. (ADR)(a)............... 1,522,851 1,291,150 0.4 47,300 Evander Gold Mines Ltd... 511,564 404,619 0.1 ----------- ------ 2,381,651 1,979,371 0.6 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Africa 8,154,430 7,601,124 2.2 - --------------------------------------------------------------------------------------------------------------------- LATIN AMERICA --------------------------------------------------------------------------------------------------------------------- Argentina Banking 60,853 Banco Frances del Rio de la Plata S.A. (ADR)(a)............... 1,345,168 1,673,458 0.5 ----------------------------------------------------------------------------------------------------- Oil & Related 246,594 Companhia Naviera Perez Companc S.A.C.F.I.M.F.A. (Class B)..................... 1,604,857 1,733,903 0.5 ----------------------------------------------------------------------------------------------------- Telecommunications 14,300 Telefonica de Argentina S.A. (Class B) (ADR)(a)............... 351,750 370,013 0.1 ----------------------------------------------------------------------------------------------------- Total Investments in Argentina 3,301,775 3,777,374 1.1 - --------------------------------------------------------------------------------------------------------------------- Brazil Banking 139,240,000 Banco Bradesco S.A. PN (Preferred)............ 1,075,689 1,009,219 0.3 ----------------------------------------------------------------------------------------------------- Beverages 3,270,000 Companhia Cervejaria Brahma S.A. PN (Preferred)............ 1,637,606 1,787,814 0.5 ----------------------------------------------------------------------------------------------------- Telecommunications 75,755 Telecomunicacoes Brasileiras S.A.- Telebras (ADR)(a)...... 3,897,541 5,795,258 1.7 ----------------------------------------------------------------------------------------------------- Utilities 41,000 Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR)(a)....... 1,253,624 1,383,750 0.4 ----------------------------------------------------------------------------------------------------- Total Investments in Brazil 7,864,460 9,976,041 2.9 - --------------------------------------------------------------------------------------------------------------------- Chile Telecommunications 18,100 Compania de Telecomunicaciones de Chile S.A. (ADR)(a).... 1,410,403 1,830,363 0.5 ----------------------------------------------------------------------------------------------------- Utilities 20,480 Enersis S.A. (ADR)(a).... 530,086 568,320 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Chile 1,940,489 2,398,683 0.7 - --------------------------------------------------------------------------------------------------------------------- Mexico Beverages 35,970 Panamerican Beverages, Inc. (Class A)......... 1,640,662 1,686,094 0.5 ----------------------------------------------------------------------------------------------------- Broadcast--Media 19,000 Grupo Televisa, S.A. de C.V. (GDR)(b)(d)....... 530,765 486,875 0.1 ----------------------------------------------------------------------------------------------------- Building & 264,950 Apasco, S.A. de C.V. Construction 'A'.................... 1,593,376 1,817,723 0.5 ----------------------------------------------------------------------------------------------------- Health & Personal 65,885 Kimberly-Clark de Mexico, S.A. de C.V. (ADR)(a).. 2,460,495 2,520,101 0.7 -----------------------------------------------------------------------------------------------------
-71- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
LATIN AMERICA Shares Value Percent of (concluded) Industry Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Mexico Multi-Industry 269,200 Grupo Carso, S.A. de C.V. (concluded) 'A1'................... 2,259,825 1,419,362 0.4 ----------------------------------------------------------------------------------------------------- Telecommunications 269,200 Carso Global Telecom, S.A. de C.V. 'A1' (d).................... 709,354 625,887 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Mexico 9,194,477 8,556,042 2.4 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Latin America 22,301,201 24,708,140 7.1 - --------------------------------------------------------------------------------------------------------------------- PACIFIC BASIN --------------------------------------------------------------------------------------------------------------------- Australia Food & Beverage 192,019 Coca-Cola Amatil, Ltd. (Ordinary)............. 1,289,134 2,051,145 0.6 ----------------------------------------------------------------------------------------------------- Media 89,939 The News Corp., Ltd. (Ordinary)............. 431,743 474,292 0.1 52,364 The News Corp., Ltd. (Preferred)............ 222,611 232,890 0.1 ----------- ------ 654,354 707,182 0.2 ----------------------------------------------------------------------------------------------------- Merchandising 18,700 Amway Asia Pacific Ltd.(ADR)(a)........... 725,368 792,413 0.2 ----------------------------------------------------------------------------------------------------- Natural Gas 37,943 Broken Hill Proprietary Pipelines Co. ................... 452,087 540,007 0.1 ----------------------------------------------------------------------------------------------------- Property 371,927 Lend Lease Corp. ........ 4,978,452 7,207,380 2.1 ----------------------------------------------------------------------------------------------------- Total Investments in Australia 8,099,395 11,298,127 3.2 - --------------------------------------------------------------------------------------------------------------------- Hong Kong Banking 354,242 HSBC Holdings PLC........ 4,447,990 7,580,431 2.2 34,000 J.C.G. Holdings Ltd...... 32,167 33,191 0.0 ----------- ------ 4,480,157 7,613,622 2.2 ----------------------------------------------------------------------------------------------------- Diversified 854,140 Hutchison Whampoa Ltd. .. 4,945,751 6,709,207 1.9 ----------------------------------------------------------------------------------------------------- Foods 3,166,000 C.P. Pokphand Co., Ltd. .................. 1,084,557 1,238,318 0.4 4,224,000 Tingyi (Cayman Islands) Holdings Co. (d)....... 1,113,725 1,105,974 0.3 ----------- ------ 2,198,282 2,344,292 0.7 ----------------------------------------------------------------------------------------------------- Insurance 176,000 National Mutual Asia Ltd. .................. 184,973 167,261 0.0 ----------------------------------------------------------------------------------------------------- Multi-Industry 399,000 Swire Pacific Ltd. (Class A)..................... 2,742,209 3,804,791 1.1 ----------------------------------------------------------------------------------------------------- Property 527,000 Cheung Kong (Holdings) Ltd. .................. 3,684,755 4,684,672 1.4 4,192,000 China Overseas Land & Investment............. 1,182,026 2,127,437 0.6 ----------- ------ 4,866,781 6,812,109 2.0 ----------------------------------------------------------------------------------------------------- Total Investments in Hong Kong 19,418,153 27,451,282 7.9 - --------------------------------------------------------------------------------------------------------------------- Japan Automobiles 440,000 Suzuki Motor Corp. (Ordinary)............. 4,988,943 4,027,634 1.2 ----------------------------------------------------------------------------------------------------- Capital Goods 911,000 Mitsubishi Heavy Industries, Ltd........ 7,221,146 7,237,651 2.1 ----------------------------------------------------------------------------------------------------- Chemicals 347,000 Shin-Etsu Chemical Co., Ltd. (Ordinary)........ 6,674,107 6,322,712 1.8 ----------------------------------------------------------------------------------------------------- Electrical 84,000 Chudenko Corp. Construction (Ordinary)............. 2,961,934 2,422,798 0.7 61,000 Taihei Dengyo Kaisha, Ltd. .................. 1,103,158 605,786 0.2 ----------- ------ 4,065,092 3,028,584 0.9 ----------------------------------------------------------------------------------------------------- Electrical 219,000 Murata Manufacturing Co., Equipment Ltd. .................. 8,117,559 7,281,088 2.1 515,000 NEC Corp. ............... 6,701,653 6,226,252 1.8 118,000 Rohm Co., Ltd. .......... 4,979,943 7,744,387 2.2 261,000 Sharp Corporation........ 4,076,502 3,718,912 1.0 ----------- ------ 23,875,657 24,970,639 7.1 -----------------------------------------------------------------------------------------------------
-72- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
PACIFIC BASIN Shares Value Percent of (continued) Industry Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Japan Insurance 365,000 Dai-Tokyo Fire & Marine (concluded) Insurance Co., Ltd. ... 2,575,006 1,938,472 0.5 187,000 Koa Fire & Marine Insurance Co., Ltd. ... 1,281,743 907,548 0.3 166,000 Mitsui Fire & Marine Insurance Co., Ltd. ... 1,353,118 893,074 0.2 118,000 Nichido Fire & Marine Insurance Co., Ltd. ... 917,801 672,539 0.2 152,000 Nippon Fire & Marine Insurance Co., Ltd. ... 1,069,498 689,119 0.2 498,000 Sumitomo Marine & Fire Insurance Co., Ltd. ... 4,176,958 3,096,373 0.9 330,000 Tokio Marine & Fire Insurance Co., Ltd. (Ordinary)............. 3,890,208 3,106,218 0.9 268,000 Yasuda Marine & Fire Insurance Co., Ltd. ... 2,004,769 1,393,230 0.4 ------------ ------------ ---------- 17,269,101 12,696,573 3.6 ----------------------------------------------------------------------------------------------------- Office Equipment 408,000 Canon, Inc. (Ordinary)... 7,392,805 9,019,689 2.6 ----------------------------------------------------------------------------------------------------- Packaging 194,000 Toyo Seikan Kaisha, Ltd. (Ordinary)............. 6,036,561 4,674,093 1.3 ----------------------------------------------------------------------------------------------------- Pharmaceuticals 197,000 Sankyo Co., Ltd. (Ordinary)............. 4,452,652 5,579,965 1.6 140,000 Taisho Pharmaceutical Co., Ltd. (Ordinary)... 2,828,042 3,300,518 0.9 ------------ ------------ ---------- 7,280,694 8,880,483 2.5 ----------------------------------------------------------------------------------------------------- Retailing 127,000 Ito Yokado Co., Ltd. (Ordinary)............. 7,163,905 5,527,461 1.6 ----------------------------------------------------------------------------------------------------- Tire & Rubber 197,000 Bridgestone Corp......... 3,447,899 3,742,660 1.1 ----------------------------------------------------------------------------------------------------- Total Investments in Japan 95,415,910 90,128,179 25.8 - --------------------------------------------------------------------------------------------------------------------- Malaysia Airlines 351,000 Malaysian Airline System BHD.................... 895,065 910,515 0.3 ----------------------------------------------------------------------------------------------------- Banking 247,000 Arab-Malaysian Merchant Bank Holding BHD....... 1,760,803 2,073,822 0.6 257,000 Malayan Banking BHD...... 2,320,535 2,849,901 0.8 598,666 Public Bank (Malaysia) BHD 'Foreign'.......... 1,055,118 1,268,461 0.4 ------------ ------------ ---------- 5,136,456 6,192,184 1.8 ----------------------------------------------------------------------------------------------------- Building Products 300,500 Hume Industries (Malaysia) BHD......... 1,773,006 1,892,257 0.5 ----------------------------------------------------------------------------------------------------- Diversified 690,000 Renong Berhad............ 1,129,538 1,224,238 0.3 Holdings ----------------------------------------------------------------------------------------------------- Printing/Publishing 232,000 The New Straits Times Press BHD (Malaysia)... 1,308,148 1,341,465 0.4 ----------------------------------------------------------------------------------------------------- Telecommunications 568,000 Technology Resources Industries BHD (d)..... 1,803,275 1,120,253 0.3 8,000 Telekom Malaysia BHD (d).................... 69,490 71,287 0.0 ------------ ------------ ---------- 1,872,765 1,191,540 0.3 ----------------------------------------------------------------------------------------------------- Utilities--Electric 114,000 Tenaga Nasional BHD...... 523,137 546,297 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Malaysia 12,638,115 13,298,496 3.8 - ---------------------------------------------------------------------------------------------------------------------
-73- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
PACIFIC BASIN Shares Value Percent of (concluded) Industry Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- New Zealand Chemicals 10,000 Fernz Corporation Ltd. .................. 27,213 34,319 0.0 ----------------------------------------------------------------------------------------------------- Electronics 17,000 PDL Holdings Ltd. ....... 82,587 92,023 0.0 ----------------------------------------------------------------------------------------------------- Foods 548,600 Wrightson Ltd. .......... 418,731 477,473 0.2 ----------------------------------------------------------------------------------------------------- Telecommunications 60,000 Telecom Corporation of New Zealand............ 256,371 306,532 0.1 ----------------------------------------------------------------------------------------------------- Textiles 93,450 Lane Walker Rudkin Industries, Ltd. ...... 109,531 112,413 0.0 ----------------------------------------------------------------------------------------------------- Total Investments in New Zealand 894,433 1,022,760 0.3 - --------------------------------------------------------------------------------------------------------------------- South Korea Telecommunications 79,207 Korea Mobile Telecommunications Corp. (ADR)(a)......... 986,349 1,019,790 0.3 ----------------------------------------------------------------------------------------------------- Utilities 17,580 Korea Electric Power Corp. ................. 752,967 513,315 0.1 ----------------------------------------------------------------------------------------------------- Total Investments in South Korea 1,739,316 1,533,105 0.4 - --------------------------------------------------------------------------------------------------------------------- Thailand Banking 108,500 Finance One Public Co., Ltd 'Foreign'.......... 856,748 219,987 0.1 430,500 Krung Thai Bank Public Co., Ltd. ............. 2,013,799 830,887 0.3 410,800 Phatra Thanakit Public Co., Ltd. 'Foreign'.... 2,925,216 1,169,275 0.3 ------------ ------------ ---------- 5,795,763 2,220,149 0.7 ----------------------------------------------------------------------------------------------------- Utilities-- 518,000 TelecomAsia Corporation Communications Public Company Ltd. 'Foreign' (d).......... 990,931 1,080,555 0.3 ----------------------------------------------------------------------------------------------------- Total Investments in Thailand 6,786,694 3,300,704 1.0 - --------------------------------------------------------------------------------------------------------------------- Total Investments in the Pacific Basin 144,992,016 148,032,653 42.4 - --------------------------------------------------------------------------------------------------------------------- SOUTHEAST ASIA --------------------------------------------------------------------------------------------------------------------- India Automobiles 26,300 Ashok Leyland Ltd. (GDR)(b)............... 302,506 243,933 0.1 20,000 Ashok Leyland Ltd. (GDR)(b)(e)............ 255,800 185,500 0.0 ------------ ------------ ---------- 558,306 429,433 0.1 ----------------------------------------------------------------------------------------------------- Hotels 14,700 East India Hotels Ltd. (GDR)(b)(d)(e)......... 404,100 345,450 0.1 13,300 Indian Hotels Co., Ltd. (GDR)(b)(e)............ 299,250 339,150 0.1 ------------ ------------ ---------- 703,350 684,600 0.2 ----------------------------------------------------------------------------------------------------- Machinery & 49,500 Larsen & Toubro Ltd. Engineering (GDR)(b)(e)............ 888,875 712,800 0.2 ----------------------------------------------------------------------------------------------------- Utilities 103,750 BSES Ltd.(GDR)(b)........ 2,025,897 2,126,875 0.6 ----------------------------------------------------------------------------------------------------- Total Investments in India 4,176,428 3,953,708 1.1 - --------------------------------------------------------------------------------------------------------------------- Indonesia Building Materials 305,000 PT Semen Gresik.......... 992,608 981,787 0.3 ----------------------------------------------------------------------------------------------------- Food & Household 614,000 PT Wicaksana Overseas Products International.......... 574,396 702,160 0.2 ----------------------------------------------------------------------------------------------------- Telecommunications 50,000 P.T. Kabelmetal Indonesia (Rights)++............. 0 0 0.0 24,100 P.T. Telekomunikasi Indonesia (ADR)(a)..... 786,702 831,450 0.2 ------------ ------------ ---------- 786,702 831,450 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Indonesia 2,353,706 2,515,397 0.7 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Southeast Asia 6,530,134 6,469,105 1.8 - ---------------------------------------------------------------------------------------------------------------------
-74- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
Shares Value Percent of WESTERN EUROPE Industry Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Czech Republic Broadcast--Media 10,000 Central European Media Enterprises Ltd. (Class A) (d)................. 275,000 312,500 0.1 ----------------------------------------------------------------------------------------------------- Total Investments in the Czech Republic 275,000 312,500 0.1 - --------------------------------------------------------------------------------------------------------------------- Finland Diversified 24,500 Outokumpu OY............. 412,272 417,907 0.1 ----------------------------------------------------------------------------------------------------- Paper & Forest 154,100 Enso-Gutzeit OY (Class A) Products (d).................... 1,154,546 1,248,980 0.4 149,200 Metsa Serla OY (Class B)..................... 1,124,023 1,118,489 0.3 73,900 UPM-Kymmene OY (d)....... 1,409,376 1,525,499 0.4 ------------ ------------ ---------- 3,687,945 3,892,968 1.1 ----------------------------------------------------------------------------------------------------- Total Investments in Finland 4,100,217 4,310,875 1.2 - --------------------------------------------------------------------------------------------------------------------- France Automobiles 6,027 Peugeot S.A.............. 792,975 678,444 0.2 ----------------------------------------------------------------------------------------------------- Banking 15,900 Compagnie Financiere de Paribas (Ordinary)..... 867,231 1,075,426 0.3 18,900 Compangie Financiere de Suez (Ordinary)........ 743,625 803,651 0.2 6,050 Societe Generale de Surveillance S.A. (Class A) (Ordinary)... 634,340 654,212 0.2 ------------ ------------ ---------- 2,245,196 2,533,289 0.7 ----------------------------------------------------------------------------------------------------- Building & 8,777 Bouygues S.A............. 908,125 910,182 0.3 Construction ----------------------------------------------------------------------------------------------------- Communication 10,027 Alcatel Alsthom Cie Equipment Generale d'Electricite S.A.................... 932,571 805,562 0.2 ----------------------------------------------------------------------------------------------------- Foods 4,300 Groupe Danone S.A........ 683,124 599,248 0.2 ----------------------------------------------------------------------------------------------------- Insurance 16,340 Assurances Generales de France S.A. (AGF)...... 416,753 527,554 0.2 ----------------------------------------------------------------------------------------------------- Multi-Industry 2,969 EuraFrance S.A........... 918,349 1,283,057 0.4 ----------------------------------------------------------------------------------------------------- Oil & Related 13,220 Societe Nationale Elf Aquitaine.............. 967,228 1,203,509 0.3 ----------------------------------------------------------------------------------------------------- Semiconductor 5,650 SGS-Thomson Microelectronics N.V. (d).................... 259,759 399,682 0.1 ----------------------------------------------------------------------------------------------------- Steel 75,498 Usinor-Sacilor S.A....... 1,116,040 1,098,708 0.3 ----------------------------------------------------------------------------------------------------- Total Investments in France 9,240,120 10,039,235 2.9 - --------------------------------------------------------------------------------------------------------------------- Germany Automobiles 3,418 Volkswagen AG............ 1,285,442 1,421,852 0.4 ----------------------------------------------------------------------------------------------------- Banking 29,610 Commerzbank AG........... 700,836 752,519 0.2 3,100 Deutsche Bank AG (Ordinary)............. 151,032 144,875 0.0 19,800 Deutsche Bank AG (Warrants)(c).......... 169,779 111,966 0.0 ------------ ------------ ---------- 1,021,647 1,009,360 0.2 ----------------------------------------------------------------------------------------------------- Chemicals 4,199 Henkel KGaA (d).......... 180,333 201,421 0.1 42,527 Henkel KGaA (Preferred).. 1,764,347 2,136,716 0.6 ------------ ------------ ---------- 1,944,680 2,338,137 0.7 ----------------------------------------------------------------------------------------------------- Engineering & 1,800 Philipp Holzmann AG (d).. 688,665 421,190 0.1 Construction ----------------------------------------------------------------------------------------------------- Machinery 17,250 Kloeckner Werke AG (d)... 1,232,262 801,674 0.2 ----------------------------------------------------------------------------------------------------- Machinery & 3,511 Thyssen AG (Ordinary).... 652,027 623,011 0.2 Equipment ----------------------------------------------------------------------------------------------------- Metals 1,290 Degussa AG............... 462,391 584,001 0.2 -----------------------------------------------------------------------------------------------------
-75- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
WESTERN Shares EUROPE Held/ Value Percent of (continued) Industry Face Amount Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Germany Retail 1,940 Karstadt AG.............. 757,073 655,704 0.2 (concluded) ----------------------------------------------------------------------------------------------------- Retail Specialty 5,500 Moebel Walther........... 306,369 296,718 0.1 ----------------------------------------------------------------------------------------------------- Total Investments in Germany 8,350,556 8,151,647 2.3 - --------------------------------------------------------------------------------------------------------------------- Greece Banking 10,850 Ergo Bank S.A. (Registered)........... 471,469 550,512 0.2 ----------------------------------------------------------------------------------------------------- Beverages 44,109 Hellenic Bottling Co. S.A.................... 1,176,157 1,414,760 0.4 ----------------------------------------------------------------------------------------------------- Total Investments in Greece 1,647,626 1,965,272 0.6 - --------------------------------------------------------------------------------------------------------------------- Hungary Telecommunications 5,500 Magyar TarKozlesi Reszvenytarsasag (Ordinary) (d)(e)...... 910,789 1,191,213 0.4 ----------------------------------------------------------------------------------------------------- Total Investments in Hungary 910,789 1,191,213 0.4 - --------------------------------------------------------------------------------------------------------------------- Ireland Insurance 157,000 Irish Life PLC........... 526,948 727,894 0.2 ----------------------------------------------------------------------------------------------------- Packaging & 297,800 Jefferson Smurfit Group Containers PLC (Ordinary)......... 888,436 858,467 0.3 ----------------------------------------------------------------------------------------------------- Total Investments in Ireland 1,415,384 1,586,361 0.5 - --------------------------------------------------------------------------------------------------------------------- Italy Building Materials 109,418 Italcementi S.p.A........ 607,540 612,582 0.2 ----------------------------------------------------------------------------------------------------- Chemicals 2,243,560 Montedison S.p.A. (d).... 1,966,796 1,527,970 0.4 ----------------------------------------------------------------------------------------------------- Diversified 1,411,500 Compagnie Industrial Riunite S.p.A. (CIR) (d).................... 1,306,203 869,259 0.3 335,500 Compagnie Industrial Riunite S.p.A. (CIR) (NC Savings) (d)....... 157,313 109,163 0.0 ------------ ------------ ---------- 1,463,516 978,422 0.3 ----------------------------------------------------------------------------------------------------- Insurance 60,500 Assicurazioni Generali S.p.A.................. 1,392,767 1,145,645 0.3 713,560 Istituto Nazionale della Assicurazioni (INA) S.p.A.................. 1,027,949 928,697 0.3 ------------ ------------ ---------- 2,420,716 2,074,342 0.6 ----------------------------------------------------------------------------------------------------- Oil & Related 264,000 Ente Nazionale Idrocarburi S.p.A. (ENI).................. 1,102,238 1,353,690 0.4 ----------------------------------------------------------------------------------------------------- Telecommunications 643,016 Stet Societa Finanziaria Telefonica S.p.A....... 1,452,678 2,170,563 0.6 ----------------------------------------------------------------------------------------------------- Tire & Rubber Lit 967,974,800 Pirelli S.p.A. 5% due 12/31/1998............. 681,998 706,097 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Italy 9,695,482 9,423,666 2.7 - --------------------------------------------------------------------------------------------------------------------- Netherlands Chemicals 6,660 Akzo Nobel N.V........... 823,170 910,637 0.3 24,770 European Vinyls Corporation International N.V...... 1,064,893 786,440 0.2 ------------ ------------ ---------- 1,888,063 1,697,077 0.5 ----------------------------------------------------------------------------------------------------- Electrical 29,250 Philips Electronics Equipment N.V.................... 1,055,864 1,186,269 0.3 ----------------------------------------------------------------------------------------------------- Engineering & 8,550 Kondor Wessels Groep NV.. 301,062 346,260 0.1 Construction ----------------------------------------------------------------------------------------------------- Holding Company 13,600 Internatio-Muller NV..... 300,713 341,970 0.1 ----------------------------------------------------------------------------------------------------- Insurance 56,055 Internationale Nederlanden Groep N.V.............. 1,629,332 2,020,059 0.6 -----------------------------------------------------------------------------------------------------
-76- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
WESTERN EUROPE Shares Value Percent of (continued) Industry Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Netherlands Telecommunications 25,700 Koninklijke PTT Nederland (concluded) N.V.................... 600,608 561,350 0.1 ----------------------------------------------------------------------------------------------------- Transportation 22,350 KLM Royal Dutch Airlines N.V.................... 655,652 629,322 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in the Netherlands 6,431,294 6,782,307 1.9 - --------------------------------------------------------------------------------------------------------------------- Norway Consumer Goods 17,618 Orkla A.S. (Class A)..... 918,190 1,216,618 0.3 ----------------------------------------------------------------------------------------------------- Oil & Gas Producers 36,005 Saga Petroleum A.S. (Class B).............. 396,180 558,728 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Norway 1,314,370 1,775,346 0.5 - --------------------------------------------------------------------------------------------------------------------- Poland Automotive & 19,000 T.C. Debica S.A. (d)..... 299,311 424,344 0.1 Equipment ----------------------------------------------------------------------------------------------------- Banking 17,078 Wielkopolsky Bank Kredytowy S.A.......... 108,118 115,617 0.1 ----------------------------------------------------------------------------------------------------- Engineering & 188,300 Mostostal-Export S.A..... 512,705 446,831 0.1 Construction ----------------------------------------------------------------------------------------------------- Total Investments in Poland 920,134 986,792 0.3 - --------------------------------------------------------------------------------------------------------------------- Portugal Forest Products 38,273 Sonae Investimentos -- SGPS S.A............... 880,494 1,212,390 0.3 ----------------------------------------------------------------------------------------------------- Total Investments in Portugal 880,494 1,212,390 0.3 - --------------------------------------------------------------------------------------------------------------------- Russia Natural Gas 36,194 RAO Gazprom (ADR)(a)(d)(e)......... 622,839 642,444 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Russia 622,839 642,444 0.2 - --------------------------------------------------------------------------------------------------------------------- Spain Engineering & 3,500 Fomento de Construciones Y Construction Contratas S.A.......... 289,804 326,095 0.1 ----------------------------------------------------------------------------------------------------- Financial Services 16,500 Argentaria Corp. Bancaria de Espana.............. 704,967 738,161 0.2 ----------------------------------------------------------------------------------------------------- Total Investments in Spain 994,771 1,064,256 0.3 - --------------------------------------------------------------------------------------------------------------------- Sweden Appliances 20,481 Electrolux AB............ 1,002,283 1,190,092 0.3 ----------------------------------------------------------------------------------------------------- Banking 7,549 Sparbanken Sverige AB (Class A).............. 93,787 129,601 0.0 ----------------------------------------------------------------------------------------------------- Building Related 47,531 Svedala Industry AB...... 690,761 805,551 0.2 ----------------------------------------------------------------------------------------------------- Engineering 27,400 SKF AB 'A'............... 496,206 629,215 0.2 ----------------------------------------------------------------------------------------------------- Forest Products 37,800 Mo Och Domsjo AB-'B' Free................... 962,403 1,064,945 0.3 432,300 Rottneros Bruks AB....... 666,730 548,701 0.2 91,500 Stora Kopparbergs Bergslags AB........... 1,152,700 1,262,069 0.4 ------------ ------------ ---------- 2,781,833 2,875,715 0.9 ----------------------------------------------------------------------------------------------------- Insurance 50,335 Forsakrings AB Skandia... 1,198,333 1,425,481 0.4 ----------------------------------------------------------------------------------------------------- Metals & Mining 46,553 Avesta Sheffield AB...... 411,954 502,076 0.1 ----------------------------------------------------------------------------------------------------- Pharmaceutical-- 19,005 Astra 'A' Fria........... 833,308 939,792 0.3 Prescription ----------------------------------------------------------------------------------------------------- Total Investments in Sweden 7,508,465 8,497,523 2.4 - --------------------------------------------------------------------------------------------------------------------- Switzerland Banking 10,360 CS Holding AG (Registered)........... 1,060,531 1,064,013 0.3 ----------------------------------------------------------------------------------------------------- Chemicals 1,375 Clariant AG (Registered)........... 449,723 588,493 0.2 -----------------------------------------------------------------------------------------------------
-77- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
WESTERN EUROPE Shares Value Percent of (concluded) Industry Held Investments Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Switzerland Diversified 13,805 Oerlikon-Buehrle Holdings (concluded) AG (d)................. 1,459,291 1,361,114 0.4 ----------------------------------------------------------------------------------------------------- Jewelry 4,738 SMH AG (Societe Suisse pour la Microelectronique et l'Horlogerie).......... 673,901 675,947 0.2 ----------------------------------------------------------------------------------------------------- Leisure 798 Fotolabo S.A............. 331,433 309,949 0.1 ----------------------------------------------------------------------------------------------------- Machinery 417 Saurer AG (d)............ 181,527 180,654 0.0 ----------------------------------------------------------------------------------------------------- Total Investments in Switzerland 4,156,406 4,180,170 1.2 - --------------------------------------------------------------------------------------------------------------------- Turkey Beverages 7,915,658 Erciyas Biracilik Ve Malt Sanayii A.S............ 1,131,316 858,809 0.2 ----------------------------------------------------------------------------------------------------- Metal Fabricating 7,949,486 Eregli Demir Ve Celik Fabrikalari T.A.S...... 941,635 954,232 0.3 ----------------------------------------------------------------------------------------------------- Retail Stores 1,398,387 Migros Turk A.S.......... 997,813 1,710,861 0.5 ----------------------------------------------------------------------------------------------------- Total Investments in Turkey 3,070,764 3,523,902 1.0 - --------------------------------------------------------------------------------------------------------------------- United Kingdom Beverages 151,140 Grand Metropolitan PLC (Ordinary) (d)......... 958,951 1,189,423 0.3 42,433 Matthew Clark PLC........ 411,176 188,745 0.1 ------------ ------------ ---------- 1,370,127 1,378,168 0.4 ----------------------------------------------------------------------------------------------------- Chemicals 94,500 Inspec Group PLC......... 285,567 342,742 0.1 6,183 Millennium Chemicals Inc. (d).................... 177,414 109,748 0.0 ------------ ------------ ---------- 462,981 452,490 0.1 ----------------------------------------------------------------------------------------------------- Computer Services 26,190 Misys PLC................ 323,536 497,793 0.1 ----------------------------------------------------------------------------------------------------- Congolomerates 432,825 Hanson PLC (Ordinary).... 734,719 607,191 0.2 ----------------------------------------------------------------------------------------------------- Diversified 100,000 Peninsular & Oriental Steam Navigation Co. (The).................. 802,965 1,009,372 0.3 ----------------------------------------------------------------------------------------------------- Food & Household 85,336 Cadbury Schweppes PLC.... 679,109 719,015 0.2 Products ----------------------------------------------------------------------------------------------------- Food Manufacturing 62,660 Unilever PLC............. 1,180,687 1,518,470 0.4 ----------------------------------------------------------------------------------------------------- Industrial--Other 134,000 Tomkins PLC (d).......... 461,257 618,967 0.2 ----------------------------------------------------------------------------------------------------- Insurance 110,150 Prudential Corp. PLC..... 588,540 926,205 0.3 ----------------------------------------------------------------------------------------------------- Pharmaceuticals 51,700 Glaxo Holdings PLC....... 679,333 838,490 0.2 ----------------------------------------------------------------------------------------------------- Real Estate 60,000 Land Securities PLC...... 593,293 766,781 0.2 ----------------------------------------------------------------------------------------------------- Retail 196,500 Tesco PLC (Ordinary)..... 901,348 1,193,411 0.3 ----------------------------------------------------------------------------------------------------- Retail Trade 389,160 ASDA Group PLC........... 716,019 818,903 0.2 ----------------------------------------------------------------------------------------------------- Tobacco 43,282 Imperial Tobacco Group PLC (d)................ 301,618 279,897 0.1 ----------------------------------------------------------------------------------------------------- Utilities 60,000 Anglian Water PLC........ 491,821 605,623 0.2 60,000 Severn Trent PLC......... 514,675 683,636 0.2 115,500 United Utilities PLC..... 1,024,248 1,227,080 0.4 50,000 Yorkshire Water PLC...... 482,984 603,057 0.2 ------------ ------------ ---------- 2,513,728 3,119,396 1.0 ----------------------------------------------------------------------------------------------------- Utilities-- 104,623 Cable & Wireless PLC..... 698,024 868,992 0.3 Communications ----------------------------------------------------------------------------------------------------- Total Investments in the United Kingdom 13,007,284 15,613,541 4.5 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Western Europe 74,541,995 81,259,440 23.3 - ---------------------------------------------------------------------------------------------------------------------
-78- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (continued) (in US dollars) - ------------------------------------------------------------------------------
SHORT-TERM Face Value Percent of SECURITIES Amount Short-Term Securities Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Commercial Paper* US$5,000,000 Alpine Securitization Co., 5.33% due 1/16/1997.............. 4,988,156 4,988,156 1.4 7,000,000 Dean Witter, Discover & Co., 5.45% due 1/15/1997.............. 6,984,104 6,984,104 2.0 16,682,000 General Motors Accept- ance Corp., 7.50% due 1/02/1997.............. 16,675,049 16,675,049 4.8 ------------ ------------ ---------- 28,647,309 28,647,309 8.2 ----------------------------------------------------------------------------------------------------- Commercial A$10,660,744 Westpac Banking Corp., Paper -- Foreign* 6.17% due 5/15/1997.... 8,238,547 8,288,961 2.4 ----------------------------------------------------------------------------------------------------- Foreign Government L 4,250,000 UK Treasury Bill, 6.11% Obligations* due 2/17/1997.......... 6,996,929 7,217,474 2.0 ----------------------------------------------------------------------------------------------------- US Government & Federal National Agency Mortgage Association: Obligations* US$5,000,000 5.23% due 1/07/1997.... 4,994,915 4,994,915 1.4 5,000,000 5.49% due 1/24/1997.... 4,981,700 4,981,700 1.4 United States Treasury Bills+: 11,000,000 4.93% due 1/09/1997.... 10,986,443 10,989,660 3.2 12,000,000 4.98% due 1/09/1997.... 11,985,060 11,988,720 3.5 350,000 4.94% due 1/30/1997.... 348,559 348,681 0.1 1,600,000 4.99% due 1/30/1997.... 1,593,347 1,593,968 0.5 10,000 4.75% due 2/27/1997.... 9,923 9,923 0.0 30,000 4.81% due 2/27/1997.... 29,768 29,768 0.0 90,000 4.82% due 2/27/1997.... 89,301 89,305 0.0 150,000 5% due 2/27/1997....... 148,792 148,842 0.0 320,000 5.01% due 2/27/1997.... 317,417 317,530 0.1 ------------ ------------ ---------- 35,485,225 35,493,012 10.2 - --------------------------------------------------------------------------------------------------------------------- Total Investments in Short-Term Securities 79,368,010 79,646,756 22.8 - --------------------------------------------------------------------------------------------------------------------- Nominal Value/Number of Contracts OPTIONS Covered by Premiums PURCHASED Options Issue Paid --------------------------------------------------------------------------------------------------------------------- Call Options 348 Nikkei, expiring June Purchased 1997 at 22,000......... 106,592 57,556 0.0 ----------------------------------------------------------------------------------------------------- Currency Put 5,600,000 German Deutschemark, Options Purchased expiring July 1997 at DM1.55................. 64,848 94,640 0.0 1,600,000 Japanese Yen, expiring February 1997 at Y115... 9,040 22,997 0.0 17,000,000 Japanese Yen, expiring July 1997 at Y115.5.... 237,575 306,000 0.1 4,600,000 Swiss Franc, expiring July 1997 at Chf1.285............... 62,100 194,120 0.1 ------------ ------------ ---------- 373,563 617,757 0.2 ----------------------------------------------------------------------------------------------------- Put Options 35 Bovespa, expiring Febru- Purchased ary 1997 at 64,469..... 117,250 29,962 0.0 ----------------------------------------------------------------------------------------------------- Total Options Purchased 597,405 705,275 0.2 - --------------------------------------------------------------------------------------------------------------------- Total Investments 336,485,191 348,422,493 99.8 - ---------------------------------------------------------------------------------------------------------------------
-79- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--International Equity Focus Fund Schedule of Investments as of December 31, 1996 (concluded) (in US dollars) - ------------------------------------------------------------------------------
Nominal Value/Number of Contracts Covered by Premiums Value Percent of OPTIONS WRITTEN Options Issue Received (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Call Options 35 Bovespa, expiring Written February 1997 at 64,469................. (117,250) (154,869) 0.0 ----------------------------------------------------------------------------------------------------- Total Options Written (117,250) (154,869) 0.0 - --------------------------------------------------------------------------------------------------------------------- Total Investments, Net of Options Written................... $336,367,941 348,267,624 99.8 ============= Variation Margin on Stock Index Futures Contracts**......... 51,556 0.0 Unrealized Depreciation on Forward Foreign Exchange Contracts***................................................ (305) 0.0 Other Assets Less Liabilities............................... 760,954 0.2 ------------ ---------- Net Assets.................................................. $349,079,829 100.0% ============= =========== - --------------------------------------------------------------------------------------------------------------------- (a) American Depositary Receipts (ADR). (b) Global Depositary Receipts (GDR). (c) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and the number of shares are subject to adjustment under certain conditions until the expiration date. (d) Non-income producing security. (e) Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $4,793,000 representing 1.4% of net assets.
- ------------------------------------------------------------------------------
Acquisition Value Issue Date(s) Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Ashok Leyland Ltd. (GDR).................................................... 3/09/1995 $ 255,800 $ 185,500 East India Hotels Ltd. (GDR)................................................ 4/23/1996- 404,100 345,450 4/24/1996 Indian Hotels Co., Ltd. (GDR)............................................... 3/08/1996 299,250 339,150 Larsen & Toubro (GDR)....................................................... 3/06/1996- 888,875 712,800 4/23/1996 Magyar Tar Kozlesi Reszvenytarsasag (Ordinary).............................. 2/15/1995- 910,789 1,191,213 12/01/1995 Nedcor Ltd. (GDR)........................................................... 5/23/1995- 1,097,188 1,376,240 5/22/1996 RAO Gazprom (ADR)........................................................... 10/21/1996- 622,839 642,444 12/06/1996 - --------------------------------------------------------------------------------------------------------------------- Total $4,478,841 $4,792,797 ========== ========== - --------------------------------------------------------------------------------------------------------------------- * Commercial Paper, Commercial Paper -- Foreign and certain Foreign and US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the rates paid at the time of purchase by the Fund.
** Stock index futures contracts purchased as of December 31, 1996 were as follows: - ------------------------------------------------------------------------------
Number of Expiration Value Contracts Issue Exchange Date (Note 1a & 1b) --------------------------------------------------------------------------------------------------------------------- 250 All Ordinaries.............................................. SFE March 1997 $12,156,224 36 Nikkei 225.................................................. SIMEX March 1997 3,006,995 61 TOPIX....................................................... TSE March 1997 7,754,059 --------------------------------------------------------------------------------------------------------------------- Total Stock Index Futures Contracts Purchased (Total Contract Price--$22,724,370) $22,917,278 --------------------------------------------------------------------------------------------------------------------- Stock index futures contracts sold as of December 31, 1996 were as follows: --------------------------------------------------------------------------------------------------------------------- Number of Expiration Value Contracts Issue Exchange Date (Note 1a & 1b) --------------------------------------------------------------------------------------------------------------------- 42 FTSE 100.................................................... LIFFE March 1997 $ 7,408,106 17 Hang Seng................................................... HKFE January 1997 1,479,312 --------------------------------------------------------------------------------------------------------------------- Total Stock Index Futures Contracts Sold (Total Contract Price--$8,607,499) $ 8,887,418 --------------------------------------------------------------------------------------------------------------------- ***Forward foreign exchange contracts as of December 31, 1996 were as follows: --------------------------------------------------------------------------------------------------------------------- Unrealized Expiration Depreciation Foreign Currency Purchased Date (Note 1b) --------------------------------------------------------------------------------------------------------------------- DM15,978,060 ...................................................................... January 1997 $ (305) --------------------------------------------------------------------------------------------------------------------- Total (US$ Commitment--10,400,000) $ (305) ---------------------------------------------------------------------------------------------------------------------
++ The rights may be exercised until February 18, 1997. + Securities held as collateral in connection with open futures contracts. See Notes to Financial Statements. -80- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Natural Resources Focus Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Aluminum 15,000 Alcan Aluminium, Ltd. ........ $ 314,175 $ 504,375 1.1% 7,600 +Alumax, Inc. ................ 250,293 253,650 0.6 4,300 Aluminum Co. of America....... 224,399 274,125 0.6 ------------ ------------ ------ 788,867 1,032,150 2.3 - --------------------------------------------------------------------------------------------------------------------- Chemicals 4,300 Air Products & Chemicals, Inc. ....................... 245,939 297,238 0.7 72,000 Asahi Chemical Industry Co., Ltd. ....................... 530,650 407,876 0.9 17,000 BASF AG....................... 407,600 655,028 1.4 10,400 Dow Chemical Co. ............. 646,664 815,100 1.8 6,700 duPont (E.I.) de Nemours & Co. ........................ 323,847 632,313 1.4 ------------ ------------ ------ 2,154,700 2,807,555 6.2 - --------------------------------------------------------------------------------------------------------------------- Diversified Resources 20,000 Asahi Glass Co., Ltd. ........ 240,000 188,256 0.4 Companies 12,800 Canadian Pacific, Ltd. ....... 197,224 339,200 0.7 5,100 Coastal Corp. ................ 137,570 249,263 0.6 33,000 Cyprus Amax Minerals Co. ..... 921,470 771,375 1.7 25,500 Norcen Energy Resources Ltd. ....................... 378,524 565,839 1.3 20,000 Occidental Petroleum Corp. ... 391,200 467,500 1.0 52,300 RGC Ltd. ..................... 206,473 232,190 0.5 ------------ ------------ ------ 2,472,461 2,813,623 6.2 - --------------------------------------------------------------------------------------------------------------------- Gold 122,000 +Acacia Resources Ltd. ....... 250,570 237,386 0.5 43,700 +Amax Gold, Inc. ............. 259,987 278,588 0.6 17,500 Ashanti Goldfields Co. Ltd. (GDR)***.................... 434,367 216,563 0.5 23,500 Cambior Inc. ................. 315,479 346,496 0.8 173,300 +Delta Gold N.L. ............. 333,170 324,818 0.7 30,600 Driefontein Consolidated Ltd. ....................... 477,914 322,295 0.7 133,000 Great Central Mines N.L. ..... 411,933 378,150 0.8 51,600 +Miramar Mining Corporation... 268,637 225,985 0.5 45,000 Newcrest Mining Ltd. ......... 192,990 178,695 0.4 20,864 Newmont Mining Corp. ......... 828,080 933,664 2.1 45,000 Placer Dome Inc. ............. 1,018,177 978,750 2.2 24,800 Prime Resources Group, Inc. ....................... 242,631 175,591 0.4 42,900 Santa Fe Pacific Gold Corp. ...................... 535,350 659,588 1.5 22,000 +TVX Gold, Inc. .............. 179,135 170,500 0.4 ------------ ------------ ------ 5,748,420 5,427,069 12.1 - --------------------------------------------------------------------------------------------------------------------- Integrated Oil 12,300 Amerada Hess Corp. ........... 646,044 711,863 1.6 Companies 10,500 Amoco Corp. .................. 554,378 845,250 1.9 5,200 British Petroleum, Co. PLC (ADR)*...................... 396,812 735,150 1.6 14,000 ENI Societa per Azioni (ADR)*...................... 654,500 722,750 1.6 2,000 OMV AG........................ 214,068 225,547 0.5 25,000 Petro-Canada (Installment Receipts)(c)................ 195,677 271,875 0.6 7,300 Repsol, S.A. ................. 210,174 279,926 0.6 3,000 Repsol, S.A. (ADR)* .......... 86,490 114,375 0.2 17,800 Societe Nationale Elf Aquitaine (ADR)* ........... 645,343 805,450 1.8 12,000 Total, S.A. (Class B)......... 728,842 976,099 2.2 19,700 Yacimientos Petroliferos Fiscales, S.A. (ADR)*....... 427,078 497,425 1.1 ------------ ------------ ------ 4,759,406 6,185,710 13.7 - --------------------------------------------------------------------------------------------------------------------- Metals & Mining 10,800 ASARCO Inc. .................. 305,116 268,650 0.6 259,000 +Centaur Mining & Exploration Ltd. ....................... 390,350 401,111 0.9 25,600 Falconbridge Ltd. (Installment Receipts) (a)............... 384,069 366,248 0.8 7,400 Inco Ltd...................... 244,911 235,875 0.5 51,300 Industrias Penoles, S.A. de C.V. ....................... 230,560 181,841 0.4 465,000 M.I.M. Holdings Ltd. ......... 867,286 649,973 1.4 34,370 Minsur S.A. (T Shares)........ 111,555 119,542 0.3
-81- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Natural Resources Focus Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Metals & Mining 91,000 Mitsubishi Materials Corp. ... 461,572 367,772 0.8 (concluded) 32,400 Noranda Inc. ................. 600,505 722,496 1.6 25,500 Outokumpu OY.................. 455,626 434,964 1.0 9,400 ++P.T. Tambang Timah (GDR)***.................... 115,742 169,905 0.4 144,400 Pasminco Ltd. ................ 195,275 227,071 0.5 6,700 Phelps Dodge Corp. ........... 382,311 452,250 1.0 108,000 QNI Ltd. ..................... 216,381 217,007 0.5 52,400 (The) RTZ Corp. PLC .......... 680,570 840,879 1.9 28,000 Resolute Ltd. ................ 60,351 58,263 0.1 6,000 Rio Algom Ltd. ............... 116,616 134,015 0.3 410,000 Savage Resources Ltd. ........ 313,412 449,358 1.0 41,000 Savage Resources Ltd. (Warrants) (b).............. 5,506 10,420 0.0 46,000 Sumitomo Metal Mining Co. Ltd. ....................... 383,546 310,242 0.7 34,000 Trelleborg 'B' Fria........... 454,495 451,504 1.0 23,000 +Westmin Resources, Inc. ..... 120,329 111,642 0.2 164,900 WMC Ltd. ..................... 964,809 1,038,541 2.3 ------------ ------------ ------ 8,060,893 8,219,569 18.2 - --------------------------------------------------------------------------------------------------------------------- Oil & Gas Producers 21,400 Apache Corp. ................. 573,935 757,025 1.7 37,000 +Chauvco Resources Ltd. ...... 437,096 380,803 0.8 10,200 +Chieftain International, Inc. (f) ........................ 227,716 265,200 0.6 23,100 Enserch Exploration Inc. ..... 230,541 271,425 0.6 68,300 Enterprise Oil PLC............ 449,045 753,667 1.7 37,300 +Gulf Canada Resources, Ltd. ....................... 264,784 272,263 0.6 7,300 Louisiana Land and Exploration Co. (The)................... 283,067 391,463 0.9 21,400 Mitchell Energy & Development Corp. (Class B)............. 374,226 473,475 1.0 28,600 +Northrock Resources Ltd. .... 227,905 256,774 0.6 13,000 +Oryx Energy Co. ............. 216,739 321,750 0.7 4,000 PanCanadian Petroleum Ltd. ... 152,305 157,956 0.4 93,000 Ranger Oil Ltd. .............. 625,617 918,375 2.0 8,200 Sonat, Inc. .................. 269,737 422,300 0.9 9,800 Vastar Resources, Inc. ....... 268,604 372,400 0.8 ------------ ------------ ------ 4,601,317 6,014,876 13.3 - --------------------------------------------------------------------------------------------------------------------- Oil Services 12,500 +Coflexip Stena Offshore, Inc. (ADR)*...................... 259,460 326,562 0.7 9,800 IHC Caland N.V. .............. 214,018 560,406 1.3 10,600 +Petroleum Geo-Services ASA (ADR)*...................... 309,952 412,075 0.9 6,400 Schlumberger Ltd. ............ 382,287 639,200 1.4 10,300 +Smedvig ASA (ADR)*........... 218,875 207,288 0.5 7,200 Transocean Offshore Inc. (d)......................... 440,451 450,900 1.0 ------------ ------------ ------ 1,825,043 2,596,431 5.8 - --------------------------------------------------------------------------------------------------------------------- Paper & Forest Products 24,533 Aracruz Celulose S.A. (ADR)*...................... 196,788 202,397 0.5 31,400 Avenor Inc. .................. 611,175 465,270 1.0 15,800 Empresa Nacional de Celulosas, S.A. ....................... 233,184 189,181 0.4 8,700 Georgia-Pacific Corp. ........ 615,783 626,400 1.4 14,800 International Paper Co. ...... 497,368 597,550 1.3 57,500 Metsa Serla OY 'B'............ 499,397 431,053 1.0 16,800 Mo Och Domsjo AB 'B' Co. ..... 373,697 473,309 1.0 52,000 Slocan Forest Products Ltd. ....................... 523,964 588,321 1.3 9,520 +UPM-Kymmene OY (e)........... 169,172 196,519 0.4 17,200 Weyerhaeuser Co. ............. 687,415 814,850 1.8 9,000 Willamette Industries, Inc. ....................... 376,875 626,625 1.4 ------------ ------------ ------ 4,784,818 5,211,475 11.5 - ---------------------------------------------------------------------------------------------------------------------
-82- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Natural Resources Focus Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Common Stocks Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Plantations 136,000 Golden Hope Plantations BHD... 240,608 231,604 0.5 90,000 Kuala Lumpur Kepong BHD....... 120,553 228,119 0.5 ------------ ------------ ------ 361,161 459,723 1.0 - --------------------------------------------------------------------------------------------------------------------- Refining 45,300 Total Petroleum (North America), Ltd. (ADR)*....... 579,947 469,987 1.0 - --------------------------------------------------------------------------------------------------------------------- Steel 83,000 British Steel PLC............. 218,182 228,614 0.5 135,000 +Kobe Steel, Ltd. ............ 390,945 284,456 0.6 12,800 Koninklijke Nederlandsche Hoogovens en Staalfabrienken N.V. ....................... 529,034 533,951 1.2 148,000 Nippon Steel Corp. ........... 501,972 437,098 1.0 244,000 Sumitomo Metal Industries, Ltd. ....................... 773,176 600,518 1.3 ------------ ------------ ------ 2,413,309 2,084,637 4.6 - --------------------------------------------------------------------------------------------------------------------- Wood Products 18,400 Louisiana-Pacific Corp. ...... 467,929 388,700 0.8 26,800 Riverside Forest Products Ltd......................... 352,710 348,204 0.8 ------------ ------------ ------ 820,639 736,904 1.6 - --------------------------------------------------------------------------------------------------------------------- Total Common Stocks 39,370,981 44,059,709 97.5 - --------------------------------------------------------------------------------------------------------------------- Face Amount Short-Term Investments --------------------------------------------------------------------------------------------------------------------- Commercial Paper** $1,352,000 General Electric Capital Corp., 7.10% due 1/02/1997................... 1,351,467 1,351,467 3.0 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Investments 1,351,467 1,351,467 3.0 - --------------------------------------------------------------------------------------------------------------------- Total Investments............. $ 40,722,448 45,411,176 100.5 ============ Liabilities in Excess of Other Assets...................... (214,181) (0.5) ------------ ------ Net Assets.................... $ 45,196,995 100.0% ============ ====== - ---------------------------------------------------------------------------------------------------------------------
(a) Receipts evidence payment by the Fund of 67% of the purchase price common stock of Falconbridge Ltd. The Fund is obligated to pay the remaining 33%, approximately $360,000, over the next year. (b) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and the number of shares are subject to adjustment under certain conditions until the expiration date. (c) Receipts evidence payment by the Fund of 71% of the purchase price common stock of Petro-Canada. The Fund is obligated to pay the remaining 29%, approximately $189,000, over the next year. (d) Created as a result of the merger of Sonat Offshore and Transocean. (e) Created as a result of the merger of Kymmene Corporation and Repola Ltd. (f) Investment in companies 5% or more of whose outstanding securities are held by the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) were as follows: - ------------------------------------------------------------------------------
Net Share Net Dividend Industry Affiliate Activity Cost Income --------------------------------------------------------------------------------------------------------------------- Oil & Gas Producers Chieftain International, Inc. ..................... 10,200 $227,716 -- - --------------------------------------------------------------------------------------------------------------------- Total $227,716 ======= - ---------------------------------------------------------------------------------------------------------------------
* American Depositary Receipts (ADR). ** Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. *** Global Depositary Receipts (GDR). + Non-income producing security. ++ Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $170,000, representing 0.4% of net assets. - ------------------------------------------------------------------------------
Acquisition Value Issue Date Cost (Note 1a) - --------------------------------------------------------------------------------------------------------------------- P.T. Tambang Timah (GDR)......................................................... 10/06/1995 $115,742 $169,905 - --------------------------------------------------------------------------------------------------------------------- Total $115,742 $169,905 ======== ======== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -83- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Asset-Backed AAA Aaa $ 9,000,000 Banc One Credit Card Master Securities++--3.3% Trust (Series B), 7.55% due 12/15/1999............. $ 9,171,523 $ 9,129,330 AAA Aaa 4,000,000 Citibank, Credit Card Master Trust I, 5.62% due 12/10/2008.......... 3,998,440 3,996,240 AAA Aaa 4,462,458 Fifth Third Auto Grantor Trust, 6.45% due 3/15/2002.............. 4,460,715 4,480,575 ------------ ------------ 17,630,678 17,606,145 - --------------------------------------------------------------------------------------------------------------------- Banks & Thrifts--12.0% Bank of New York Co., Inc.: A- A2 4,000,000 7.625% due 7/15/2002............. 4,306,000 4,159,160 A- A2 2,000,000 7.875% due 11/15/2002............ 2,213,400 2,106,200 BankAmerica Corp.: A A2 7,000,000 8.375% due 3/15/2002............. 7,361,550 7,499,310 A+ A1 1,000,000 7.125% due 5/12/2005............. 985,500 1,007,540 BBB+ A2 2,000,000 First Interestate Bancorp, 11.25% due 3/27/2001.................... 2,354,060 2,303,520 BBB+ A1 5,000,000 +First Union Capital Corp., 7.85% due 1/01/2027.................... 4,991,300 4,991,300 A- A2 1,500,000 First Union Corp., 7.50% due 7/15/2006........................ 1,500,690 1,539,720 A- A3 2,000,000 Golden West Financial Corp., 9.15% due 5/23/1998.................... 2,271,480 2,075,860 BBB+ A3 1,000,000 +HSBC Americas Inc., 7.808% due 12/15/2026....................... 988,460 966,100 AA- Aa2 3,000,000 JPM Capital Trust, 7.54% due 1/15/2027........................ 3,000,000 2,931,870 NationsBank Corp.: A A2 2,000,000 7.50% due 2/15/1997.............. 1,998,280 2,003,740 A- A3 5,000,000 6.50% due 8/15/2003.............. 4,755,150 4,887,850 Norwest Corp.: AA- Aa3 5,000,000 6.25% due 4/15/1999.............. 4,983,600 5,004,000 AA- Aa3 2,500,000 6.75% due 5/12/2000.............. 2,529,975 2,528,250 A A2 12,950,000 US Bancorp, 6.95% due 11/28/1997... 13,048,032 13,082,738 AA+ Aa2 3,000,000 Wachovia Corp., 6.55% due 6/09/1997........................ 2,997,810 3,012,780 BBB A1 4,500,000 Wells Fargo Capital I, 7.96% due 12/15/2026....................... 4,421,515 4,498,065 ------------ ------------ 64,706,802 64,598,003 - --------------------------------------------------------------------------------------------------------------------- Canadian Province of Quebec (Canada) (2): Province*--2.4% A+ A2 3,500,000 8.80% due 4/15/2003.............. 3,944,780 3,852,135 A+ A2 9,500,000 7.125% due 2/09/2024............. 7,990,800 9,123,230 ------------ ------------ 11,935,580 12,975,365 - --------------------------------------------------------------------------------------------------------------------- Federal AAA Aaa 3,000,000 Federal Home Loan Banks, 6.65% Agencies--1.9% due 11/13/2001................... 2,997,656 2,992,020 AAA Aaa 7,000,000 Federal National Mortgage Association, 7.85% due 9/10/2004........................ 6,925,569 7,164,080 ------------ ------------ 9,923,225 10,156,100 - --------------------------------------------------------------------------------------------------------------------- Finance--4.5% Associates Corp. of North America: AA- Aa3 5,000,000 8.375% due 1/15/1998............. 5,016,100 5,115,700 AA- Aa3 1,500,000 5.25% due 9/01/1998.............. 1,454,385 1,478,085 AA- Aa3 1,000,000 7.25% due 9/01/1999.............. 987,620 1,021,960 A+ Aa3 5,500,000 CIT Group Holdings, Inc., 7% due 9/30/1997........................ 5,547,490 5,545,705 Commercial Credit Co.: A+ A1 3,250,000 10.00% due 5/01/1999............. 3,626,350 3,506,393 A+ A1 3,000,000 6.70% due 8/01/1999.............. 3,022,580 3,018,030 AAA Aaa 3,245,000 General Electric Capital Corp., 8.125% due 5/15/2012............. 3,449,052 3,587,347 A+ A2 1,000,000 Transamerica Financial Corp., 6.80% due 3/15/1999.................... 999,730 1,010,520 ------------ ------------ 24,103,307 24,283,740 - ---------------------------------------------------------------------------------------------------------------------
-84- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Finance-- Bear Stearns Companies Other--14.4% Inc.(The): A A2 10,000,000 6.75% due 8/15/2000.............. 9,936,500 10,059,900 A A2 1,000,000 6.70% due 8/01/2003.............. 1,002,800 983,990 Dean Witter, Discover & Co.: A A2 3,500,000 6.75% due 8/15/2000.............. 3,486,805 3,525,375 A A2 4,000,000 6.30% due 1/15/2006.............. 3,982,400 3,778,688 A A2 3,500,000 6.75% due 1/01/2016.............. 3,500,000 3,222,170 A+ A2 4,000,000 Equitable Cos. Inc., 9% due 12/15/2004....................... 4,416,200 4,478,800 Equitable Life Assurance Society: A A2 4,355,000 +6.95% due 12/01/2005............. 4,110,249 4,272,168 A A2 3,500,000 +7.70% due 12/01/2015............. 3,476,060 3,498,530 A Baa1 10,000,000 Lehman Brothers Holdings, Inc., 7.375% due 8/15/1997............. 9,987,000 10,065,300 BBB+ A3 5,000,000 MBNA Corporation, 5.681% due 9/14/1998........................ 5,000,000 5,001,980 AA- A2 6,100,000 +Pacific Mutual Life Insurance Company, 7.90% due 12/30/2023.... 5,999,655 6,242,496 PaineWebber Group, Inc.: BBB+ Baa1 3,000,000 9.25% due 12/15/2001............. 3,501,570 3,288,240 BBB+ Baa1 2,000,000 8.875% due 3/15/2005............. 2,012,540 2,169,240 Smith Barney Holdings, Inc.: A- A2 2,000,000 5.875% due 2/01/2001............. 1,993,680 1,943,496 A- A2 4,000,000 6.50% due 10/15/2002............. 3,980,560 3,933,680 A- A2 2,000,000 6.625% due 11/15/2003............ 1,988,320 1,969,380 A A1 2,000,000 Travelers Capital II, 7.75% due 12/01/2036....................... 2,003,400 1,923,120 Travelers Corp. (The): A+ A1 1,000,000 9.50% due 3/01/2002.............. 1,084,200 1,119,190 A+ A1 6,000,000 7.875% due 5/15/2025............. 6,053,840 6,266,940 ------------ ------------ 77,515,779 77,742,683 - --------------------------------------------------------------------------------------------------------------------- Industrial-- Anheuser-Busch Cos., Inc.: Consumer AA- A1 2,500,000 8.75% due 12/01/1999............. 2,839,090 2,656,250 Goods--3.8% AA- A1 5,000,000 7.375% due 7/01/2023............. 5,127,300 4,947,100 A- A3 7,000,000 IBP, Inc., 6.125% due 2/01/2006.... 6,431,460 6,600,510 AA Aa2 2,000,000 Kimberly-Clark Corporation, 7.875% due 2/01/2023.................... 2,033,960 2,082,080 A A2 4,000,000 Philip Morris Companies, Inc., 9% due 1/01/2001.................... 4,071,540 4,303,480 ------------ ------------ 20,503,350 20,589,420 - --------------------------------------------------------------------------------------------------------------------- Industrial-- AA Aa3 2,000,000 BP America Inc., 9.375% due Energy--2.6% 11/01/2000....................... 2,204,960 2,200,980 AA- A1 7,000,000 Consolidated Natural Gas Co., 8.75% due 6/01/1999.................... 7,448,861 7,361,900 A- A1 3,000,000 Dresser Industries, Inc., 7.60% due 8/15/2096........................ 2,991,270 3,062,790 A+ A1 1,500,000 Texaco Capital Inc., 9% due 12/15/1999....................... 1,731,670 1,606,110 ------------ ------------ 14,376,761 14,231,780 - ---------------------------------------------------------------------------------------------------------------------
-85- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Industrial-- A- A3 6,500,000 Chrysler Finance Corporation Manufacturing--8.2% 10.95% due 8/01/2017............. 7,380,520 7,007,260 AA- Aa3 2,950,000 du Pont (E.I.) de Nemours & Co., 8.25% due 1/15/2022.............. 3,066,304 3,102,751 Ford Motor Credit Company: A+ A1 3,000,000 7% due 9/25/2001................. 2,988,060 3,044,730 A+ A1 5,000,000 7.50% due 6/15/2004.............. 5,140,200 5,147,300 A+ A1 2,500,000 7.75% due 3/15/2005.............. 2,497,725 2,603,625 General Motors Acceptance Corp.: A- A3 3,000,000 7.125% due 5/11/1998............. 3,033,840 3,045,660 A- A3 4,000,000 7.70% due 4/15/2016.............. 3,967,000 4,136,920 A- A3 3,500,000 7.40% due 9/01/2025.............. 3,471,790 3,461,290 Lockheed Martin Corp.: BBB+ A3 7,000,000 6.625% due 6/15/1998............. 6,999,090 7,053,970 BBB+ A3 2,500,000 6.55% due 5/15/1999.............. 2,498,800 2,511,675 A- Baa2 3,000,000 McDonnell Douglas Corporation, 8.625% due 4/01/1997............. 3,050,010 3,019,710 ------------ ------------ 44,093,339 44,134,891 - --------------------------------------------------------------------------------------------------------------------- Industrial-- A+ A1 2,500,000 Bass America, Inc., 8.125% due Services--11.1% 3/31/2002........................ 2,668,930 2,656,825 A A2 4,000,000 Carnival Cruise Lines, Inc., 7.70% due 7/15/2004.................... 4,208,480 4,159,680 Columbia/HCA Healthcare Corp.: A- A2 5,000,000 6.41% due 6/15/2000.............. 4,997,000 4,987,400 A- A2 1,845,000 7.05% due 12/01/2027............. 1,729,946 1,756,643 A- A2 3,000,000 7.75% due 7/15/2036.............. 2,976,840 3,058,500 Dillard Department Stores, Inc.: A+ A2 5,000,000 7.375% due 6/15/1999............. 5,305,840 5,089,200 A+ A2 3,000,000 9.125% due 8/01/2011............. 3,240,150 3,465,210 A A2 2,000,000 +Disney Enterprises Inc., 6.85% due 1/10/2007........................ 1,998,660 1,998,580 A+ A1 7,000,000 +Electronic Data Systems Corp., 6.85% due 5/15/2000.............. 6,994,470 7,085,547 A A3 5,000,000 Hertz Corp., 6% due 1/15/2003...... 4,823,600 4,804,800 AAA Aaa 3,000,000 Johnson & Johnson Co., 8.72% due 11/01/2024....................... 3,000,000 3,338,040 A A2 2,000,000 May Department Stores Company, 10.625% due 11/01/2010........... 2,419,800 2,588,400 A- A2 7,000,000 Sears, Roebuck & Co., 6.82% due 10/17/2002....................... 7,014,280 7,009,520 AA A2 7,000,000 Wal-Mart Stores, Inc., 8.50% due 9/15/2024........................ 7,036,810 7,490,350 ------------ ------------ 58,414,806 59,488,695 - --------------------------------------------------------------------------------------------------------------------- Industrial AA A1 9,500,000 Boeing Co., 6.35% due 6/15/2003.... 8,549,905 9,348,760 Transportation-- Southwest Airlines, Inc.: 3.4% A- A3 3,500,000 9.40% due 7/01/2001.............. 4,021,990 3,804,500 A- A3 4,000,000 8% due 3/01/2005................. 3,980,450 4,231,480 A- A3 1,000,000 7.875% due 9/01/2007............. 992,600 1,032,790 ------------ ------------ 17,544,945 18,417,530 - --------------------------------------------------------------------------------------------------------------------- Supranational-- 0.6% AAA Aaa 1,000,000 Asian Development Bank, 10.75% due 6/01/1997...................... 1,084,890 1,019,170 AAA Aaa 2,000,000 Inter-American Development Bank Co., 8.875% due 6/01/2009........ 2,481,700 2,330,520 ------------ ------------ 3,566,590 3,349,690 - ---------------------------------------------------------------------------------------------------------------------
-86- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
S&P Moody's Face Value Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Utilities-- GTE Corp.: Communications-- BBB+ A3 1,000,000 8.85% due 3/01/1998.............. 1,143,360 1,031,020 2.5% BBB+ A3 1,500,000 9.375% due 12/01/2000............ 1,647,090 1,648,305 BBB+ A3 3,500,000 9.10% due 6/01/2003.............. 3,965,330 3,904,215 BBB+ A3 2,000,000 10.30% due 11/15/2017............ 2,187,020 2,164,900 AAA Aaa 2,500,000 Indiana Bell Telephone Co. Inc., 7.30% due 8/15/2026.............. 2,495,725 2,537,100 Southwestern Bell Telcommunications Corp.: AA Aa3 1,000,000 6.125% due 3/01/2000............. 1,005,000 993,580 AA Aa3 1,000,000 6.625% due 4/01/2005............. 958,450 989,450 ------------ ------------ 13,401,975 13,268,570 - --------------------------------------------------------------------------------------------------------------------- Utilities-- AA- Aa2 7,000,000 Duke Power Co., 8% due Electric--3.8% 11/01/1999....................... 6,966,520 7,288,190 A+ A1 3,000,000 Georgia Power Co., 6.125% due 9/01/1999........................ 2,892,720 2,983,140 AA- A1 2,000,000 Northern States Power Company, 7.125% due 7/01/2025............. 2,122,360 1,960,120 A A2 7,500,000 Virginia Electric & Power Co., 8.625% due 10/01/2024............ 7,416,540 8,114,235 ------------ ------------ 19,398,140 20,345,685 - --------------------------------------------------------------------------------------------------------------------- Yankee ABN AMRO Bank (1): Corporates*-- AA- Aa2 1,500,000 7.55% due 6/28/2006.............. 1,499,790 1,553,055 10.9% AA- Aa2 1,000,000 7.30% due 12/01/2026............. 977,900 950,800 A+ A1 6,000,000 Australia & New Zealand Banking Group Ltd., 7.55% due 9/15/2006 (1).............................. 5,990,880 6,176,640 AA- Aa3 6,500,000 CRA Finance Ltd., 6.50% due 12/01/2003 (1)................... 6,509,920 6,333,535 A A3 2,000,000 China Light & Power Co., Ltd., 7.50% due 4/15/2006 (5).......... 1,987,260 2,016,640 AA+ Aa1 1,000,000 Deutsche Bank Financial Inc., 6.70% due 12/13/2006 (1)............... 996,910 981,360 Enersis S.A.(4): A- Baa1 8,000,000 6.90% due 12/01/2006............. 7,979,360 7,807,920 A- Baa1 2,000,000 7.40% due 12/01/2016............. 1,989,440 1,940,480 A+ A1 2,000,000 Ford Capital, B.V., 9.50% due 6/01/2010 (1).................... 2,217,880 2,375,320 Grand Metropolitan Investment Corp. (1): A+ A2 5,500,000 6.50% due 9/15/1999.............. 5,615,810 5,503,190 A+ A2 1,000,000 8.625% due 8/15/2001............. 1,049,910 1,079,190 BBB+ A3 3,000,000 HSBC Americas Inc., 7% due 11/01/2006 (1)................... 2,974,800 2,961,600 AA- A1 6,000,000 Korea Electric Power Corporation, 8% due 7/01/2002 (5)............. 6,312,060 6,330,780 A+ A1 1,000,000 +Petronas Corp., 6.875% due 7/01/2003 (4).................... 986,480 1,001,430 BBB+ A3 3,000,000 Philips Electronics N.V., 7.20% due 6/01/2026 (4).................... 2,993,220 3,041,250 Pohang Iron & Steel Co., Ltd. (3): A+ A2 4,500,000 7.375% due 5/15/2005............. 4,581,720 4,561,695 A+ A2 4,000,000 7.125% due 11/01/2006............ 3,995,480 3,989,080 ------------ ------------ 58,658,820 58,603,965 - ---------------------------------------------------------------------------------------------------------------------
-87- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
S&P Moody's Face Value Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a) --------------------------------------------------------------------------------------------------------------------- Yankee AAA Aaa 2,000,000 Export-Import Bank of Japan, 8.35% Sovereign*--2.7% due 12/01/1999 (1)............... 2,113,320 2,107,060 AA- A1 3,000,000 Korea Development Bank, 6.625% due 11/21/2003 (2)................... 3,011,060 2,970,000 Metropolis of Tokyo (Japan) (2): AAA Aaa 3,000,000 8.70% due 10/05/1999............. 3,469,410 3,184,290 AAA Aaa 250,000 9.25% due 11/08/2000............. 268,427 273,657 BBB A3 6,000,000 People's Republic of China, 6.625% due 1/15/2003 (2)................ 5,970,960 5,839,254 ------------ ------------ 14,833,177 14,374,261 - --------------------------------------------------------------------------------------------------------------------- Total Corporate Bonds & Notes--88.1%....................... 470,607,274 474,166,523 - --------------------------------------------------------------------------------------------------------------------- US Government Obligations --------------------------------------------------------------------------------------------------------------------- US Treasury Notes AAA Aaa 2,500,000 5.875% due 6/30/2000............. 2,502,025 2,481,250 AAA Aaa 2,500,000 8.75% due 8/15/2000.............. 2,976,172 2,709,375 AAA Aaa 1,000,000 6.25% due 2/15/2003.............. 982,500 998,750 AAA Aaa 5,500,000 5.75% due 8/15/2003.............. 5,371,953 5,335,000 AAA Aaa 11,000,000 6.50% due 5/15/2005.............. 10,668,276 11,073,920 AAA Aaa 3,000,000 6.50% due 10/15/2006............. 2,985,469 3,016,410 - --------------------------------------------------------------------------------------------------------------------- Total US Government Obligations--4.7% 25,486,395 25,614,705 - --------------------------------------------------------------------------------------------------------------------- Short-Term Securities --------------------------------------------------------------------------------------------------------------------- Commercial Paper**--0.9% 5,000,000 General Electric Capital Corp., 6% due 1/03/1997.................... 4,997,500 4,997,500 - --------------------------------------------------------------------------------------------------------------------- Repurchase 24,932,000 Lehman Brothers Inc., purchased on Agreements***--4.7% 12/31/96 to yield 7.10% to 1/02/97.......................... 24,932,000 24,932,000 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Securities--5.6% 29,929,500 29,929,500 - --------------------------------------------------------------------------------------------------------------------- Total Investments--98.4%........... $526,023,169 529,710,728 ============ Other Assets Less Liabilities--1.6%.................. 8,683,000 ------------ Net Assets--100.0%................. $538,393,728 ============ - ---------------------------------------------------------------------------------------------------------------------
* Corresponding industry groups for foreign securities, which are denominated in US dollars. (1) Financial Institution (4) Industrial (2) Government Entity (5) Utility (3) Industrial Mining and Metals ** Commercial Paper is traded on a discount basis; the interest rate shown is the discount rate paid at the time of purchase by the Fund. *** Repurchase Agreements are fully collateralized by US Government and Agency Obligations. + Restricted security as to resale. The value of the Fund's investment in restricted securities was approximately $30,056,000, representing 5.6% of net assets. - ------------------------------------------------------------------------------
Acquisition Value Issue Date Cost (Note 1a) - --------------------------------------------------------------------------------------------------------------------- Disney Enterprises Inc., 6.85% due 1/10/2007.................................. 12/18/1996 $ 1,998,660 $ 1,998,580 Electronic Data Systems, Corp., 6.85% due 5/15/2000 .......................... 5/26/1995 6,994,470 7,085,547 Equitable Life Assurance Society, 6.95% due 12/01/2005........................ 6/11/1996 4,110,249 4,272,168 Equitable Life Assurance Society, 7.70% due 12/01/2015........................ 10/17/1996 3,476,060 3,498,530 First Union Capital Corp., 7.85% due 1/01/2027................................ 12/27/1996 4,991,300 4,991,300 HSBC Americas Inc., 7.808% due 12/15/2026..................................... 12/04/1996 988,460 966,100 Pacific Mutual Life Insurance Company, 7.90% due 12/30/2023................... 9/24/1996 5,999,655 6,242,496 Petronas Corp., 6.875% due 7/01/2003.......................................... 8/10/1995 986,480 1,001,430 - --------------------------------------------------------------------------------------------------------------------- Total $29,545,334 $30,056,151 =========== =========== - ---------------------------------------------------------------------------------------------------------------------
++ Subject to principal paydowns. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. -88- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Quality Equity Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Stocks & Warrants Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Aerospace 176,000 Northrop Grumman Corp. ..... $ 11,530,816 $ 14,564,000 1.8% 190,000 United Technologies Corp. .................... 7,831,355 12,540,000 1.6 ------------ ------------ ------ 19,362,171 27,104,000 3.4 - --------------------------------------------------------------------------------------------------------------------- Automobile 205,000 General Motors Corp. ....... 10,846,146 11,428,750 1.4 - --------------------------------------------------------------------------------------------------------------------- Automobile Parts 338,000 +Lear Corporation........... 11,323,000 11,534,250 1.5 - --------------------------------------------------------------------------------------------------------------------- Banking 320,000 Bank of New York Co., Inc....................... 6,531,925 10,800,000 1.3 60,000 Bank of New York Co., Inc. (Warrants) (c)............ 433,750 4,447,500 0.6 67,100 BankAmerica Corporation .... 6,865,310 6,693,225 0.8 121,000 Citicorp.................... 8,956,427 12,463,000 1.6 ------------ ------------ ------ 22,787,412 34,403,725 4.3 - --------------------------------------------------------------------------------------------------------------------- Building & Construction 277,800 Oakwood Homes Corp.......... 6,329,367 6,354,675 0.8 - --------------------------------------------------------------------------------------------------------------------- Chemicals 163,000 +FMC Corporation............ 11,552,704 11,430,375 1.4 240,000 PPG Industries Inc. ........ 11,911,956 13,470,000 1.7 ------------ ------------ ------ 23,464,660 24,900,375 3.1 - --------------------------------------------------------------------------------------------------------------------- Communications 96,834 TCI Pacific Communications (Convertible Preferred)... 9,353,653 8,787,686 1.1 - --------------------------------------------------------------------------------------------------------------------- Computer Services 215,000 cisco Systems, Inc. ........ 10,373,567 13,679,375 1.7 255,000 Electronic Data Systems Corp. .................... 11,193,379 11,028,750 1.4 86,000 International Business Machines Corp. ........... 9,370,635 12,986,000 1.6 ------------ ------------ ------ 30,937,581 37,694,125 4.7 - --------------------------------------------------------------------------------------------------------------------- Computer Technology 295,500 +Gulfstream Aerospace Corp...................... 7,274,816 7,165,875 0.9 - --------------------------------------------------------------------------------------------------------------------- Computers 203,000 +Compaq Computer Corp. ..... 15,028,761 15,072,750 1.9 - --------------------------------------------------------------------------------------------------------------------- Congolomerates 100,200 AlliedSignal Inc. .......... 7,365,309 6,713,400 0.9 - --------------------------------------------------------------------------------------------------------------------- Electrical Equipment 114,000 General Electric Co. ....... 8,855,064 11,271,750 1.4 80,300 Linear Technology Corporation............... 3,295,002 3,513,125 0.5 ------------ ------------ ------ 12,150,066 14,784,875 1.9 - --------------------------------------------------------------------------------------------------------------------- Electronics/Instruments 387,500 Corning Inc. ............... 11,485,244 17,921,875 2.3 - --------------------------------------------------------------------------------------------------------------------- Energy & Related 690,300 Edison International........ 13,122,844 13,719,712 1.7 - --------------------------------------------------------------------------------------------------------------------- Engineering & Construction 274,400 Foster Wheeler Corporation............... 11,706,877 10,187,100 1.3 - --------------------------------------------------------------------------------------------------------------------- Entertainment 245,351 Viacom, Inc. (Class B)...... 9,184,077 8,556,616 1.1 - --------------------------------------------------------------------------------------------------------------------- Financial Services 307,000 American Express Company.... 14,499,680 17,345,500 2.2 302,800 First Data Corp............. 10,714,914.. 11,052,200 1.4 ------------ ------------ ------ 25,214,594 28,397,700 3.6 - --------------------------------------------------------------------------------------------------------------------- Foods 362,000 Heinz (H.J.) Company........ 11,901,557 12,941,500 1.6 - --------------------------------------------------------------------------------------------------------------------- Foreign--Argentina* 255,000 Yacimientos Petroliferos Fiscales S.A. (ADR) (a)(1).................... 5,330,905 6,438,750 0.8 - --------------------------------------------------------------------------------------------------------------------- Foreign--Canada* 240,000 Canadian Pacific, Ltd.(2)... 4,915,307 6,360,000 0.8 118,400 Magna International, Inc. (Class A)(3).............. 5,437,021 6,600,800 0.8 73,900 Potash Corp. of Saskatchewan Inc.(4) .................. 5,014,349 6,281,500 0.8 ------------ ------------ ------ 15,366,677 19,242,300 2.4 - --------------------------------------------------------------------------------------------------------------------- Foreign--France* 130,000 Scor SA (ADR) (a)(5)........ 4,959,500 4,468,750 0.5 111,100 +SGS-Thompson Microelectronics N.V. (NY Registered Shares)(6)..... 4,089,372 7,777,000 1.0 ------------ ------------ ------ 9,048,872 12,245,750 1.5 - --------------------------------------------------------------------------------------------------------------------- Foreign--Mexico* 140,000 Panamerican Beverages, Inc. (Class A) (7)............. 5,529,885 6,562,500 0.8 - ---------------------------------------------------------------------------------------------------------------------
-89- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Quality Equity Fund Schedule of Investments as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Stocks & Warrants Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Foreign--South Korea* 175,700 Hyundai Engineering & Construction Co., Ltd. (GDR) (b)(8)++............ 2,289,371 1,098,125 0.1 - --------------------------------------------------------------------------------------------------------------------- Foreign--Switzerland* 113,000 +Novartis AG (ADR) (a)(9)... 4,932,475 6,313,875 0.8 - --------------------------------------------------------------------------------------------------------------------- Foreign--United Kingdom* 208,000 British Steel PLC (ADR) (a)(10)................... 5,476,712 5,720,000 0.7 205,000 Glaxo Wellcome PLC (ADR) (a)(9).................... 5,547,641 6,508,750 0.8 197,000 Grand Metropolitan PLC (ADR) (a)(7).................... 5,337,393 6,230,125 0.8 47,000 Imperial Chemical Industries PLC (ADR) (a)(11)......... 2,416,395 2,444,000 0.3 88,600 National Westminster Bank PLC (ADR) (a)(12)......... 5,587,192 6,157,700 0.8 147,000 Vodafone Group PLC (ADR) (a)(13)................... 5,117,125 6,082,125 0.8 ------------ ------------ ------ 29,482,458 33,142,700 4.2 - --------------------------------------------------------------------------------------------------------------------- Hospital Management 417,000 +Health Management Associates, Inc. (Class A)........................ 9,396,499 9,382,500 1.2 - --------------------------------------------------------------------------------------------------------------------- Hospital Supplies 305,000 Abbott Laboratories......... 12,470,021 15,478,750 2.0 - --------------------------------------------------------------------------------------------------------------------- Insurance 103,000 Aetna Inc. ................. 6,648,424 8,240,000 1.0 285,000 Allstate Corp. ............. 9,378,920 16,494,375 2.1 196,000 UNUM Corporation............ 12,508,249 14,161,000 1.8 ------------ ------------ ------ 28,535,593 38,895,375 4.9 - --------------------------------------------------------------------------------------------------------------------- Leisure 426,000 Brunswick Corporation....... 10,541,056 10,224,000 1.3 - --------------------------------------------------------------------------------------------------------------------- Machinery 206,000 +American Standard Companies, Inc. .......... 6,825,765 7,879,500 1.0 300,000 Deere & Co. ................ 12,310,813 12,187,500 1.5 ------------ ------------ ------ 19,136,578 20,067,000 2.5 - --------------------------------------------------------------------------------------------------------------------- Manufacturing 200,000 Fisher Scientific International, Inc. ...... 6,606,669 9,425,000 1.2 - --------------------------------------------------------------------------------------------------------------------- Natural Gas 330,000 Enron Corp. ................ 12,657,402 14,231,250 1.8 - --------------------------------------------------------------------------------------------------------------------- Natural Gas Pipelines 170,000 IMC Global, Inc. ........... 6,589,268 6,651,250 0.8 - --------------------------------------------------------------------------------------------------------------------- Oil Service 350,000 Dresser Industries, Inc. ... 8,202,968 10,850,000 1.4 78,000 Schlumberger Ltd. .......... 6,580,141 7,790,250 1.0 ------------ ------------ ------ 14,783,109 18,640,250 2.4 - --------------------------------------------------------------------------------------------------------------------- Paper 146,000 Kimberly-Clark Corporation .............. 11,227,298 13,906,500 1.8 - --------------------------------------------------------------------------------------------------------------------- Petroleum 261,600 Pennzoil Co. ............... 10,752,129 14,780,400 1.9 357,000 Unocal Corp. ............... 12,002,947 14,503,125 1.8 ------------ ------------ ------ 22,755,076 29,283,525 3.7 - --------------------------------------------------------------------------------------------------------------------- Pharmaceuticals 195,000 Merck & Co., Inc. .......... 11,792,491 15,453,750 1.9 - --------------------------------------------------------------------------------------------------------------------- Railroads 154,000 Burlington Northern Santa Fe Inc. ..................... 12,636,886 13,301,750 1.7 - --------------------------------------------------------------------------------------------------------------------- Real Estate 279,000 Prentiss Properties Trust... 5,708,700 6,975,000 0.8 Investment Trusts 137,700 Starwood Lodging Trust...... 5,396,590 7,590,712 1.0 ------------ ------------ ------ 11,105,290 14,565,712 1.8 - --------------------------------------------------------------------------------------------------------------------- Retail 591,400 Limited, Inc. (The)......... 12,739,046 10,866,975 1.4 260,000 Sears, Roebuck & Co. ....... 10,339,207 11,992,500 1.5 ------------ ------------ ------ 23,078,253 22,859,475 2.9 - --------------------------------------------------------------------------------------------------------------------- Retail Specialty 347,100 Rite Aid Corporation........ 11,147,442 13,797,225 1.7 426,000 +Toys 'R' Us, Inc. ......... 13,238,973 12,780,000 1.6 ------------ ------------ ------ 24,386,415 26,577,225 3.3 - ---------------------------------------------------------------------------------------------------------------------
-90- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Quality Equity Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Shares Value Percent of Industry Held Stocks & Warrants Cost (Note 1a) Net Assets --------------------------------------------------------------------------------------------------------------------- Software--Computer 311,600 BMC Software, Inc. ......... $ 11,552,980 $ 12,892,450 1.6% 302,750 Oracle Corp. ............... 10,052,946 12,601,969 1.6 ------------ ------------ ------ 21,605,926 25,494,419 3.2 - --------------------------------------------------------------------------------------------------------------------- Steel 267,000 AK Steel Holding Corp. ..... 11,024,039 10,579,875 1.3 - --------------------------------------------------------------------------------------------------------------------- Telecommunications 478,000 +Airtouch Communications, Inc. ..................... 13,584,871 12,069,500 1.5 220,000 Bell Atlantic Corp.......... 13,554,148 14,245,000 1.8 ------------ ------------ ------ 27,139,019 26,314,500 3.3 - --------------------------------------------------------------------------------------------------------------------- Tobacco 71,000 Philip Morris Companies, Inc. ..................... 6,752,180 7,996,375 1.0 - --------------------------------------------------------------------------------------------------------------------- Travel & Lodging 453,300 Carnival Corp. (Class A).... 13,364,651 14,958,900 1.9 - --------------------------------------------------------------------------------------------------------------------- Utilities--Gas 140,000 El Paso Natural Gas Company .................. 6,860,804 7,070,000 0.9 - --------------------------------------------------------------------------------------------------------------------- Total Stocks & Warrants 655,263,301 754,070,370 94.9 - --------------------------------------------------------------------------------------------------------------------- Face Amount Short-Term Securities --------------------------------------------------------------------------------------------------------------------- Commercial Paper** $ 5,000,000 Clipper Receivables Corp., 5.42% due 1/09/1997....... 4,993,225 4,993,225 0.6 8,511,000 General Motors Acceptance Corp., 7.50% due 1/02/1997................. 8,507,454 8,507,454 1.1 10,000,000 Goldman Sachs Group, L.P., 5.42% due 1/06/1997....... 9,990,966 9,990,966 1.2 7,000,000 International Securitization Corp., 5.75% due 1/21/1997................. 6,976,521 6,976,521 0.9 ------------ ------------ ------ 30,468,166 30,468,166 3.8 - --------------------------------------------------------------------------------------------------------------------- US Government Agency 10,000,000 Federal Home Loan Mortgage Obligations** Corp., 5.40% due 1/03/1997................. 9,995,500 9,995,500 1.3 - --------------------------------------------------------------------------------------------------------------------- Total Short-Term Securities 40,463,666 40,463,666 5.1 - --------------------------------------------------------------------------------------------------------------------- Total Investments........... $695,726,967 794,534,036 100.0 ============ Liabilities In Excess of Other Assets.............. (258,808) 0.0 ------------ ------ Net Assets.................. $794,275,228 100.0% ============ ====== - ---------------------------------------------------------------------------------------------------------------------
(a) American Depositary Receipts (ADR). (b) Global Depositary Receipts (GDR). (c) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date. * Corresponding industry groups for foreign securities: (1) Petroleum (6) Semiconductors (11) Chemicals (2) Natural Resources (7) Beverages (12) Banking (3) Automobile Parts (8) Engineering & Construction (13) Communications (4) Natural Gas Pipelines (9) Pharmaceuticals (5) Insurance (10) Steel
** Commercial Paper and certain US Government Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. + Non-income producing security. ++ Restricted security as to resale, the value of the Fund's investment in restricted securities was approximately $1,098,000, representing 0.1% of net assets.
----------------------------------------------------------------------------------------------------------------- Acquisition Value Issue Date Cost (Note 1a) ----------------------------------------------------------------------------------------------------------------- Hyundai Engineering & Construction Co., Ltd. (GDR).................. 3/19/1996 $2,289,371 $1,098,125 ----------------------------------------------------------------------------------------------------------------- Total $2,289,371 $1,098,125 ========== =========== -----------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -91- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Reserve Assets Fund Schedule of Investments as of December 31, 1996 - ------------------------------------------------------------------------------
Face Interest Maturity Value Amount Issue Rate* Date (Note 1a) --------------------------------------------------------------------------------------------------------------------- Bank Notes--1.3% $ 300,000 Bank of America, Illinois...................... 5.63% 12/30/97 $ 299,850 - --------------------------------------------------------------------------------------------------------------------- Total Bank Notes (Cost--$299,971) 299,850 - --------------------------------------------------------------------------------------------------------------------- Certificates of 500,000 Chase Manhattan Bank USA, Delaware............. 5.60 4/01/97 500,100 Deposit--2.2% - --------------------------------------------------------------------------------------------------------------------- Total Certificates of Deposit (Cost--$500,000) 500,100 - --------------------------------------------------------------------------------------------------------------------- Commercial 282,000 Allomon Funding Corp........................... 5.35 1/17/97 281,377 Paper--43.5% 587,000 Allomon Funding Corp........................... 5.33 1/21/97 585,358 364,000 Bear Stearns Companies, Inc. (The)............. 5.35 1/31/97 362,424 800,000 Beta Finance Inc............................... 5.35 4/07/97 788,558 750,000 Caisse des Depots et Consignations............. 5.30 2/03/97 746,417 500,000 Finova Capital Corp............................ 5.48 3/20/97 494,204 500,000 General Electric Capital Corp.................. 5.50 3/03/97 495,483 333,000 General Electric Capital Corp.................. 5.64 3/05/97 329,892 300,000 General Electric Capital Corp.................. 5.45 3/25/97 296,296 720,000 General Motors Acceptance Corp................. 5.34 1/23/97 717,774 400,000 General Motors Acceptance Corp................. 5.33 6/02/97 390,940 502,000 Greenwich Funding Corporation.................. 5.33 1/28/97 500,078 526,000 Korea Development Bank......................... 5.32 1/23/97 524,374 87,000 Korea Development Bank......................... 5.35 1/23/97 86,731 1,000,000 National Fleet Funding Corp.................... 5.34 1/15/97 998,072 500,000 New Center Asset Trust......................... 5.43 1/29/97 497,984 600,000 New Center Asset Trust......................... 5.50 2/25/97 595,131 500,000 Toshiba International Finance (UK) PLC......... 5.35 1/17/97 498,896 58,000 Toshiba International Finance (UK) PLC......... 5.37 1/27/97 57,787 712,000 Windmill Funding Corp.......................... 5.35 1/24/97 709,694 - --------------------------------------------------------------------------------------------------------------------- Total Commercial Paper (Cost--$9,957,326) 9,957,470 - --------------------------------------------------------------------------------------------------------------------- Corporate Notes--8.7% 1,000,000 LABS Trust Series 1996-C Senior Notes+......... 5.625 12/29/97 1,000,000 1,000,000 Short-Term Card Account Trust (1995-1)+........ 5.615 1/15/97 1,000,000 - --------------------------------------------------------------------------------------------------------------------- Total Corporate Notes (Cost--$1,999,996) 2,000,000 - --------------------------------------------------------------------------------------------------------------------- Funding 1,000,000 Jackson National Life Insurance Co.+........... 5.41 4/08/97 1,000,000 Agreements--4.4% - --------------------------------------------------------------------------------------------------------------------- Total Funding Agreements (Cost--$1,000,000) 1,000,000 - --------------------------------------------------------------------------------------------------------------------- Master Notes--4.4% 1,000,000 Goldman Sachs Group, L.P.+..................... 5.88 8/01/97 1,000,000 - --------------------------------------------------------------------------------------------------------------------- Total Master Notes (Cost--$1,000,000) 1,000,000 - --------------------------------------------------------------------------------------------------------------------- US Government, Agency 70,000 Federal Farm Credit Bank....................... 5.52 1/21/97 69,796 & Instrumentality 90,000 Federal Farm Credit Bank....................... 5.50 2/13/97 89,451 Obligations-- 120,000 Federal Home Loan Bank......................... 5.62 5/05/97 117,823 Discount--5.6% 40,000 Federal National Mortgage Association.......... 5.35 3/13/97 39,582 110,000 Federal National Mortgage Association.......... 5.41 3/13/97 108,851 165,000 Federal National Mortgage Association.......... 5.38 3/14/97 163,253 300,000 Federal National Mortgage Association.......... 5.30 3/17/97 296,689 110,000 Federal National Mortgage Association.......... 5.34 3/18/97 108,769 50,000 Federal National Mortgage Association.......... 5.40 3/24/97 49,396 20,000 Federal National Mortgage Association.......... 5.28 4/03/97 19,731 15,000 Federal National Mortgage Association.......... 5.26 4/10/97 14,782 210,000 International Bank for Reconstruction and Development.................................... 5.54 2/20/97 208,482 - --------------------------------------------------------------------------------------------------------------------- Total US Government, Agency & Instrumentality Obligations--Discount (Cost--$1,286,426) 1,286,605 - ---------------------------------------------------------------------------------------------------------------------
-92- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc.--Reserve Assets Fund Schedule of Investments as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Face Interest Maturity Value Amount Issue Rate* Date (Note 1a) --------------------------------------------------------------------------------------------------------------------- US Government, Agency 105,000 Federal Home Loan Bank......................... 6.12% 4/15/98 104,967 & Instrumentality 1,000,000 Federal National Mortgage Association+......... 5.85 2/14/97 1,000,494 Obligations-- 1,000,000 Federal National Mortgage Association+......... 5.70 5/19/97 1,000,000 Non-Discount--30.7% 500,000 Federal National Mortgage Association+......... 5.521 5/22/97 499,870 300,000 Federal National Mortgage Association.......... 5.47 12/30/97 299,541 500,000 Federal National Mortgage Association+......... 5.46 4/24/98 499,750 1,000,000 Federal National Mortgage Association+......... 5.75 5/14/98 1,000,000 365,000 Student Loan Marketing Association+............ 5.62 1/23/97 365,018 200,000 US Treasury Notes.............................. 6.125 5/31/97 200,500 400,000 US Treasury Notes.............................. 8.50 7/15/97 406,437 200,000 US Treasury Notes.............................. 6.00 8/31/97 200,562 250,000 US Treasury Notes.............................. 5.75 9/30/97 250,449 650,000 US Treasury Notes.............................. 5.625 10/31/97 650,406 200,000 US Treasury Notes.............................. 5.375 11/30/97 199,594 150,000 US Treasury Notes.............................. 5.25 12/31/97 149,519 200,000 US Treasury Notes.............................. 5.625 11/30/98 199,156 - --------------------------------------------------------------------------------------------------------------------- Total US Government, Agency & Instrumentality Obligations-- Non-Discount (Cost--$7,026,821) 7,026,263 - --------------------------------------------------------------------------------------------------------------------- Total Investments (Cost--$23,070,540)--100.8%.................... 23,070,288 Liabilities in Excess of Other Assets--(0.8%)................................. (184,917) ----------- Net Assets--100.0%............................. $22,885,371 =========== - ---------------------------------------------------------------------------------------------------------------------
* Commercial Paper and certain US Government, Agency & Instrumentality Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. Other securities bear interest rates at the rates shown, payable at fixed dates or upon maturity. The interest rates on variable rate securities are adjusted periodically based upon appropriate indexes; the interest rates shown are the rates in effect at December 31, 1996. + Variable Rate Notes. See Notes to Financial Statements. -93- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Assets and Liabilities as of December 31, 1996 - ------------------------------------------------------------------------------
Basic Developing Domestic American Value Capital Money Balanced Focus Markets Market Fund Fund Focus Fund Fund --------------------------------------------------------------------------------------------------------------------- Assets: Investments, at value* (Note 1a)........................... $210,545,210 $522,663,382 $ 96,192,191 $ 278,860,287 Cash....................................................... 993 -- 71 10,370 Foreign cash (Note 1c)..................................... -- -- 724,487 -- Receivable for securities sold............................. -- 3,242,613 435,288 -- Interest receivable........................................ 1,786,475 -- 40,392 1,069,959 Receivable for capital shares sold......................... -- 936,960 971,206 -- Dividends receivable....................................... 151,604 519,497 68,281 -- Deferred organization expenses (Note 1f)................... -- 1,440 -- -- Prepaid registration fees and other assets (Note 1f)....... 3,441 1,794 27,135 2,392 ------------ ------------ ----------- ------------ Total assets............................................. 212,487,723 527,365,686 98,459,051 279,943,008 ------------ ------------ ----------- ------------ - --------------------------------------------------------------------------------------------------------------------- Liabilities: Payable for securities purchased........................... 166,848 1,672,743 2,753,565 3,197,475 Payable for capital shares redeemed........................ 135,085 322,896 26 1,832,621 Payable to investment adviser (Note 2)..................... 103,518 273,971 27,327 114,211 Accrued expenses and other liabilities..................... 35,258 165,912 79,231 42,687 ------------ ------------ ----------- ------------ Total liabilities........................................ 440,709 2,435,522 2,860,149 5,186,994 ------------ ------------ ----------- ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets................................................. $212,047,014 $524,930,164 $ 95,598,902 $ 274,756,014 ============ ============ =========== ============ - --------------------------------------------------------------------------------------------------------------------- Net Assets Consist of: Common Stock, $0.10 par value+............................. $ 1,324,286 $ 3,562,243 $ 950,806 $ 27,477,548 Paid-in capital in excess of par........................... 174,548,138 422,337,791 92,662,419 247,297,930 Undistributed investment income--net....................... 3,604,288 3,224,622 1,752,408 -- Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5)................................................. 20,595,249 52,901,365 (4,054,029) -- Unrealized appreciation (depreciation) on investments and foreign currency transactions--net....................... 11,975,053 42,904,143 4,287,298 (19,464) ------------ ------------ ----------- ------------ Net Assets................................................. $212,047,014 $524,930,164 $ 95,598,902 $ 274,756,014 ============ ============ =========== ============ - --------------------------------------------------------------------------------------------------------------------- Capital Shares Outstanding................................. 13,242,862 35,622,430 9,508,063 274,775,478 ============ ============ =========== ============ Net Asset Value, Offering and Redemption Price Per Share... $ 16.01 $ 14.74 $ 10.05 $ 1.00 ============ ============ =========== ============ - --------------------------------------------------------------------------------------------------------------------- * Identified cost.......................................... $198,570,157 $479,759,239 $ 91,897,323 $ 278,879,751 ============ ============ =========== ============ + Authorized shares........................................ 100,000,000 100,000,000 100,000,000 1,300,000,000 ============ ============ =========== ============ - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -94- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Assets and Liabilities as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
Global Global Global Equity Bond Strategy Utility Growth Focus Focus Focus Fund Fund++ Fund Fund --------------------------------------------------------------------------------------------------------------------- Assets: Investments, at value* (Note 1a)............................ $451,805,311 $100,348,183 $867,228,567 $142,177,130 Cash........................................................ 608 10,072 194,752 25,262 Foreign cash (Note 1c)...................................... -- 60,267 15,583,973 340 Interest receivable......................................... 58,494 2,094,950 3,816,480 33,360 Receivable for forward foreign exchange contracts (Note 1b)....................................................... -- 141,607 3,709,150 -- Receivable for securities sold.............................. 1,151,250 2,666,378 -- -- Dividends receivable........................................ 312,385 -- 1,082,249 430,750 Receivable for capital shares sold.......................... 703,607 779 414 78,173 Deferred organization expenses (Note 1f).................... -- 2,367 -- 2,414 Prepaid registration fees and other assets (Note 1f)........ 2,555 642 3,600 918 ------------ ------------ ------------ ------------ Total assets.............................................. 454,034,210 105,325,245 891,619,185 142,748,347 ------------ ------------ ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1b)....................................... -- 78,492 2,598,413 -- Payable for securities purchased............................ 561,675 11,126,689 16,114,249 -- Payable for capital shares redeemed......................... 48,793 104,824 691,642 177,446 Payable to investment adviser (Note 2)...................... 293,221 43,076 496,049 74,269 Accrued expenses and other liabilities...................... 101,256 164,790 1,434,257 58,831 Payable for forward foreign exchange contracts (Note 1b).... -- -- 81,757 -- Variation margin on stock index futures contracts (Note 1b)....................................................... -- 17,464 -- -- ------------ ------------ ------------ ------------ Total liabilities......................................... 1,004,945 11,535,335 21,416,367 310,546 ------------ ------------ ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets.................................................. $453,029,265 $ 93,789,910 $870,202,818 $142,437,801 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- Net Assets Consist of: Common Stock, $0.10 par value+.............................. $ 1,727,480 $ 960,915 $ 6,272,330 $ 1,168,693 Paid-in capital in excess of par............................ 374,280,783 94,976,976 746,052,734 117,927,335 Undistributed investment income--net........................ 1,422,632 118,851 20,579,673 1,132,021 Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5)........................................................ 22,041,727 (1,230,690) 26,215,075 (2,628,376) Unrealized appreciation (depreciation) on investments and foreign currency transactions--net........................ 53,556,643 (1,036,142) 71,083,006 24,838,128 ------------ ------------ ------------ ------------ Net Assets.................................................. $453,029,265 $ 93,789,910 $870,202,818 $142,437,801 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- Capital Shares Outstanding.................................. 17,274,795 9,609,151 62,723,303 11,686,930 ============ ============ ============ ============ Net Asset Value, Offering and Redemption Price Per Share.... $ 26.22 $ 9.76 $ 13.87 $ 12.19 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- * Identified cost........................................... $398,248,668 $101,153,795 $793,370,058 $117,339,737 ============ ============ ============ ============ + Authorized shares......................................... 100,000,000 100,000,000 200,000,000 100,000,000 ============ ============ ============ ============ - ---------------------------------------------------------------------------------------------------------------------
++ International Bond Fund was acquired by World Income Focus Fund. Subsequent to the acquisition, World Income Focus Fund changed its name to Global Bond Focus Fund. See Notes to Financial Statements. -95- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Assets and Liabilities as of December 31, 1996 (continued) - ------------------------------------------------------------------------------
High Government Current International Bond Income Index 500 Equity Focus Fund++ Fund Fund++++ Fund --------------------------------------------------------------------------------------------------------------------- Assets: Investments, at value* (Note 1a)............................ $ 87,831,280 $410,867,543 $ 10,844,116 $ 347,717,218 Options purchased, at value (premiums paid-$597,405) (Notes 1a & 1b).................................................. -- -- -- 705,275 Variation margin on stock index futures contracts (Note 1b)....................................................... -- -- -- 51,556 Cash........................................................ 776 -- -- 11,007 Foreign cash (Note 1c)...................................... -- -- -- 814,905 Receivable for options written.............................. -- -- -- 26,960 Interest receivable......................................... 1,419,180 6,689,392 -- 210 Receivable for capital shares sold.......................... 365,988 2,353 -- 287,014 Dividends receivable........................................ -- -- 7,216 306,875 Receivable for securities sold.............................. -- -- 1,881 294,641 Receivable for forward foreign exchange contracts (Note 1b)....................................................... -- -- -- 217,542 Receivable from investment adviser (Note 2)................. -- -- 1,651 -- Receivable for loaned securities (Note 6)................... 83 -- -- -- Deferred organization expenses (Note 1f).................... -- -- 14,852 -- Prepaid registration fees and other assets (Note 1f)........ 717 5,893 -- 3,416 ------------ ------------ ------------ ------------ Total assets.............................................. 89,618,024 417,565,181 10,869,716 350,436,619 ------------ ------------ ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Liabilities: Options written, at value (premiums received-$117,250) (Notes 1a & 1b)........................................... -- -- -- 154,869 Unrealized depreciation on forward foreign exchange contracts (Note 1b)....................................... -- -- -- 305 Payable for custodian bank (Note 1h)........................ -- 2,604,491 -- -- Payable for securities purchased............................ -- -- 63,798 604,180 Payable to investment adviser (Note 2)...................... 12,244 172,193 -- 225,798 Payable for capital shares redeemed......................... -- 83,294 22 8,823 Variation margin on stock index futures contracts (Note 1b)....................................................... -- -- 29,200 -- Accrued expenses and other liabilities...................... 24,988 90,285 24,856 362,815 ------------ ------------ ------------ ------------ Total liabilities......................................... 37,232 2,950,263 117,876 1,356,790 ------------ ------------ ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets.................................................. $ 89,580,792 $414,614,918 $ 10,751,840 $ 349,079,829 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- Net Assets Consist of: Common Stock, $0.10 par value+.............................. $ 861,700 $ 3,638,978 $ 105,735 $ 3,002,760 Paid-in capital in excess of par............................ 87,437,337 412,111,475 10,476,301 329,573,888 Undistributed investment income--net........................ 484,603 3,786,391 16,863 4,510,300 Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5)................................ (154,414) (5,478,242) (193) 192,008 Unrealized appreciation on investments and foreign currency transactions--net......................................... 951,566 556,316 153,134 11,800,873 ------------ ------------ ------------ ------------ Net Assets.................................................. $ 89,580,792 $414,614,918 $ 10,751,840 $ 349,079,829 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- Capital Shares Outstanding.................................. 8,617,002 36,389,781 1,057,347 30,027,594 ============ ============ ============ ============ Net Asset Value, Offering and Redemption Price Per Share.... $ 10.40 $ 11.39 $ 10.17 $ 11.63 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- * Identified cost........................................... $ 86,879,714 $410,311,227 $ 10,696,027 $ 335,887,786 ============ ============ ============ ============ + Authorized shares......................................... 100,000,000 100,000,000 100,000,000 100,000,000 ============ ============ ============ ============ - ---------------------------------------------------------------------------------------------------------------------
++ Formerly known as Intermediate Government Bond Fund. ++++ The Fund commenced operations on December 13, 1996. See Notes to Financial Statements. -96- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Assets and Liabilities as of December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Natural Resources Prime Quality Reserve Focus Bond Equity Assets Fund Fund Fund Fund --------------------------------------------------------------------------------------------------------------------- Assets: Investments, at value* (Note 1a)............................ $ 45,411,176 $529,710,728 $794,534,036 $ 23,070,288 Cash........................................................ 507 654 85 6,098 Interest receivable......................................... -- 8,433,549 -- 88,796 Receivable for securities sold.............................. 39,532 5,093,200 -- -- Dividends receivable........................................ 59,829 -- 1,227,381 -- Receivable for capital shares sold.......................... -- 498,018 365,270 39,787 Receivable for loaned securities (Note 6)................... -- 610 -- -- Prepaid registration fees and other assets (Note 1f)........ 403 7,494 5,695 2,561 ------------ ------------ ------------ ------------ Total assets.............................................. 45,511,447 543,744,253 796,132,467 23,207,530 ------------ ------------ ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Liabilities: Payable for securities purchased............................ 220,652 4,996,751 1,289,280 299,763 Payable to investment adviser (Note 2)...................... 25,855 201,657 304,791 9,534 Payable for capital shares redeemed......................... 50,989 54,060 110,758 820 Accrued expenses and other liabilities...................... 16,956 98,057 152,410 12,042 ------------ ------------ ------------ ------------ Total liabilities......................................... 314,452 5,350,525 1,857,239 322,159 ------------ ------------ ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets.................................................. $ 45,196,995 $538,393,728 $794,275,228 $ 22,885,371 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- Net Assets Consist of: Common Stock, $0.10 par value+.............................. $ 344,378 $ 4,521,158 $ 2,419,424 $ 2,288,562 Paid-in capital in excess of par............................ 36,969,567 542,786,415 651,091,058 20,597,061 Undistributed investment income--net........................ 221,415 3,129,844 5,217,038 -- Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5)........................................................ 2,970,842 (15,731,248) 36,740,639 -- Unrealized appreciation (depreciation) on investments and foreign currency transactions--net........................ 4,690,793 3,687,559 98,807,069 (252) ------------ ------------ ------------ ------------ Net Assets.................................................. $ 45,196,995 $538,393,728 $794,275,228 $ 22,885,371 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- Capital Shares Outstanding.................................. 3,443,783 45,211,583 24,194,244 22,885,622 ============ ============ ============ ============ Net Asset Value, Offering and Redemption Price Per Share.... $ 13.12 $ 11.91 $ 32.83 $ 1.00 ============ ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------- * Identified cost........................................... $ 40,722,448 $526,023,169 $695,726,967 $ 23,070,540 ============ ============ ============ ============ + Authorized shares......................................... 100,000,000 100,000,000 100,000,000 500,000,000 ============ ============ ============ ============ - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -97- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Operations for the Year Ended December 31, 1996 - ------------------------------------------------------------------------------
Basic Developing Domestic American Value Capital Money Balanced Focus Markets Market Fund Fund Focus Fund Fund - --------------------------------------------------------------------------------------------------------------------- Investment Income (Notes 1d & 1e): Interest and discount earned...................................... $ 6,807,063 $ 2,321,975 $ 557,486 $15,317,537 Dividends*........................................................ 1,833,183 5,869,178 2,257,621 -- ----------- ----------- ---------- ----------- Total income...................................................... 8,640,246 8,191,153 2,815,107 15,317,537 ----------- ----------- ---------- ----------- - --------------------------------------------------------------------------------------------------------------------- Expenses: Investment advisory fees (Note 2)................................. 1,186,936 2,414,605 765,718 1,386,726 Custodian fees.................................................... 27,739 39,578 192,342 17,641 Accounting services (Note 2)...................................... 47,193 94,151 17,633 49,358 Professional fees................................................. 20,794 27,988 8,370 29,810 Registration fees (Note 1f)....................................... 2,869 62,939 10,191 24 Directors' fees and expenses...................................... 5,004 7,451 1,383 6,723 Transfer agent fees (Note 2)...................................... 5,006 4,958 5,007 5,020 Pricing services.................................................. 685 232 6,224 -- Amortization of organization expenses (Note 1f)................... -- 720 2,667 1,340 Other............................................................. 4,250 5,250 -- 10,742 ----------- ----------- ---------- ----------- Total expenses before reimbursement............................... 1,300,476 2,657,872 1,009,535 1,507,384 Reimbursement of expenses (Note 2)................................ -- -- (52,388) -- ----------- ----------- ---------- ----------- Total expenses after reimbursement................................ 1,300,476 2,657,872 957,147 1,507,384 ----------- ----------- ---------- ----------- Investment income--net............................................ 7,339,770 5,533,281 1,857,960 13,810,153 ----------- ----------- ---------- ----------- - --------------------------------------------------------------------------------------------------------------------- Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net (Notes 1b, 1c, 1e & 3): Realized gain (loss) on investments--net.......................... 21,869,723 56,406,548 (51,709) 12,359 Realized loss on foreign currency transactions--net............... -- -- (105,274) -- Change in unrealized appreciation/depreciation on investments--net................................................ (9,430,963) 13,550,612 4,837,024 (157,747) Change in unrealized appreciation/depreciation on foreign currency transactions.................................................... -- -- (7,883) -- ----------- ----------- ---------- ----------- Total realized and unrealized gain (loss) on investments and foreign currency transactions--net.............................. 12,438,760 69,957,160 4,672,158 (145,388) ----------- ----------- ---------- ----------- Net Increase in Net Assets Resulting from Operations.............. $19,778,530 $75,490,441 $6,530,118 $13,664,765 =========== =========== ========== =========== - --------------------------------------------------------------------------------------------------------------------- * Net of withholding tax on dividends............................. $ 873 $ 159,174 $ 103,221 -- =========== =========== ========== =========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -98- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Operations for the Year Ended December 31, 1996 (continued) - ------------------------------------------------------------------------------
Global Global Global Equity Bond Strategy Utility Growth Focus Focus Focus Fund Fund Fund Fund --------------------------------------------------------------------------------------------------------------------- Investment Income (Notes 1d & 1e): Interest and discount earned*.................................. $ 2,906,699 $7,362,977 $ 11,236,222 $ 659,024 Dividends**.................................................... 2,359,527 68,036 8,177,095 6,059,957 Other income................................................... -- 42,863 4,675 -- ----------- ---------- ------------ ----------- Total income................................................... 5,266,226 7,473,876 19,417,992 6,718,981 ----------- ---------- ------------ ----------- - --------------------------------------------------------------------------------------------------------------------- Expenses: Investment advisory fees (Note 2).............................. 3,010,613 518,022 3,715,122 880,959 Custodian fees................................................. 42,130 30,154 165,186 29,004 Accounting services (Note 2)................................... 90,851 18,069 107,351 31,814 Professional fees.............................................. 29,504 11,372 50,835 15,356 Registration fees (Note 1f).................................... 49,227 562 -- 19 Directors' fees and expenses................................... 8,142 1,898 12,226 3,283 Transfer agent fees (Note 2)................................... 5,002 5,002 5,006 5,007 Pricing services............................................... -- 5,093 3,930 -- Amortization of organization expenses (Note 1f)................ -- 1,578 -- 863 Other.......................................................... 5,389 2,016 17,599 4,391 ----------- ---------- ------------ ----------- Total expenses................................................. 3,240,858 593,766 4,077,255 970,696 ----------- ---------- ------------ ----------- Investment income--net......................................... 2,025,368 6,880,110 15,340,737 5,748,285 ----------- ---------- ------------ ----------- - --------------------------------------------------------------------------------------------------------------------- Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net (Notes 1b, 1c, 1e & 3): Realized gain on investments--net.............................. 22,199,518 905,735 45,320,331 1,243,231 Realized gain (loss) on foreign currency transactions--net..... -- (75,020 ) 15,637,082 (46,439) Change in unrealized appreciation/depreciation on investments--net............................................. 5,970,999 (531,602 ) 37,056,845 10,440,233 Change in unrealized appreciation/depreciation on foreign currency transactions........................................ -- (174,496 ) (12,458,193) (9,723) ----------- ---------- ------------ ----------- Total realized and unrealized gain on investments and foreign currency transactions--net................................... 28,170,517 124,617 85,556,065 11,627,302 ----------- ---------- ------------ ----------- Net Increase in Net Assets Resulting from Operations........... $30,195,885 $7,004,727 $100,896,802 $17,375,587 =========== ========== ============ =========== - --------------------------------------------------------------------------------------------------------------------- * Net of withholding tax on interest.......................... $ -- $ 32,711 $ 80,349 $ -- =========== ========== ============ =========== ** Net of withholding tax on dividends......................... $ 3,500 $ -- $ 462,853 $ 350,006 =========== ========== ============ =========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -99- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Operations for the Year Ended December 31, 1996 (continued) - ------------------------------------------------------------------------------
High International Government Current Equity Bond Income Index 500 Focus Fund Fund Fund+ Fund - --------------------------------------------------------------------------------------------------------------------- Investment Income (Notes 1d & 1e): Interest and discount earned*..................................... $3,898,013 $37,867,841 $ 9,587 $ 3,616,175 Dividends**....................................................... -- 883,127 7,276 5,353,531 Other income...................................................... 7,464 254,493 -- -- ----------- ----------- -------- ----------- Total income...................................................... 3,905,477 39,005,461 16,863 8,969,706 ----------- ----------- -------- ----------- - --------------------------------------------------------------------------------------------------------------------- Expenses: Investment advisory fees (Note 2)................................. 297,926 1,881,541 1,638 2,358,140 Custodian fees.................................................... 12,035 38,264 500 278,327 Accounting services (Note 2)...................................... 13,454 85,714 120 68,951 Professional fees................................................. 7,193 35,064 -- 26,860 Registration fees (Note 1f)....................................... 14,717 26,617 441 27,017 Pricing services.................................................. 1,264 9,274 25 22,351 Directors' fees and expenses...................................... 1,009 8,229 -- 6,266 Transfer agent fees (Note 2)...................................... 4,991 4,960 417 4,589 Amortization of organization expenses (Note 1f)................... -- -- 148 1,383 Other............................................................. 1,191 6,439 -- 9,054 ----------- ----------- -------- ----------- Total expenses before reimbursement............................... 353,780 2,096,102 3,289 2,802,938 Reimbursement of expenses (Note 2)................................ (264,214 ) -- (3,289 ) -- ----------- ----------- -------- ----------- Expenses after reimbursement...................................... 89,566 2,096,102 -- 2,802,938 ----------- ----------- -------- ----------- Investment income--net............................................ 3,815,911 36,909,359 16,863 6,166,768 ----------- ----------- -------- ----------- - --------------------------------------------------------------------------------------------------------------------- Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net (Notes 1b, 1c, 1e & 3): Realized gain (loss) on investments--net.......................... (154,413 ) (3,777,610) (193 ) 9,049,271 Realized gain on foreign currency transactions--net............... -- -- -- 889,867 Change in unrealized appreciation/depreciation on investments--net................................................ (1,012,273 ) 8,565,962 153,134 3,256,180 Change in unrealized appreciation/depreciation on foreign currency transactions.................................................... -- -- -- (745,643) ----------- ----------- -------- ----------- Total realized and unrealized gain (loss) on investments and foreign currency transactions--net.............................. (1,166,686 ) 4,788,352 152,941 12,449,675 ----------- ----------- -------- ----------- Net Increase in Net Assets Resulting from Operations.............. $2,649,225 $41,697,711 $169,804 $18,616,443 =========== =========== ======== =========== - --------------------------------------------------------------------------------------------------------------------- * Net of withholding tax on interest............................. $ -- $ -- $ -- $ 977 =========== =========== ======== =========== ** Net of withholding tax on dividends............................ $ -- $ -- $ -- $ 555,297 =========== =========== ======== =========== - ---------------------------------------------------------------------------------------------------------------------
+The Fund commenced operations on December 13, 1996. See Notes to Financial Statements. -100- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Operations for the Year Ended December 31, 1996 (concluded) - ------------------------------------------------------------------------------
Natural Resources Prime Quality Reserve Focus Bond Equity Assets Fund Fund Fund Fund - --------------------------------------------------------------------------------------------------------------------- Investment Income (Notes 1d & 1e): Interest and discount earned................................ $ 75,317 $ 35,506,054 $ 5,883,776 $ 1,323,908 Dividends*.................................................. 939,896 -- 11,052,176 -- Other income................................................ -- 58,223 3,074 -- ---------- ----------- ------------ ---------- Total income................................................ 1,015,213 35,564,277 16,939,026 1,323,908 ---------- ----------- ------------ ---------- - --------------------------------------------------------------------------------------------------------------------- Expenses: Investment advisory fees (Note 2)........................... 297,742 2,160,063 3,136,852 118,827 Accounting services (Note 2)................................ 10,026 107,314 158,146 3,830 Custodian fees.............................................. 31,761 45,793 60,419 10,988 Professional fees........................................... 7,148 42,418 56,245 6,043 Registration fees (Note 1f)................................. 16 29,647 52,190 -- Directors' fees and expenses................................ 1,018 10,976 14,937 -- Transfer agent fees (Note 2)................................ 5,002 5,005 4,982 4,997 Pricing services............................................ 4,735 8,819 214 -- Other....................................................... 1,434 8,811 11,246 -- ---------- ----------- ------------ ---------- Total expenses.............................................. 358,882 2,418,846 3,495,231 144,685 ---------- ----------- ------------ ---------- Investment income--net...................................... 656,331 33,145,431 13,443,795 1,179,223 ---------- ----------- ------------ ---------- - --------------------------------------------------------------------------------------------------------------------- Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net (Notes 1b, 1c, 1e & 3): Realized gain on investments--net........................... 2,970,830 215,210 36,740,673 3,049 Realized gain (loss) on foreign currency transactions--net......................................... (13,371) -- 147 -- Change in unrealized appreciation/depreciation on investments--net.......................................... 2,055,840 (21,044,224) 67,969,744 (14,201) Change in unrealized appreciation/depreciation on foreign currency transactions..................................... 2,033 -- -- -- ---------- ----------- ------------ ---------- Total realized and unrealized gain (loss) on investments and foreign currency transactions--net........................ 5,015,332 (20,829,014) 104,710,564 (11,152) ---------- ----------- ------------ ---------- Net Increase in Net Assets Resulting from Operations........ $ 5,671,663 $ 12,316,417 $118,154,359 $ 1,168,071 ========== =========== ============ ========== - --------------------------------------------------------------------------------------------------------------------- * Net of withholding tax on dividends....................... $ 75,184 $ -- $ 262,454 $ -- ========== =========== ============ ========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -101- - ------------------------------------------------------------------------------ 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: 1996 1995 --------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net......................................................... $ 7,339,770 $ 8,022,508 Realized gain (loss) on investments--net....................................... 21,869,723 (311,392) Change in unrealized appreciation/depreciation on investments--net............. (9,430,963) 27,587,655 ------------ ------------ Net increase in net assets resulting from operations........................... 19,778,530 35,298,771 ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net......................................................... (7,882,096) (7,173,644) Realized gain on investments--net.............................................. (328,715) -- ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders................................................................... (8,210,811) (7,173,644) ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net increase (decrease) in net assets derived from capital share transactions................................................................. (12,432,919) 25,836,347 ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase (decrease) in net assets........................................ (865,200) 53,961,474 Beginning of year.............................................................. 212,912,214 158,950,740 ------------ ------------ End of year*................................................................... $212,047,014 $212,912,214 ============ ============ - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net.......................................... $ 3,604,288 $ 4,146,614 ============ ============ - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -102- ============================================================================== Basic Value Focus Fund - ---------------------------------- For the Year Ended December 31, ---------------------------------- 1996 1995 - ---------------------------------- $ 5,533,281 $ 3,967,636 56,406,548 13,595,994 13,550,612 34,077,480 - ------------ ------------ 75,490,441 51,641,110 - ------------ ------------ - ---------------------------------- (4,571,085) (3,296,595) (16,947,347) (7,106,929) - ------------ ------------ (21,518,432) (10,403,524) - ------------ ------------ - ---------------------------------- 164,495,262 100,918,588 - ------------ ------------ - ---------------------------------- 218,467,271 142,156,174 306,462,893 164,306,719 - ------------ ------------ $524,930,164 $306,462,893 ============ ============ - ---------------------------------- $ 3,224,622 $ 2,262,426 ============ ============ - ---------------------------------- -103- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------
Developing Capital Markets Focus Fund -------------------------------- For the Year Ended December 31, -------------------------------- Increase (Decrease) in Net Assets: 1996 1995 ------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net.......................................................... $ 1,857,960 $ 1,186,414 Realized gain (loss) on investments and foreign currency transactions--net...... (156,983) (3,129,641) Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net...................................................... 4,829,141 1,803,333 ----------- ----------- Net increase (decrease) in net assets resulting from operations................. 6,530,118 (139,894) ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net.......................................................... (1,385,673) (332,002) Realized gain on investments--net............................................... -- -- ----------- ----------- Net decrease in net assets resulting from dividends and distributions to shareholders.................................................................... (1,385,673) (332,002) ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net increase (decrease) in net assets derived from capital share transactions... 35,245,827 19,004,774 ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase (decrease) in net assets......................................... 40,390,272 18,532,878 Beginning of year............................................................... 55,208,630 36,675,752 ----------- ----------- End of year*.................................................................... $95,598,902 $55,208,630 =========== =========== - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net (Note 1i)................................. $ 1,752,408 $ 1,184,973 =========== =========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -104- ============================================================================== Domestic Money Market Fund - ---------------------------------- For the Year Ended December 31, ---------------------------------- 1996 1995 - ---------------------------------- $ 13,810,153 $ 17,526,423 12,359 44,778 (157,747) 334,598 ------------ 13,664,765 17,905,799 ------------ - ---------------------------------- (13,810,153) (17,526,423) (12,359) (44,778) ------------ ) (13,822,512 (17,571,201) ------------ - ---------------------------------- (28,998,068) (59,621,869) ------------ - ---------------------------------- (29,155,815) (59,287,271) 303,911,829 363,199,100 ------------ $274,756,014 $303,911,829 ============ - ---------------------------------- $ -- $ -- ============ - ---------------------------------- -105- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------
Equity Growth Fund ---------------------------------- For the Year Ended December 31, ---------------------------------- Increase (Decrease) in Net Assets: 1996 1995 ------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net......................................................... $ 2,025,368 $ 1,785,602 Realized gain on investments and foreign currency transactions--net............ 22,199,518 45,385,878 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net..................................................... 5,970,999 44,941,516 ------------ ------------ Net increase in net assets resulting from operations........................... 30,195,885 92,112,996 ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net......................................................... (1,882,603) (889,063) Realized gain on investments--net.............................................. (43,561,906) -- ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders................................................................... (45,444,509) (889,063) ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net proceeds from issuance of capital shares................................... 128,356,735 78,653,598 Net proceeds from issuance of capital shares resulting from reorganization..... -- -- ------------ ------------ Net increase in net assets derived from capital share transactions............. 128,356,735 78,653,598 ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase in net assets................................................... 113,108,111 169,877,531 Beginning of year.............................................................. 339,921,154 170,043,623 ------------ ------------ End of year*................................................................... $453,029,265 $339,921,154 ============ ============ - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net (Note 1i)................................ $ 1,422,632 $ 1,279,867 ============ ============ - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -106- ============================================================================== Global Bond Focus Fund -------------------------------- For the Year Ended December 31, -------------------------------- 1996 1995 -------------------------------- $ 6,880,110 $ 6,952,991 830,715 510,287 (706,098) 4,502,738 ------------ 7,004,727 11,966,016 ------------ - -------------------------------- (6,810,949) (6,851,555) -- -- ------------ ) (6,810,949 (6,851,555) ------------ - -------------------------------- (6,069,072) 1,580,255 17,820,572 -- ------------ 11,751,500 1,580,255 ------------ - -------------------------------- 11,945,278 6,694,716 81,844,632 75,149,916 ------------ $93,789,910 $81,844,632 ============ - -------------------------------- $ 118,851 $ 765,308 ============ - -------------------------------- -107- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------
Global Strategy Focus Fund ---------------------------------- For the Year Ended December 31, ---------------------------------- Increase (Decrease) in Net Assets: 1996 1995 --------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net......................................................... $ 15,340,737 $ 17,146,054 Realized gain (loss) on investments and foreign currency transactions--net..... 60,957,413 (23,380,052) Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net..................................................... 24,598,652 58,162,628 ------------ ------------ Net increase in net assets resulting from operations........................... 100,896,802 51,928,630 ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net......................................................... (12,699,527) (16,913,134) In excess of realized gains on investments--net................................ -- (199,509) ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders................................................................... (12,699,527) (17,112,643) ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net redemptions from capital shares............................................ (52,564,882) (9,981,690) Net proceeds from issuance of capital shares resulting from reorganization..... 294,328,812 -- ------------ ------------ Net increase (decrease) in net assets derived from capital share transactions................................................................. 241,763,930 (9,981,690) ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase (decrease) in net assets........................................ 329,961,205 24,834,297 Beginning of year.............................................................. 540,241,613 515,407,316 ------------ ------------ End of year*................................................................... $870,202,818 $540,241,613 ============ ============ - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net (Note 1i)................................ $ 20,579,673 $ 7,489,615 ============ ============ - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -108- ============================================================================== Global Utility Focus Fund - ---------------------------------- For the Year Ended December 31, ---------------------------------- 1996 1995 - ---------------------------------- $ 5,748,285 $ 5,942,408 1,196,792 (2,380,178) 10,430,510 26,090,740 ------------ 17,375,587 29,652,970 ------------ - ---------------------------------- (6,739,387) (5,144,108) -- -- ------------ (6,739,387) (5,144,108) ------------ - ---------------------------------- 16,423,676 2,526,392 -- -- ------------ (16,423,676) (2,526,392) ------------ - ---------------------------------- (5,787,476) 21,982,470 148,225,277 126,242,807 ------------ $142,437,801 $148,225,277 ============ - ---------------------------------- $ 1,132,021 $ 2,159,534 ============ - ---------------------------------- -109- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------
Government Bond Fund -------------------------------- For the Year Ended December 31, -------------------------------- Increase (Decrease) in Net Assets: 1996 1995 --------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net.......................................................... $ 3,815,911 $ 1,796,464 Realized gain (loss) on investments--net........................................ (154,413) 192,982 Change in unrealized appreciation/depreciation on investments--net.............. (1,012,273) 2,024,581 ----------- ----------- Net increase in net assets resulting from operations............................ 2,649,225 4,014,027 ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net.......................................................... (3,530,361) (1,670,786) Realized gain on investments--net............................................... (137,668) -- ----------- ----------- Net decrease in net assets resulting from dividends and distributions to shareholders.................................................................... (3,668,029) (1,670,786) ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net increase in net assets derived from capital share transactions.............. 49,603,169 20,842,535 ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase in net assets.................................................... 48,584,365 23,185,776 Beginning of year............................................................... 40,996,427 17,810,651 ----------- ----------- End of year*.................................................................... $89,580,792 $40,996,427 =========== =========== - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net (Note 1i)................................. $ 484,603 $ 199,053 =========== =========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -110- ============================================================================== High Current Income Fund - ---------------------------------- For the Year Ended December 31, ---------------------------------- 1996 1995 - ---------------------------------- $ 36,909,359 $ 30,889,361 (3,777,610) 589,358 8,565,962 16,336,511 ------------ 41,697,711 47,815,230 ------------ - ---------------------------------- (36,130,450) (30,645,264) -- -- ------------ (36,130,450) (30,645,264) ------------ - ---------------------------------- 52,695,717 83,463,234 ------------ - ---------------------------------- 58,262,978 100,633,200 356,351,940 255,718,740 ------------ $414,614,918 $356,351,940 ============ - ---------------------------------- $ 3,786,391 $ 2,822,298 ============ - ---------------------------------- -111- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------
Index 500 Fund --------------- For the Period Dec. 13, 1996+ Increase (Decrease) in Net Assets: to Dec. 31, 1996 --------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net........................................................................... $ 16,863 Realized gain (loss) on investments and foreign currency transactions--net....................... (193) Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net................................................................................ 153,134 ----------- Net increase in net assets resulting from operations............................................. 169,804 ----------- - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net........................................................................... -- Realized gain on investments--net................................................................ -- In excess of realized gain on investments--net................................................... -- ----------- Net decrease in net assets resulting from dividends and distributions to shareholders............ -- ----------- - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net increase in net assets derived from capital share transactions............................... 582,036 ----------- - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase in net assets..................................................................... 751,840 Beginning of period.............................................................................. 10,000,000 ----------- End of period*................................................................................... $ 10,751,840 =========== - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net (Note 1i).................................................. $ 16,863 =========== - ---------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations. See Notes to Financial Statements. -112- ============================================================================== International Equity Focus Fund - ---------------------------------- For the Year Ended December 31, ---------------------------------- 1996 1995 - ---------------------------------- $ 6,166,768 $ 4,728,612 9,939,138 (7,417,463) 2,510,537 15,585,541 ------------ 18,616,443 12,896,690 ------------ - ---------------------------------- (3,669,329) (151,930) -- (3,904,078) -- (5,275,618) ------------ (3,669,329) (9,331,626) ------------ - ---------------------------------- 68,530,474 14,153,402 ------------ - ---------------------------------- 83,477,588 17,718,466 265,602,241 247,883,775 ------------ $349,079,829 $265,602,241 ============ - ---------------------------------- $ 4,510,300 $ 4,974,839 ============ - ---------------------------------- -113- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------
Natural Resources Focus Fund -------------------------------- For the Year Ended December 31, -------------------------------- Increase (Decrease) in Net Assets: 1996 1995 --------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net.......................................................... $ 656,331 $ 745,572 Realized gain on investments and foreign currency transactions--net............. 2,957,459 789,560 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net...................................................... 2,057,873 3,506,951 ----------- ----------- Net increase in net assets resulting from operations............................ 5,671,663 5,042,083 ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net.......................................................... (722,544) (719,125) Realized gain on investments--net............................................... (740,711) (116,046) ----------- ----------- Net decrease in net assets resulting from dividends and distributions to shareholders.................................................................... (1,463,255) (835,171) ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net increase (decrease) in net assets derived from capital share transactions... (2,113,764) (819,422) ----------- ----------- - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase in net assets.................................................... 2,094,644 3,387,490 Beginning of year............................................................... 43,102,351 39,714,861 ----------- ----------- End of year*.................................................................... $45,196,995 $43,102,351 =========== =========== - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income-net (Note 1i).................................. $ 221,415 $ 315,714 =========== =========== - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -114- - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Prime Bond Fund - ---------------------------------- For the Year Ended December 31, ---------------------------------- 1996 1995 - ---------------------------------- $ 33,145,431 $ 30,681,580 215,210 2,850,926 (21,044,224) 46,631,310 ------------ 12,316,417 80,163,816 ------------ - ---------------------------------- (32,511,472) (30,585,478) -- -- ------------ (32,511,472) (30,585,478) ------------ - ---------------------------------- 68,750,815 49,025,455 ------------ - ---------------------------------- 48,555,760 98,603,793 489,837,968 391,234,175 ------------ $538,393,728 $489,837,968 ============ - ---------------------------------- $ 3,129,844 $ 2,495,885 ============ - ---------------------------------- -115- - ------------------------------------------------------------------------------ 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: 1996 1995 --------------------------------------------------------------------------------------------------------------------- Operations: Investment income--net.................................................... $ 13,443,795 $ 10,721,106 Realized gain on investments and foreign currency transactions--net....... 36,740,820 84,589,225 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net................................................ 67,969,744 17,627,851 ------------ ------------ Net increase in net assets resulting from operations...................... 118,154,359 112,938,182 ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Dividends & Distributions to Shareholders (Note 1g): Investment income--net.................................................... (14,235,069) (8,042,730) Realized gain on investments--net......................................... (84,325,410) (9,959,874) ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders.............................................................. (98,560,479) (18,002,604) ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 4): Net increase (decrease) in net assets derived from capital share transactions............................................................ 130,130,747 85,255,141 ------------ ------------ - --------------------------------------------------------------------------------------------------------------------- Net Assets: Total increase (decrease) in net assets................................... 149,724,627 180,190,719 Beginning of year......................................................... 644,550,601 464,359,882 ------------ ------------ End of year*.............................................................. $ 794,275,228 $ 644,550,601 ============ ============ - --------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net (Note 1i)........................... $ 5,217,038 $ 6,008,129 ============ ============ - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. -116- ============================================================================== Reserve Assets Fund - ------------------------------------ For the Year Ended December 31, - ------------------------------------ 1996 1995 - ------------------------------------ $ 1,179,223 $ 1,572,494 3,049 10,309 (14,201) 41,873 ------------ 1,168,071 1,624,676 ------------ - ------------------------------------ (1,179,223) (1,572,494) (3,049) (10,309) ------------ (1,182,272) (1,582,803) ------------ - ------------------------------------ (2,650,297) (6,688,035) ------------ - ------------------------------------ (2,664,498) (6,646,162) 25,549,869 32,196,031 ------------ $ 22,885,371 $ 25,549,869 ============ - ------------------------------------ $ -- $ -- ============ - ------------------------------------ -117- - ------------------------------------------------------------------------------ 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 For the Year Ended December 31, statements. ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year...................... $ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82 -------- -------- -------- -------- ------- Investment income--net.................................. .53 .59 .48 .32 .31 Realized and unrealized gain (loss) on investments--net...................................... .89 2.06 (1.06) 1.37 .37 -------- -------- -------- -------- ------- Total from investment operations........................ 1.42 2.65 (.58) 1.69 .68 -------- -------- -------- -------- ------- Less dividends and distributions: Investment income--net................................ (.56) (.56) (.37) (.34) (.37) Realized gain on investments--net..................... (.02) -- -- (.12) (.28) In excess of realized gain on investments--net........ -- -- (.05) -- -- -------- -------- -------- -------- ------- Total dividends and distributions....................... (.58) (.56) (.42) (.46) (.65) -------- -------- -------- -------- ------- Net asset value, end of year............................ $ 16.01 $ 15.17 $ 13.08 $ 14.08 $ 12.85 ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:* Based on net asset value per share...................... 9.73% 20.81% (4.19%) 13.49% 5.72% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses................................................ .60% .61% .63% .70% .97% ======== ======== ======== ======== ======= Investment income--net.................................. 3.39% 4.22% 3.95% 3.20% 3.71% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of year (in thousands).................. $212,047 $212,912 $158,951 $115,420 $24,918 ======== ======== ======== ======== ======= Portfolio turnover...................................... 236.50% 38.40% 35.36% 12.55% 36.34% ======== ======== ======== ======== ======= Average commission rate paid**.......................... $ .0610 -- -- -- -- ======== ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses. ** For the fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. See Notes to Financial Statements. -118- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Basic Value Focus Fund ------------------------------------------------------ For the Year Ended December 31, For the Period The following per share data and ratios have been derived from ---------------------------------- July 1, 1993+ to information provided in the financial statements. Increase December 31, (Decrease) in Net Asset Value: 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period.......................... $ 13.10 $ 11.10 $ 10.95 $ 10.00 -------- -------- -------- ------- Investment income--net........................................ .17 .18 .17 .04 Realized and unrealized gain on investments--net.............. 2.37 2.49 .08 .91 -------- -------- -------- ------- Total from investment operations.............................. 2.54 2.67 .25 .95 -------- -------- -------- ------- Less dividends and distributions: Investment income--net...................................... (.18) (.19) (.10) -- Realized gain on investments--net........................... (.72) (.48) -- -- -------- -------- -------- ------- Total dividends and distributions............................. (.90) (.67) (.10) -- -------- -------- -------- ------- Net asset value, end of period................................ $ 14.74 $ 13.10 $ 11.10 $ 10.95 ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share............................ 20.69% 25.49% 2.36% 9.50%++ ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses...................................................... .66% .66% .72% .86%* ======== ======== ======== ======= Investment income--net........................................ 1.37% 1.68% 2.08% 1.69%* ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands)...................... $524,930 $306,463 $164,307 $ 47,207 ======== ======== ======== ======= Portfolio turnover............................................ 68.41% 74.10% 60.55% 30.86% ======== ======== ======== ======= Average commission rate paid++++.............................. $ .0549 -- -- -- ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return. ++++ For the fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. See Notes to Financial Statements. -119- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Developing Capital Markets Focus Fund -------------------------------------------- For the Year Ended December 31, For the Period The following per share data and ratios have been derived from ------------------------ May 2, 1994+ to information provided in the financial statements. Increase (Decrease) December 31, in Net Asset Value: 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period................................. $ 9.32 $ 9.51 $ 10.00 -------- -------- -------- Investment income--net............................................... .20 .20 .09 Realized and unrealized gain (loss) on investments and foreign currency transactions--net......................................... .76 (.30) (.58) -------- -------- -------- Total from investment operations..................................... .96 (.10) (.49) -------- -------- -------- Less dividends from investment income--net........................... (.23) (.09) -- -------- -------- -------- Net asset value, end of period....................................... $ 10.05 $ 9.32 $ 9.51 ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share................................... 10.59% (1.08%) (4.90%)++ ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses, net of reimbursement....................................... 1.25% 1.25% 1.29%* ======== ======== ======== Expenses............................................................. 1.31% 1.36% 1.35%* ======== ======== ======== Investment income--net............................................... 2.42% 2.73% 2.18%* ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands)............................. $ 95,599 $55,209 $ 36,676 ======== ======== ======== Portfolio turnover................................................... 87.33% 62.53% 29.79% ======== ======== ======== Average commission rate paid++....................................... $ 0.0003 $ -- $ -- ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ For the fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the rate shown. ++ Aggregate total investment return. See Notes to Financial Statements. -120- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Domestic Money Market Fund ---------------------------------------------------------- For the Year Ended The following per share data and ratios have been derived December 31, For the Period from information provided in the financial statements. ----------------------------------------- Feb. 20, 1992+ to Dec. 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- Investment income--net.................................... .0504 .0547 .0386 .0302 .0302 Realized and unrealized gain (loss) on investments--net... (.0005) .0012 (.0007) .0005 .0013 -------- -------- -------- -------- -------- Total from investment operations.......................... .0499 .0559 .0379 .0307 .0315 -------- -------- -------- -------- -------- Less dividends and distributions: Investment income--net.................................. (.0504) (.0547) (.0386) (.0302) (.0302) Realized gain on investments--net....................... (.0001) (.0002) -- (.0005) (.0010) -------- -------- -------- -------- -------- Total dividends and distributions......................... (.0505) (.0549) (.0386) (.0307) (.0312) -------- -------- -------- -------- -------- Net asset value, end of period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share........................ 5.13% 5.64% 3.93% 3.10% 3.65%* ======== ======== ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses, net of reimbursement............................ .54% .55% .50% .36% .32%* ======== ======== ======== ======== ======== Expenses.................................................. .54% .55% .57% .63% .88%* ======== ======== ======== ======== ======== Investment income--net, and realized gain on investments--net........................................ 4.97% 5.50% 4.02% 3.03% 3.48%* ======== ======== ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands).................. $274,756 $303,912 $363,199 $170,531 $ 41,128 ======== ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. See Notes to Financial Statements. -121- - ------------------------------------------------------------------------------ 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 from information provided in the financial statements. December 31, -------------------------------------------------------- Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year......................... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 -------- -------- -------- -------- ------- Investment income (loss)--net.............................. .13 .17 .05 (.01) .01 Realized and unrealized gain (loss) on investments--net.... 1.84 8.64 (1.56) 3.17 (.10) -------- -------- -------- -------- ------- Total from investment operations........................... 1.97 8.81 (1.51) 3.16 (.09) -------- -------- -------- -------- ------- Less dividends and distributions: Investment income--net................................... (.14) (.09) -- --++ (.07) Realized gain on investments--net........................ (3.59) -- (.19) -- -- -------- -------- -------- -------- ------- Total dividends and distributions.......................... (3.73) (.09) (.19) -- (.07) -------- -------- -------- -------- ------- Net asset value, end of year............................... $ 26.22 $ 27.98 $ 19.26 $ 20.96 $ 17.80 ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:* Based on net asset value per share......................... 8.11% 45.90% (7.27%) 17.78% (.53%) ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses................................................... .81% .81% .83% .96% 1.18% ======== ======== ======== ======== ======= Investment income (loss)--net.............................. .50% .72% .27% (.05%) .04% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of year (in thousands)..................... $453,029 $339,921 $170,044 $ 98,976 $23,167 ======== ======== ======== ======== ======= Portfolio turnover......................................... 80.84% 96.79% 88.48% 131.75% 98.64% ======== ======== ======== ======== ======= Average commission rate paid++............................. $ .0598 $ -- $ -- $ -- $ -- ======== ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses. + Based on average shares outstanding during the year. ++ Amount is less than $.01 per share. ++ For the fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. See Notes to Financial Statements. -122- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Global Bond Focus Fund ---------------------------------------------------- For the Year Ended The following per share data and ratios have been derived December 31, For the Period from information provided in the financial statements. ---------------------------------- July 1, 1993+ to December 31, Increase (Decrease) in Net Asset Value: 1996++ 1995++ 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period........................ $ 9.79 $ 9.17 $ 10.38 $ 10.00 -------- -------- -------- ------- Investment income--net...................................... .78 .85 .76 .25 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........................ (.03) .61 (1.19) .33 -------- -------- -------- ------- Total from investment operations............................ .75 1.46 (.43) .58 -------- -------- -------- ------- Less dividends and distributions: Investment income--net.................................... (.78) (.84) (.76) (.20) In excess of realized gain on investments--net............ -- -- (.02) -- -------- -------- -------- ------- Total dividends and distributions........................... (.78) (.84) (.78) (.20) -------- -------- -------- ------- Net asset value, end of period.............................. $ 9.76 $ 9.79 $ 9.17 $ 10.38 ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share.......................... 8.02% 16.69% (4.21%) 5.90%++ ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses.................................................... .69% .68% .75% .94%* ======== ======== ======== ======= Investment income--net...................................... 7.95% 8.99% 8.01% 6.20%* ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands).................... $ 93,790 $ 81,845 $ 75,150 $ 50,737 ======== ======== ======== ======= Portfolio turnover.......................................... 267.13% 132.57% 117.58% 54.80% ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Based on average shares outstanding during the year. ++ Aggregate total investment return. See Notes to Financial Statements. -123- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Global Strategy Focus Fund -------------------------------------------------------------- For the Year Ended The following per share data and ratios have been December 31, For the Period derived from information provided in the financial --------------------------------------------- Feb. 28, 1992+ to statements. December 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period............... $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00 ------- ------- ------- ------- Investment income--net............................. .28 .39 .30 .16 .13 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........... 1.33 .82 (.48) 1.96 .13 ------- ------- ------- ------- Total from investment operations................... 1.61 1.21 (.18) 2.12 .26 ------- ------- ------- ------- Less dividends and distributions: Investment income--net........................... (.29) (.39) (.21) (.17) (.04) Realized gain on investments--net................ -- --++ (.04) -- -- In excess of realized gain on investments--net... -- -- (.01) ------- ------- ------- ------- Total dividends and distributions.................. (.29) (.39) (.26) (.17) (.04) ------- ------- ------- ------- Net asset value, end of period..................... $ 13.87 $ 12.55 $ 11.73 $ 12.17 $ 10.22 ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share................. 13.17% 10.60% (1.46%) 21.03% 2.62%++ ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses, net of reimbursement..................... .71% .72% .77% .88% 1.25%* ======= ======= ======= ======= Expenses........................................... .71% .72% .77% .88% 1.35%* ======= ======= ======= ======= Investment income--net............................. 2.68% 3.33% 2.85% 2.41% 2.66%* ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands)........... $870,203 $540,242 $515,407 $269,627 $15,527 ======= ======= ======= ======= Portfolio turnover................................. 173.44% 27.23% 21.03% 17.07% 14.47% ======= ======= ======= ======= Average commission rate paid+++.................... $ .0143 $ -- $ -- $ -- $ -- ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Amount is less than $.01 per share. +++ For the fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the rate shown. ++ Aggregate total investment return. See Notes to Financial Statements. -124- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Global Utility Focus Fund ----------------------------------------------------- For the Year Ended December 31, For the Period The following per share data and ratios have been derived ---------------------------------- July 1, 1993+ to from information provided in the financial statements. December 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period........................ $ 11.30 $ 9.45 $ 10.66 $ 10.00 -------- -------- -------- -------- Investment income--net...................................... .46 .45 .35 .04 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........................ .95 1.79 (1.25) .64 -------- -------- -------- -------- Total from investment operations............................ 1.41 2.24 (.90) .68 -------- -------- -------- -------- Less dividends and distributions: Investment income--net.................................... (.52) (.39) (.29) (.02) In excess of realized gain on investments--net............ -- -- (.02) -- -------- -------- -------- -------- Total dividends and distributions........................... (.52) (.39) (.31) (.02) -------- -------- -------- -------- Net asset value, end of period.............................. $ 12.19 $ 11.30 $ 9.45 $ 10.66 ======== ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share.......................... 12.96% 24.33% (8.51%) 6.85%++ ======== ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses.................................................... .66% .66% .73% .89%* ======== ======== ======== ======== Investment income--net...................................... 3.90% 4.44% 3.68% 2.84%* ======== ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands).................... $142,438 $148,225 $126,243 $104,517 ======== ======== ======== ======== Portfolio turnover.......................................... 11.39% 11.05% 9.52% 1.72% ======== ======== ======== ======== Average commission rate paid++.............................. $ .0522 $ -- $ -- $ -- ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ For the fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the rate shown. ++ Aggregate total investment return. See Notes to Financial Statements. -125- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Government Bond Fund --------------------------------------------- For the Year Ended December 31, For the Period The following per share data and ratios have been derived from ------------------------- May 2, 1994+ to information provided in the financial statements. December 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period................................ $ 10.79 $ 9.97 $ 10.00 -------- -------- -------- Investment income--net.............................................. .65 .62 .25 Realized and unrealized gain (loss) on investments--net............. (.36) .81 (.07) -------- -------- -------- Total from investment operations.................................... .29 1.43 .18 -------- -------- -------- Less dividends and distributions: Investment income--net............................................ (.64) (.61) (.21) Realized gain on investments--net................................. (.04) -- -- -------- -------- -------- Total dividends and distributions................................... (.68) (.61) (.21) -------- -------- -------- Net asset value, end of period...................................... $ 10.40 $ 10.79 $ 9.97 ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share.................................. 2.86% 14.83% 1.79%++ ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses, net of reimbursement...................................... .15% .00% .00%* ======== ======== ======== Expenses............................................................ .59% .66% .80%* ======== ======== ======== Investment income--net.............................................. 6.39% 6.28% 4.66%* ======== ======== ======== - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands)............................ $ 89,581 $ 40,996 $ 17,811 ======== ======== ======== Portfolio turnover.................................................. 21.23% 45.39% 103.03% ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return. See Notes to Financial Statements. -126- - ------------------------------------------------------------------------------ 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 For the Year Ended December 31, statements. ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: 1996+ 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year...................... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 -------- -------- -------- -------- ------- Investment income--net.................................. 1.08 1.09 1.05 .95 1.07 Realized and unrealized gain (loss) on investments--net...................................... .12 .65 (1.47) .95 .90 -------- -------- -------- -------- ------- Total from investment operations........................ 1.20 1.74 (.42) 1.90 1.97 -------- -------- -------- -------- ------- Less dividends from investment income--net.............. (1.06) (1.10) (1.03) (.97) (1.07) -------- -------- -------- -------- ------- Net asset value, end of year............................ $ 11.39 $ 11.25 $ 10.61 $ 12.06 $ 11.13 ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:* Based on net asset value per share...................... 11.27% 17.21% (3.59%) 17.84% 20.05% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses................................................ .54% .55% .61% .72% .89% ======== ======== ======== ======== ======= Investment income--net.................................. 9.50% 9.92% 9.73% 8.62% 10.06% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of year (in thousands).................. $414,615 $356,352 $255,719 $163,428 $26,343 ======== ======== ======== ======== ======= Portfolio turnover...................................... 48.92% 41.60% 51.88% 35.67% 28.21% ======== ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses. + Based on average shares outstanding during the year. See Notes to Financial Statements. -127- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Index 500 Fund ----------------- For the Period The following per share data and ratios have been derived from information provided in the Dec. 13, 1996+ to financial statements. Increase (Decrease) in Net Asset Value: Dec. 31, 1996 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period........................................................... $ 10.00 -------- Investment income--net......................................................................... .02 Realized and unrealized gain on investments--net............................................... .15 -------- Total from investment operations............................................................... .17 -------- Net asset value, end of period................................................................. $ 10.17 ======== - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share............................................................. 1.70%++ ======== - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses, net of reimbursement................................................................. .00%* ======== Expenses....................................................................................... .60%* ======== Investment income--net......................................................................... 3.08%* ======== - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands)....................................................... $ 10,752 ======== Portfolio turnover............................................................................. .04% ======== Average commission rate paid................................................................... $ .0120 ======== - ---------------------------------------------------------------------------------------------------------------------
* Annualized ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return. See Notes to Financial Statements. -128- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
International Equity Focus Fund ---------------------------------------------------- For the Year Ended December 31, For the Period The following per share data and ratios have been derived from -------------------------------- July 1, 1993+ to information provided in the financial statements. Increase December 31, (Decrease) in Net Asset Value: 1996++ 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period............................ $ 11.06 $ 10.90 $ 11.03 $ 10.00 -------- -------- -------- ------- Investment income--net.......................................... .23 .20 .19 .01 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................................... .49 .37 (.13) 1.02 -------- -------- -------- ------- Total from investment operations................................ .72 .57 .06 1.03 -------- -------- -------- ------- Less dividends and distributions: Investment income--net........................................ (.15) (.01) (.18) -- Realized gain on investments--net............................. -- (.17) (.01) -- In excess of realized gain on investments--net................ -- (.23) -- -- -------- -------- -------- ------- Total dividends and distributions............................... (.15) (.41) (.19) -- -------- -------- -------- ------- Net asset value, end of period.................................. $ 11.63 $ 11.06 $ 10.90 $ 11.03 ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:** Based on net asset value per share.............................. 6.62% 5.48% .55% 10.30%++ ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses........................................................ .89% .89% .97% 1.14%* ======== ======== ======== ======= Investment income--net.......................................... 1.96% 1.95% 1.09% .30%* ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of period (in thousands)........................ $349,080 $265,602 $247,884 $76,906 ======== ======== ======== ======= Portfolio turnover.............................................. 49.87% 100.02% 58.84% 17.39% ======== ======== ======== ======= Average commission rate paid***................................. $ .0004 $ -- $ -- $ -- ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. *** For the fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the rate shown. + Commencement of Operations. ++ Based on average shares outstanding during the period. ++ Aggregate total investment return. See Notes to Financial Statements. -129- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Natural Resources Focus Fund ------------------------------------------------------- The following per share data and ratios have been derived For the Year Ended December 31, from information provided in the financial statements. ------------------------------------------------------- Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year........................ $ 11.95 $ 10.82 $ 10.82 $ 9.84 $ 10.06 ------- ------- ------- ------- ------- Investment income--net.................................... .18 .20 .17 .11 .18 Realized and unrealized gain (loss) on investments and foreign currency transactions--net...................... 1.40 1.15 (.02) .92 (.05) ------- ------- ------- ------- ------- Total from investment operations.......................... 1.58 1.35 .15 1.03 .13 ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net.................................. (.20) (.19) (.15) (.05) (.29) Realized gain on investments--net....................... (.21) (.03) -- -- (.06) ------- ------- ------- ------- ------- Total dividends and distributions......................... (.41) (.22) (.15) (.05) (.35) ------- ------- ------- ------- ------- Net asset value, end of year.............................. $ 13.12 $ 11.95 $ 10.82 $ 10.82 $ 9.84 ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:* Based on net asset value per share........................ 13.52% 12.65% 1.44% 10.47% 1.36% ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses, net of reimbursement............................ .78% .78% .87% 1.13% 1.25% ======= ======= ======= ======= ======= Expenses.................................................. .78% .78% .87% 1.13% 1.27% ======= ======= ======= ======= ======= Investment income--net.................................... 1.43% 1.75% 1.91% 1.34% 2.00% ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of year (in thousands).................... $45,197 $43,102 $39,715 $14,778 $ 4,144 ======= ======= ======= ======= ======= Portfolio turnover........................................ 31.11% 30.15% 10.94% 58.44% 22.88% ======= ======= ======= ======= ======= Average commission rate paid**............................ $ .0225 -- -- -- -- ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses. **For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the rate shown. See Notes to Financial Statements. -130- - ------------------------------------------------------------------------------ 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 For the Year Ended December 31, statements. ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year...................... $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 -------- -------- -------- -------- ------- Investment income--net.................................. .80 .82 .77 .70 .79 Realized and unrealized gain (loss) on investments--net...................................... (.55) 1.34 (1.36) .71 .04 -------- -------- -------- -------- ------- Total from investment operations........................ .25 2.16 (.59) 1.41 .83 -------- -------- -------- -------- ------- Less dividends and distributions: Investment income--net................................ (.79) (.83) (.76) (.70) (.81) Realized gain on investments--net..................... -- -- -- (.11) -- In excess of realized gain on investments--net........ -- -- (.17) -- -- -------- -------- -------- -------- ------- Total dividends and distributions....................... (.79) (.83) (.93) (.81) (.81) -------- -------- -------- -------- ------- Net asset value, end of year............................ $ 11.91 $ 12.45 $ 11.12 $ 12.64 $ 12.04 ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:* Based on net asset value per share...................... 2.21% 20.14% (4.80%) 12.02% 7.27% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses................................................ .49% .50% .54% .63% .78% ======== ======== ======== ======== ======= Investment income--net.................................. 6.67% 7.00% 6.74% 5.86% 6.76% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of year (in thousands).................. $538,394 $489,838 $391,234 $314,091 $84,810 ======== ======== ======== ======== ======= Portfolio turnover...................................... 91.88% 90.12% 139.89% 115.26% 82.74% ======== ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses. See Notes to Financial Statements. -131- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (continued) - ------------------------------------------------------------------------------
Quality Equity Fund ------------------------------------------------------- The following per share data and ratios have been derived For the Year Ended December 31, from information provided in the financial statements. ------------------------------------------------------- Increase (Decrease) in Net Asset Value: 1996+ 1995+ 1994+ 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year.......................... $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 -------- -------- -------- -------- ------- Investment income--net...................................... .58 .58 .38 .24 .34 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........................ 4.44 5.48 (.74) 3.46 .32 -------- -------- -------- -------- ------- Total from investment operations............................ 5.02 6.06 (.36) 3.70 .66 -------- -------- -------- -------- ------- Less dividends and distributions: Investment income--net.................................... (.66) (.45) (.25) (.12) (.58) Realized gain on investments--net......................... (4.29) (.59) (.67) (.04) (.95) -------- -------- -------- -------- ------- Total dividends and distributions........................... (4.95) (1.04) (.92) (.16) (1.53) -------- -------- -------- -------- ------- Net asset value, end of year................................ $ 32.83 $ 32.76 $ 27.74 $ 29.02 $ 25.48 ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:* Based on net asset value per share.......................... 17.90% 22.61% (1.20%) 14.57% 2.69% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses.................................................... .49% .51% .54% .62% .74% ======== ======== ======== ======== ======= Investment income--net...................................... 1.89% 1.94% 1.39% 1.07% 1.54% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of year (in thousands)...................... $794,275 $644,551 $464,360 $309,420 $87,977 ======== ======== ======== ======== ======= Portfolio turnover.......................................... 88.30% 140.32% 60.57% 88.25% 62.54% ======== ======== ======== ======== ======= Average commission rate paid++.............................. $ .0615 -- -- -- -- ======== ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses. + Based on average shares outstanding during the period. ++For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may significantly affect the rate shown. See Notes to Financial Statements. -132- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Financial Highlights (concluded) - ------------------------------------------------------------------------------
Reserve Assets Fund --------------------------------------------------- The following per share data and ratios have been derived from For the Year Ended December 31, information provided in the financial statements. --------------------------------------------------- Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- ------- Investment income--net........................................... .0501 .0543 .0371 .0268 .0320 Realized and unrealized gain (loss) on investments--net.......... (.0005) .0018 (.0009) .0005 .0007 -------- -------- -------- -------- ------- Total from investment operations................................. .0496 .0561 .0362 .0273 .0327 -------- -------- -------- -------- ------- Less dividends and distributions: Investment income--net......................................... (.0501) (.0543) (.0362) (.0268) (.0320) Realized gain on investments--net.............................. (.0001) (.0004) -- (.0005) (.0005) -------- -------- -------- -------- ------- Total dividends and distributions................................ (.0502) (.0547) (.0362) (.0273) (.0325) -------- -------- -------- -------- ------- Net asset value, end of year..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Total Investment Return:* Based on net asset value per share............................... 5.13% 5.61% 3.79% 2.77% 3.29% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses......................................................... .61% .61% .65% .70% .79% ======== ======== ======== ======== ======= Investment income--net, and realized gain on investments--net.... 4.96% 5.47% 3.75% 2.73% 3.36% ======== ======== ======== ======== ======= - --------------------------------------------------------------------------------------------------------------------- Supplemental Data: Net assets, end of year (in thousands)........................... $22,885 $25,550 $32,196 $30,168 $26,767 ======== ======== ======== ======== ======= - ---------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses. See Notes to Financial Statements. -133- - ------------------------------------------------------------------------------ Merrill Lynch Variable Series Funds, Inc. Notes to Financial Statements - --------------------------------------------------------- 1. Significant Accounting Policies: Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end management investment company, which is comprised of 16 separate funds ("Funds" or "Fund") offering 16 separate classes of shares to the Merrill Lynch Life Insurance Company, ML Life Insurance Company of New York (indirect wholly-owned subsidiaries of Merrill Lynch & Co., Inc. "ML & Co."), and other insurance companies, which are not affiliated with ML & Co., for their separate accounts to fund benefits under certain variable annuity contracts. Each Fund is classified as "diversified", as defined in the Investment Company Act of 1940, except for Developing Capital Markets Focus Fund, Global Bond Focus Fund, Global Strategy Focus Fund, and Natural Resources Focus Fund, all of which are classified as "non-diversified". The following is a summary of significant accounting policies followed by the Funds. (a) Valuation of investments--Money market securities maturing more than sixty days after the valuation date are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in the securities. When such securities are valued with sixty days or less to maturity, the difference between the valuation existing on the sixty-first day before maturity and maturity value is amortized on a straight-line basis to maturity. Investments maturing within sixty days from their date of acquisition are valued at amortized cost, which approximates market value. Portfolio securities which are traded on stock exchanges are valued at the last sale price as of the close of business on the day the securities are being valued, or lacking any sales, at the closing bid price. Securities traded in the over-the-counter market are valued at the last available bid price prior to the time of valuation. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. Options written are valued at the last sale price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, the last asked price. Options purchased are valued at the last sale price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. (b) Derivative financial instruments--Certain Funds may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the equity, debt and currency markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. - - Forward foreign exchange contracts--Certain Funds are authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Funds' records. However, the effect on operations is recorded from the date the Funds enter into such contracts. Premium or discount is amortized over the life of the contracts. - - Options--Certain Funds may write and purchase call and put options. When a Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid or received is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. - - Financial futures contracts--Certain Funds may purchase or sell futures contracts and options on such futures contracts for the pur- -134- - ------------------------------------------------------------------------------ pose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. - - Foreign currency options and futures--Certain Funds may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-US dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. (c) Foreign currency transactions-- Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets and liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Company's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income (including amortization of premium and discount) is recognized on the accrual basis. Realized gains and losses on security transactions are determined on the identified cost basis. (f) Deferred organization expenses and prepaid registration fees--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period. Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Funds are recorded on the ex-dividend dates. (h) Custodian bank--The Fund recorded an amount payable to the custodian bank reflecting an overnight overdraft which resulted from a failed trade which settled the next day. (i) Reclassification--Generally accepted accounting principles require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Company has entered into an Investment Advisory Agreement with Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which is the limited partner. MLAM is responsible for the management of the Company's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Funds. For such services, the Company pays a monthly fee based upon the average daily value of each Funds' net assets at the following annual rates: 0.65% of the average daily net assets of each of the Natural Resources Focus Fund and Global Strategy Focus Fund, 0.55% of the average daily net assets of the American Balanced Fund, 0.50% of the average daily net assets of each of the Domestic Money Market Fund and Government Bond Fund, 0.60% of the average daily net assets of each of the Basic Value Focus Fund, Global Bond Focus Fund and Global Utility Focus Fund, 0.75% of the average daily net assets of each of the Equity Growth Fund and the International Equity Focus Fund, 0.30% of the average daily net assets of the Index 500 Fund, 1.00% of the average daily net assets of the Developing Capital Markets Focus -135- - ------------------------------------------------------------------------------ Fund, and at the following annual rates with respect to the other Funds: Reserve Assets Fund - -------------------------------------------------------------------------- Portion of average daily value of net assets of the Fund: - -------------------------------------------------------------------------- Advisory Fee - -------------------------------------------------------------------------- Not exceeding $500 million...................................... 0.500% In excess of $500 million but not exceeding $750 million........ 0.425% In excess of $750 million but not exceeding $1 billion.......... 0.375% In excess of $1 billion but not exceeding $1.5 billion.......... 0.350% In excess of $1.5 billion but not exceeding $2 billion.......... 0.325% In excess of $2 billion but not exceeding $2.5 billion.......... 0.300% In excess of $2.5 billion....................................... 0.275% - -------------------------------------------------------------------------- Quality Equity Fund - -------------------------------------------------------------------------- Portion of average daily value of net assets of the Fund: - -------------------------------------------------------------------------- Advisory Fee - -------------------------------------------------------------------------- Not exceeding $250 million...................................... 0.500% In excess of $250 million but not exceeding $300 million........ 0.450% In excess of $300 million but not exceeding $400 million........ 0.425% In excess of $400 million....................................... 0.400% - -------------------------------------------------------------------------- High Current Income Fund and Prime Bond Fund - ------------------------------------------------------------------------- Portion of aggregate average daily value of net assets of both Funds: Advisory Fee - ------------------------------------------------------------------------- High Current Prime Income Bond Fund Fund - ------------------------------------------------------------------------- Not exceeding $250 million......................... 0.55% 0.50% In excess of $250 million but not more than $500 million................................. 0.50% 0.45% In excess of $500 million but not more then $750 million................................. 0.45% 0.40% In excess of $750 million.......................... 0.40% 0.35% - ------------------------------------------------------------------------ MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an agreement which limits the operating expenses paid by each Fund to 1.25% of its average daily net assets. Any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by MLAM which, in turn, will be reimbursed by MLLA. For the year ended December 31, 1996, MLAM earned fees of $765,718 for the Developing Capital Markets Fund of which $52,388 was waived, $297,926 for the Government Bond Fund of which $264,214 was voluntarily waived, and $1,638 for the Index 500 Fund, all of which was voluntarily waived. In addition, MLAM has also reimbursed the Index 500 Fund $1,651 in additional expenses. For the year ended December 31, 1996, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of MLAM, earned commissions on the execution of portfolio security transactions as follows: - -------------------------------------------------------------------------- American Balanced Fund........................................... $ 5,808 Basic Value Focus Fund........................................... 24,040 Developing Capital Markets Focus Fund............................ 45,365 Equity Growth Fund............................................... 1,500 Global Bond Focus Fund........................................... 625 Global Strategy Focus Fund....................................... 51,412 Global Utility Focus Fund........................................ 6,780 High Current Income Fund......................................... 3,750 International Equity Focus Fund.................................. 55,842 Natural Resources Focus Fund..................................... 3,285 Quality Equity Fund.............................................. 67,998 - -------------------------------------------------------------------------- Accounting services are provided to the Company by MLAM at cost. For the year ended December 31, 1996, Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, earned fees for providing security price quotations to compute the Fund's net asset values as follows: - -------------------------------------------------------------------------- American Balanced Fund........................................... $ 278 Global Bond Focus Fund........................................... 3,020 Global Strategy Focus Fund....................................... 175 Global Utility Focus Fund........................................ 77 Government Bond Fund............................................. 822 High Current Income Fund......................................... 7,269 Prime Bond Fund.................................................. 5,884 - -------------------------------------------------------------------------- Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the Company's transfer agent. Certain officers and/or directors of the Company are officers and/or directors of MLAM, PSI, MLFDS, Merrill Lynch Funds Distributor, Inc., a wholly-owned subsidiary of Merrill Lynch Group, Inc., which is the Funds' distributor, and/or ML & Co. -136- - ------------------------------------------------------------------------------ 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended December 31, 1996 were as follows: - ------------------------------------------------------------------------------ Purchases Sales - ------------------------------------------------------------------------------- American Balanced Fund........................ $ 468,212,355 $448,976,551 Basic Value Focus Fund........................ 324,382,250 244,338,802 Developing Capital Markets Focus Fund......... 97,734,651 60,019,618 Domestic Money Market Fund.................... -- -- Equity Growth Fund............................ 363,579,751 282,977,363 Global Bond Focus Fund........................ 204,794,563 211,818,050 Global Strategy Focus Fund.................... 994,958,721 869,964,495 Global Utility Focus Fund..................... 15,474,733 22,987,878 Government Bond Fund.......................... 59,565,793 11,232,578 High Current Income Fund...................... 202,112,872 171,527,776 Index 500 Fund................................ 9,342,346 1,881 International Equity Focus Fund............... 181,926,488 121,558,312 Natural Resources Focus Fund.................. 13,662,240 15,112,240 Prime Bond Fund............................... 488,860,103 421,701,849 Quality Equity Fund........................... 826,913,708 523,148,231 Reserve Assets Fund........................... -- -- - -------------------------------------------------------------------------------- Transactions in options written for the year ended December 31, 1996, were as follows: International Equity Focus Fund - -------------------------------------------------------------------------------- Nominal Value/ Number of Contracts Covered by Premiums Call Options Written Written Options Received - -------------------------------------------------------------------------------- Outstanding call options written, beginning of year................................... 6,800 $ 54,253 Options written............................ 9,004 685,805 Options expired............................ (15,769) (622,808) -------- -------- Outstanding call options written, end of year...................................... 35 $ 117,250 ======== ======== - -------------------------------------------------------------------------------- International Equity Focus Fund - -------------------------------------------------------------------------------- Nominal Value/ Number of Contracts Covered by Premiums Put Options Written Written Options Received - -------------------------------------------------------------------------------- Outstanding put options written, beginning of year.................................... 914 $ 21,437 Options written............................. 1,240,000 8,866 Options expired............................. (1,240,914) (30,303) ---------- ------- Outstanding put options written, end of year....................................... -- $ -- ========== ======= - -------------------------------------------------------------------------------- Global Bond Focus Fund - -------------------------------------------------------------------------------- Nominal Value/ Number of Contracts Covered by Premiums Call Options Written Written Options Received - -------------------------------------------------------------------------------- Outstanding call options written, beginning of year................................... -- -- Options written............................ 17,530,792 $ 203,117 Options expired............................ (4,782,042) (84,608) Options closed............................. (12,748,750) (118,509) -------- -------- Outstanding call options written, end of year...................................... -- $ -- ======== ======== - ------------------------------------------------------------------------------- At December 31, 1996, net unrealized appreciation (depreciation) and aggregate cost for Federal income tax purposes were as follows: - ------------------------------------------------------------------------------ Basic Developing Domestic American Value Capital Money Balanced Focus Markets Market Fund Fund Focus Fund Fund - ------------------------------------------------------------------------------- Appreciated securities......... $ 13,527,140 $ 61,508,505 $11,560,298 $ 26,805 Depreciated securities......... (1,612,879) (19,839,815) (7,410,808) (46,269) ------------ ------------- ----------- ------------ Net unrealized appreciation (depreciation)..... $ 11,914,261 $ 41,668,690 $ 4,149,490 $ (19,464) ============ ============= =========== ============ Cost for Federal income tax purposes........... $198,630,949 $ 480,994,692 $92,042,701 $ 278,879,751 ============ ============= =========== ============= - ------------------------------------------------------------------------------- Global Global Global Equity Bond Strategy Utility Growth Focus Focus Focus Fund Fund Fund Fund - ------------------------------------------------------------------------------- Appreciated securities........ $ 83,280,830 $ 1,830,484 $ 94,154,461 $ 28,483,400 Depreciated securities........ (29,835,984) (2,656,113) (20,709,668) (3,646,007) Net unrealized appreciation (depreciation).... $ 53,444,846 $ (825,629) $ 73,444,793 $ 24,837,393 Cost for Federal income tax purposes.......... $398,360,465 $ 101,173,812 $793,783,774 $117,339,737 - -------------------------------------------------------------------------------- High International Government Current Index Equity Bond Income 500 Focus Fund Fund Fund Fund - -------------------------------------------------------------------------------- Appreciated securities......... $ 1,117,721 $ 19,337,378 $ 229,986 $ 33,699,478 Depreciated securities......... (166,155) (19,093,901) (81,897) (22,707,701) ---------- ------------ ----------- ------------ Net unrealized appreciation....... $ 951,566 $ 243,477 $ 148,089 $ 10,991,777 ========== ============ =========== ============ Cost for Federal income tax purposes*.......... $ 86,879,714 $ 410,624,066 $10,696,027 $336,658,090 ========== ============ =========== ============ - -------------------------------------------------------------------------------- Natural Resources Prime Quality Reserve Focus Bond Equity Assets Fund Fund Fund Fund - -------------------------------------------------------------------------------- Appreciated securities........ $ 7,011,676 $ 8,898,661 $109,167,111 $ 2,247 Depreciated securities........ (2,329,143) (5,291,507) (10,826,689) (2,499) ------------ ------------ ------------ ------------ Net unrealized $ 4,682,533 $ 3,607,154 $ 98,340,422 $ (252) appreciation (depreciation).... $ 4,682,533 $ 3,607,154 $ 98,340,422 $ (252) ============ ============ ============ ============ Cost for Federal income tax purposes.......... $ 40,728,643 $ 526,103,574 $696,193,614 $ 23,070,540 ============ ============ ============ ============ - ------------------------------------------------------------------------------- *Net of premiums received on options written. -137- - -------------------------------------------------------------------------------- At December 31, 1996, net realized and unrealized gains (losses) were as follows: - -------------------------------------------------------------------------------- American Basic Value Balanced Fund Focus Fund -------------------------- ------------------------- Realized Gains Unrealized Realized Unrealized (Losses) Gains Gains Gains - ------------------------------------------------------------------------------- Long-term investments.. $21,874,118 $ 11,975,053 $56,406,548 $42,904,143 Short-term investments........... (4,395) -- -- -- ----------- ----------- ----------- ----------- $21,869,723 $ 11,975,053 $56,406,548 $42,904,143 =========== =========== =========== =========== - ------------------------------------------------------------------------------- Developing Capital Domestic Money Markets Fund Market Fund ---------------------- ------------------ Realized Unrealized Gains Gains Realized Unrealized (Losses) (Losses) Gains Losses - -------------------------------------------------------------------------------- Long-term investments............ $ (51,802) $4,294,868 -- -- Short-term investments........... 93 -- $12,359 $(19,464) Foreign currency transactions.... (105,274) (7,570) -- -- --------- ---------- ------- -------- $(156,983) $4,287,298 $12,359 $(19,464) ========= ========== ======= ======== - -------------------------------------------------------------------------------- Equity Growth Global Bond Fund Focus Fund ------------------------- ------------------------ Realized Realized Unrealized Gains Unrealized Gains Gains (Losses) Gains (Losses) (Losses) - -------------------------------------------------------------------------------- Long-term investments.... $22,199,566 $53,556,643 $1,224,648 $ (805,740) Short-term investments... (48) -- 168 128 Financial futures contracts............... -- -- (321,503) (70,548) Options written.......... -- -- 2,422 -- Currency options purchased............... -- -- (59,398) -- Currency options written................. -- -- (119,980) -- Foreign currency transactions............ -- -- 483,430 (81,490) Forward foreign exchange contracts............... -- -- (379,072) (78,492) ----------- ----------- --------- ----------- $22,199,518 $53,556,643 $ 830,715 $(1,036,142) =========== =========== ========= =========== - -------------------------------------------------------------------------------- Global Strategy Global Utility Focus Fund Focus Fund ------------------------- ------------------------ Realized Unrealized Realized Gains Gains Gains Unrealized (Losses) (Losses) (Losses) Gains - -------------------------------------------------------------------------------- Long-term investments.... $45,325,716 $73,858,509 $1,243,303 $24,837,393 Short-term investments... (5,385) -- (72) -- Foreign currency transactions............ 105,281 (177,090) (46,439) 735 Forward foreign exchange contracts............... 15,531,801 (2,598,413) -- -- ----------- ----------- --------- ----------- $60,957,413 $71,083,006 $1,196,792 $24,838,128 =========== =========== ========= =========== - -------------------------------------------------------------------------------- Government High Current Bond Fund Income Fund -------------------- ---------------------- Realized Gains Unrealized Realized Unrealized (Losses) Gains Losses Gains - -------------------------------------------------------------------------------- Long-term investments.......... $(155,827) $951,566 $(3,777,593) $556,316 Short-term investments......... 1,414 -- (17) -- --------- -------- ----------- -------- $(154,413) $951,566 $(3,777,610) $556,316 ========= ======== =========== ======== - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Index 500 International Equity Fund Focus Fund ------------------- ------------------------ Realized Unrealized Realized Unrealized Gains Gains Losses Gains (Losses) (Losses) - -------------------------------------------------------------------------------- Long-term investments.......... $(193) $148,089 $6,741,641 $11,550,686 Short-term investments......... -- -- 9,058 278,746 Stock index futures contracts..................... -- 5,045 2,000,430 (87,011) Options purchased.............. -- -- (71,729) (136,324) Options written................ -- -- 104,705 (37,619) Foreign currency transactions.................. -- -- (170,376) (11,494) Forward foreign exchange contracts..................... -- -- 89,755 (305) Currency options written....... -- -- 8,866 -- Currency options purchased..... -- -- 1,226,788 244,194 ---- -------- ---------- ----------- $(193) $153,134 $9,939,138 $11,800,873 ==== ======== ========== =========== - -------------------------------------------------------------------------------- Natural Resources Focus Fund Prime Bond Fund ----------------------- ----------------------- Realized Gains Unrealized Realized Unrealized (Losses) Gains Gains Gains - -------------------------------------------------------------------------------- Long-term investments....... $2,970,799 $4,688,728 $ 215,210 $3,687,559 Short-term investments...... 31 -- -- -- Foreign currency transactions............... (13,371) 2,065 -- -- --------- ---------- ------- -------- $2,957,459 $4,690,793 $ 215,210 $3,687,559 ========= ========== ======= ======== - -------------------------------------------------------------------------------- Quality Equity Fund Reserve Assets Fund ------------------------- -------------------- Realized Gains Unrealized Realized Unrealized (Losses) Gains Gains Losses - ------------------------------------------------------------------------------- Long-term investments...... $36,744,079 $98,807,069 -- -- Short-term investments..... (3,406) -- $3,049 $ (252) Foreign currency transactions.............. 147 -- -- -- ----------- ----------- ------ ----- $36,740,820 $98,807,069 $3,049 $ (252) =========== =========== ====== ===== - -------------------------------------------------------------------------------- 4. Capital Share Transactions: Transactions in capital shares were as follows: American Balanced Fund - -------------------------------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount - -------------------------------------------------------------------------------- Shares sold..................................... 578,134 $ 8,724,352 Shares issued to shareholders in reinvestment of dividends and distributions.................... 554,530 8,210,811 ---------- ------------ Total issued.................................... 1,132,664 16,935,163 Shares redeemed................................. (1,921,234) (29,368,082) ---------- ------------ Net decrease.................................... (788,570) $(12,432,919) ========== ============ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount - -------------------------------------------------------------------------------- Shares sold..................................... 2,201,026 $ 30,814,364 Shares issued to shareholders in reinvestment of dividends...................................... 529,259 7,173,644 --------- ------------ Total issued.................................... 2,730,285 37,988,008 Shares redeemed................................. (850,020) (12,151,661) --------- ------------ Net increase.................................... 1,880,265 $ 25,836,347 ========= ============ - ------------------------------------------------------------------------------- Basic Value Focus Fund - ------------------------------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount - ------------------------------------------------------------------------------- Shares sold..................................... 11,000,199 $149,832,843 Shares issued to shareholders in reinvestment of dividends and distributions.................... 1,724,353 21,518,432 ---------- ------------ Total issued.................................... 12,724,552 171,351,275 Shares redeemed................................. (493,551) (6,856,013) ---------- ------------ Net increase.................................... 12,231,001 $164,495,262 ========== ============ - ------------------------------------------------------------------------------- -138- - ------------------------------------------------------------------------------ - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold........................................ 7,762,209 $ 98,591,635 Shares issued to shareholders in reinvestment of dividends and distributions....................... 1,538,264 10,403,524 --------- ------------ Total issued....................................... 9,300,473 108,995,159 Shares redeemed.................................... (711,444) (8,076,571) --------- ------------ Net increase....................................... 8,589,029 $100,918,588 ========= ============ --------------------------------------------------------- Developing Capital Markets Focus Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold....................................... 4,462,492 $ 44,124,402 Shares issued to shareholders in reinvestment of dividends........................................ 151,274 1,385,673 ----------- ------------ Total issued...................................... 4,613,766 45,510,075 Shares redeemed................................... (1,027,712) (10,264,248) ----------- ------------ Net increase...................................... 3,586,054 $ 35,245,827 =========== ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold......................................... 2,555,725 $23,265,598 Shares issued to shareholders in reinvestment of dividends.......................................... 36,009 332,002 ----------- ------------ Total issued........................................ 2,591,734 23,597,600 Shares redeemed..................................... (525,636) (4,592,826) ----------- ------------ Net increase........................................ 2,066,098 $19,004,774 =========== ============ --------------------------------------------------------- Domestic Money Market Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold.................................... 103,681,145 $ 103,681,145 Shares issued to shareholders in reinvestment of dividends and distributions................ 13,824,990 13,824,990 ------------ ------------- Total issued................................... 117,506,135 117,506,135 Shares redeemed................................ (146,504,203) (146,504,203) ------------ ------------- Net decrease................................... (28,998,068) $ (28,998,068) ============ ============= --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold..................................... 111,267,159 $111,267,159 Shares issued to shareholders in reinvestment of dividends and distributions.................... 17,571,280 17,571,280 ------------ ------------ Total issued.................................... 128,838,439 128,838,439 Shares redeemed................................. (188,460,308) (188,460,308) ------------ ------------ Net decrease.................................... (59,621,869) $(59,621,869) ============ ============ --------------------------------------------------------- Equity Growth Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold........................................ 3,897,758 $ 99,038,352 Shares issued to shareholders in reinvestment of dividends and distributions....................... 1,870,190 45,444,509 --------- ------------ Total issued....................................... 5,767,948 144,482,861 Shares redeemed.................................... (639,891) (16,126,126) --------- ------------ Net increase....................................... 5,128,057 $128,356,735 ========= ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold..................................... 3,628,361 $ 86,301,010 Shares issued to shareholders in reinvestment of dividends...................................... 41,296 889,063 ------------ ------------ Total issued.................................... 3,669,657 87,190,073 Shares redeemed................................. (353,757) (8,536,475) ------------ ------------ Net increase.................................... 3,315,900 $ 78,653,598 ============ ============ --------------------------------------------------------- Global Bond Focus Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold..................................... 844,095 $ 8,236,250 Shares issued to shareholders in reinvestment of dividends...................................... 704,764 6,810,949 Shares issued resulting from reorganization..... 1,883,889 17,820,572 ---------- ------------ Total issued.................................... 3,432,748 32,867,771 Shares redeemed................................. (2,183,963) (21,116,271) ---------- ------------ Net increase.................................... 1,248,785 $ 11,751,500 ========== ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold..................................... 481,318 $ 4,592,255 Shares issued to shareholders in reinvestment of dividends...................................... 727,949 6,851,555 ---------- ------------ Total issued.................................... 1,209,267 11,443,810 Shares redeemed................................. (1,045,651) (9,863,555) ---------- ------------ Net increase.................................... 163,616 $ 1,580,255 ========== ============ --------------------------------------------------------- Global Strategy Focus Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- - --------------------------------------------------------- Shares sold....................................... 1,190,964 $ 14,964,723 Shares issued to shareholders in reinvestment of dividends........................................ 1,034,164 12,699,527 Shares issued resulting from reorganization....... 23,634,508 294,328,812 ---------- ------------ Total issued...................................... 25,859,636 321,993,062 Shares redeemed................................... (6,200,613) (80,229,132) ---------- ------------ Net increase...................................... 19,659,023 $241,763,930 ========== ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold....................................... 2,383,467 $ 28,913,701 Shares issued to shareholders in reinvestment of dividends and distributions...................... 1,452,481 17,112,643 ---------- ------------ Total issued...................................... 3,835,948 46,026,344 Shares redeemed................................... (4,725,965) (56,008,034) ---------- ------------ Net decrease...................................... (890,017) $ (9,981,690) ========== ============ --------------------------------------------------------- Global Utility Focus Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold....................................... 858,704 $ 9,800,413 Shares issued to shareholders in reinvestment of dividends........................................ 595,856 6,739,387 ---------- ------------ Total issued...................................... 1,454,560 16,539,800 Shares redeemed................................... (2,881,155) (32,963,476) ---------- ------------ Net decrease...................................... (1,426,595) $(16,423,676) ========== ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold....................................... 782,432 $ 7,896,815 Shares issued to shareholders in reinvestment of dividends........................................ 517,492 5,144,108 ---------- ------------ Total issued...................................... 1,299,924 13,040,923 Shares redeemed................................... (1,545,955) (15,567,315) ---------- ------------ Net decrease...................................... (246,031) $ (2,526,392) ========== ============ --------------------------------------------------------- -139- - ------------------------------------------------------------------------------ Government Bond Fund - --------------------------------------------------------- Dollar For the Year Ended December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold......................................... 4,677,811 $48,169,342 Shares issued to shareholders in reinvestment of dividends and distributions........................ 354,243 3,668,029 --------- ----------- Total issued........................................ 5,032,054 51,837,371 Shares redeemed..................................... (215,188) (2,234,202) --------- ----------- Net increase........................................ 4,816,866 $49,603,169 ========= =========== --------------------------------------------------------- - --------------------------------------------------------- Dollar For the Year Ended December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold........................................ 2,173,331 $ 22,410,622 Shares issued to shareholders in reinvestment of dividends......................................... 161,544 1,670,786 --------- ----------- Total issued....................................... 2,334,875 24,081,408 Shares redeemed.................................... (321,060) (3,238,873) --------- ----------- Net increase....................................... 2,013,815 $ 20,842,535 ========= =========== --------------------------------------------------------- High Current Income Fund - --------------------------------------------------------- Dollar For the Year Ended December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold....................................... 3,441,094 $ 38,643,510 Shares issued to shareholders in reinvestment of dividends........................................ 3,229,888 36,130,450 ---------- ------------ Total issued...................................... 6,670,982 74,773,960 Shares redeemed................................... (1,968,366) (22,078,243) ---------- ------------ Net increase...................................... 4,702,616 $ 52,695,717 ========== ============ --------------------------------------------------------- - --------------------------------------------------------- Dollar For the Year Ended December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold....................................... 5,980,682 $ 65,910,048 Shares issued to shareholders in reinvestment of dividends........................................ 2,792,967 30,645,264 ----------- ------------ Total issued...................................... 8,773,649 96,555,312 Shares redeemed................................... (1,184,474) (13,092,078) ----------- ------------ Net increase...................................... 7,589,175 $ 83,463,234 =========== ============ --------------------------------------------------------- Index 500 Fund --------------------------------------------------------- For the Period December 13, 1996+ to December 31, Dollar 1996 Shares Amount --------------------------------------------------------- Shares sold......................................... 57,357 $ 582,138 Shares redeemed..................................... (10) (102) ----------- ------------ Net increase........................................ 57,347 $ 582,036 =========== ============ --------------------------------------------------------- +Prior to December 13, 1996 (commencement of operations), the Fund issued 1,000,000 shares to MLLA for $10,000,000. International Equity Focus Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold.................................. 6,562,205 $ 75,036,616 Shares issued to shareholders in reinvestment of dividends................................ 334,488 3,669,329 --------- ------------ Total issued................................. 6,896,693 78,705,945 Shares redeemed.............................. (886,963) (10,175,471) --------- ------------ Net increase................................. 6,009,730 $ 68,530,474 ========= ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold.................................. 2,540,187 $ 26,767,717 Shares issued to shareholders in reinvestment of dividends and distributions.............. 898,135 9,331,626 -------- --------- Total issued................................. 3,438,322 36,099,343 Shares redeemed.............................. (2,161,108) (21,945,941) -------- --------- Net increase................................. 1,277,214 $ 14,153,402 ============ --------------------------------------------------------- Natural Resources Focus Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold.................................... 450,602 $ 5,663,127 Shares issued to shareholders in reinvestment of dividends and distributions................ 122,221 1,463,255 ------- --------- Total issued................................... 572,823 7,126,382 Shares redeemed................................ (737,357) (9,240,146) ------- --------- Net decrease................................... (164,534) $ (2,113,764) ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold.......................................... 474,971 $ 5,198,076 Shares issued to shareholders in reinvestment of dividends and distributions......................... 63,806 835,171 -------- ----------- Total issued......................................... 538,777 6,033,247 Shares redeemed...................................... (601,388) (6,852,669) -------- ----------- Net decrease......................................... (62,611) $ (819,422) ======== =========== --------------------------------------------------------- Prime Bond Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold........................................ 5,521,436 $65,068,417 Shares issued to shareholders in reinvestment of dividends......................................... 2,739,002 32,511,472 ---------- ------------ Total issued....................................... 8,260,439 97,579,889 Shares redeemed.................................... (2,399,918) (28,829,074) ---------- ------------ Net increase....................................... 5,860,520 $68,750,815 ========== ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold........................................ 3,880,829 $45,621,465 Shares issued to shareholders in reinvestment of dividends......................................... 2,612,921 30,585,478 ---------- ------------ Total issued....................................... 6,493,750 76,206,943 Shares redeemed.................................... (2,316,349) (27,181,488) ---------- ------------ Net increase....................................... 4,177,401 $49,025,455 ========== ============ --------------------------------------------------------- Quality Equity Fund - --------------------------------------------------------- For the Year Ended Dollar December 31, 1996 Shares Amount --------------------------------------------------------- Shares sold........................................ 1,934,738 $ 58,210,337 Shares issued to shareholders in reinvestment of dividends and distributions....................... 3,478,605 98,560,479 --------- ------------ Total issued....................................... 5,413,343 156,770,816 Shares redeemed.................................... (895,337) (26,640,069) --------- ------------ Net increase....................................... 4,518,006 $130,130,747 ========= ============ --------------------------------------------------------- - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold........................................ 2,793,165 $ 82,433,320 Shares issued to shareholders in reinvestment of dividends and distributions....................... 651,881 18,002,604 --------- ------------ Total issued....................................... 3,445,046 100,435,924 Shares redeemed.................................... (509,752) (15,180,783) --------- ------------ Net increase....................................... 2,935,294 $ 85,255,141 ========= ============ --------------------------------------------------------- Reserve Assets Fund - --------------------------------------------------------- Dollar For the Year EndedDecember 31, 1996 Shares Amount --------------------------------------------------------- Shares sold...................................... 6,967,844 $ 6,967,844 Shares issued to shareholders in reinvestment of dividends and distributions..................... 1,182,349 1,182,349 ----------- ----------- Total issued..................................... 8,150,193 8,150,193 Shares redeemed.................................. (10,800,490) (10,800,490) ----------- ----------- Net decrease..................................... (2,650,297) $ (2,650,297) =========== =========== --------------------------------------------------------- -140- - ------------------------------------------------------------------------------ - --------------------------------------------------------- For the Year Ended Dollar December 31, 1995 Shares Amount --------------------------------------------------------- Shares sold...................................... 6,811,139 $ 6,811,139 Shares issued to shareholders in reinvestment of dividends and distributions..................... 1,582,801 1,582,801 ----------- ----------- Total issued..................................... 8,393,940 8,393,940 Shares redeemed.................................. (15,081,975) (15,081,975) ----------- ----------- Net decrease..................................... (6,688,035) $ (6,688,035) =========== =========== --------------------------------------------------------- 5. Capital Loss Carryforward: At December 31, 1996, the Company had net capital loss carryforwards of approximately $3,909,000 in the Developing Capital Markets Focus Fund, of which $91,000 expires in 2003 , $3,728,000 expires in 2003 and $90,000 expires in 2004; $514,000 in the Global Bond Focus Fund, all of which expires in 2002; $2,331,000 in the Global Utility Focus Fund, of which $121,000 expires in 2002 and $2,210,000 expires in 2003; $71,000 in the Government Bond Fund, all of which expires in 2004; $295,000 in the High Current Income Fund, all of which expires in 2003; $15,651,000 in the Prime Bond Fund, of which $14,796,000 expires in 2002 and $855,000 expires in 2003. These amounts will be available to offset like amounts of any future taxable gains. 6. Loaned Securities: At December 31, 1996, the Government Bond Fund, the Prime Bond Fund and the Quality Equity Fund held US Treasury bonds having aggregate values of approximately $2,600,000, $6,798,000 and $6,514,000, respectively, as collateral for portfolio securities loaned having market values of approximately $2,514,000, $6,515,000 and $6,579,000, respectively. 7. Commitments: At December 31, 1996, the following Portfolios had entered into foreign exchange contracts, in addition to the contracts listed on the Schedules of Investments, under which they agreed to purchase and sell various foreign currencies with values of approximately: - --------------------------------------------------------- Purchase Sell --------------------------------------------------------- Development Capital Markets.......... $1,282,000 $ 79,000 Global Bond Focus Fund............... 4,107,000 2,659,000 International Equity Focus Fund...... -- 298,000 Natural Resources Focus Fund......... 222,000 39,000 --------------------------------------------------------- 8. Acquisition of Flexible Strategy Fund and International Bond Fund: On December 9, 1996, Global Strategy Focus Fund acquired all the net assets of Flexible Strategy Fund pursuant to a plan of reorganization. The acquisition was accomplished by a tax-free exchange of 23,634,508 Common Stock shares of Global Strategy Focus Fund for 20,765,107 Common Stock shares of Flexible Strategy Fund. Flexible Strategy Fund's net assets on that date of $325,430,454, including $30,966,642 of unrealized appreciation, were combined with those of Global Strategy Focus Fund. The aggregate net assets of Global Strategy Focus Fund after the acquisition amounted to $874,098,755. On December 9, 1996, World Income Focus Fund acquired all the net assets of International Bond Fund pursuant to a plan of reorganization. The acquisition was accomplished by a tax-free exchange of 1,883,889 Common Stock shares of World Income Focus Fund for 1,788,555 Common Stock shares of International Bond Fund. International Bond Fund's net assets on that date of $18,188,183, including $232,608 of unrealized appreciation, were combined with those of World Income Focus Fund. The aggregate net assets of World Income Focus Fund after the acquisition amounted to $97,534,880. Subsequent to the acquisition, World Income Focus Fund changed its name to Global Bond Focus Fund. 9. Subsequent Event: On January 2, 1997, the Board of Directors declared ordinary income dividends and capital gains distributions per share payable on January 9, 1997 to shareholders of record as of December 31, 1996 as follows: - --------------------------------------------------------- Ordinary Capital Fund Income Gains --------------------------------------------------------- American Balanced Fund.......................... $ .603285 $1.228672 Basic Value Focus Fund.......................... .665501 .943093 Developing Capital Markets Focus Fund........... .182600 -- Equity Growth Fund.............................. .533168 .831606 Global Strategy Focus Fund...................... .432947 .289873 Global Utility Focus Fund....................... .096870 -- Index 500 Fund.................................. .017480 .002863 International Equity Focus Fund................. .214967 .087059 Natural Resources Focus Fund.................... .205662 .723589 Quality Equity Fund............................. 1.195788 .557701 --------------------------------------------------------- -141- UNAUDITED FINANCIAL STATEMENTS FOR THE INDEX 500 FUND 142 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- General Electric Company++................................... 21,366 $ 2,120,576 Coca-Cola Co. ............................................... 32,289 1,804,148 Exxon Corp.++................................................ 16,114 1,736,284 Intel Corporation............................................ 10,658 1,482,794 +Microsoft Corporation++..................................... 15,612 1,431,425 Merck & Co., Inc. ........................................... 15,643 1,317,923 Royal Dutch Petroleum Co. N.V. (NY Shares) (ADR)*............ 6,957 1,217,475 Phillip Morris Companies, Inc. .............................. 10,569 1,206,187 Procter & Gamble Co. ........................................ 8,851 1,017,865 International Business Machines Corp. ....................... 6,716 922,611 Johnson & Johnson Co. ....................................... 17,282 913,786 Wal-Mart Companies, Inc. .................................... 29,767 829,755 du Pont (E.I.) de Nemours & Co. ............................. 7,306 774,436 Bristol-Myers Squibb Co. .................................... 12,996 766,764 American Telephone & Telegraph Co. .......................... 21,026 730,654 American International Group, Inc. .......................... 6,094 715,283 Pfizer, Inc. ................................................ 8,366 703,790 Hewlett-Packard Co. ......................................... 13,196 702,687 Mobil Corporation............................................ 5,113 667,886 PepsiCo, Inc. ............................................... 20,161 657,753 Citicorp..................................................... 6,005 650,041 Walt Disney Co............................................... 8,802 642,546 Chevron Corp. ............................................... 8,468 589,585 Lilly (Eli) & Co. ........................................... 7,160 588,910 GTE Corp. ................................................... 12,481 581,927 Abbott Laboratories.......................................... 10,081 565,796 Amoco Corp. ................................................. 6,453 558,991 NationsBank Corp. ........................................... 9,970 552,089 BellSouth Corporation........................................ 12,893 544,729 General Motors Corp. ........................................ 9,811 543,284 Chase Manhattan Corp. ....................................... 5,695 533,194 Gillette Co.................................................. 7,198 522,755 Federal National Mortgage Association........................ 14,170 511,891 American Home Products Corporation........................... 8,289 497,340 Ford Motor Company........................................... 15,384 482,673 BankAmerica Corp. ........................................... 4,657 469,193 Motorola, Inc. .............................................. 7,693 464,465 Boeing Co. .................................................. 4,650 458,606 Minnesota Mining & Manufacturing Co. ........................ 5,424 458,328 Ameritech Corp. ............................................. 7,128 438,372 Lucent Technologies, Inc. ................................... 8,262 435,820 McDonald's Corp. ............................................ 9,055 427,849 SBC Communications Inc. ..................................... 7,834 412,264 +Cisco Systems, Inc. ........................................ 8,533 410,651 Standard & Poors Depositary Receipts......................... 5,300 399,984 Travelers Corporation........................................ 8,311 397,889 Unilever N.V. (ADR)*......................................... 2,077 386,841
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- Texaco Inc. .................................................. 3,432 $ 375,804 American Express Company...................................... 6,150 368,231 Kimberly-Clark Corp. ......................................... 3,666 364,309 Schering-Plough Corp. ........................................ 4,794 348,763 Bell Atlantic Corporation..................................... 5,681 345,831 Schlumberger, Ltd. ........................................... 3,197 342,878 Allstate Corp. ............................................... 5,770 342,594 Wells Fargo & Company......................................... 1,201 341,234 +Oracle Corp. ................................................ 8,778 338,502 Home Depot, Inc. ............................................. 6,233 333,466 Eastman Kodak Co. ............................................ 4,324 328,084 Time Warner Inc. ............................................. 7,379 319,142 MCI Communications Corp. ..................................... 8,895 316,884 Warner-Lambert Co. ........................................... 3,520 304,480 First Union Corporation....................................... 3,681 298,621 Columbia/HCA Healthcare Corp. ................................ 8,713 292,975 Monsanto Co. ................................................. 7,631 291,886 Atlantic Richfield Company.................................... 2,087 281,745 Campbell Soup Co. ............................................ 6,068 281,404 Chrysler Corp. ............................................... 9,121 273,630 Anheuser-Busch Companies, Inc. ............................... 6,482 273,054 +Compaq Computer Corp. ....................................... 3,515 269,337 Emerson Electric Co. ......................................... 5,820 261,900 AlliedSignal Inc. ............................................ 3,670 261,488 NYNEX Corp. .................................................. 5,710 260,519 Sears, Roebuck & Co. ......................................... 5,081 255,320 Sara Lee Corporation.......................................... 6,279 254,299 Sprint Corporation............................................ 5,586 254,163 Federal Home Loan Mortgage Corp. ............................. 9,284 252,989 Dow Chemical Company (The).................................... 3,154 252,320 +WorldCom, Inc. .............................................. 11,211 246,642 Pharmacia & Upjohn Inc. ...................................... 6,594 241,505 Xerox Corp. .................................................. 4,212 239,557 Morgan (J.P.) & Company, Inc. ................................ 2,419 237,667 United Technologies Corp. .................................... 3,120 234,780 Nike, Inc. (Class B).......................................... 3,739 231,818 First Chicago Corp. .......................................... 4,138 223,969 Norwest Corporation........................................... 4,806 222,277 BancOne Corp. ................................................ 5,547 220,493 Northern Telecom Ltd. ........................................ 3,354 219,268 US West Communications Group.................................. 6,198 210,732 Lockheed Martin Corp. ........................................ 2,500 210,000 Pacific Telesis Group......................................... 5,559 209,852 Caterpillar, Inc. ............................................ 2,485 199,421 First Data Corp. ............................................. 5,808 196,746 Fleet Financial Group Inc. ................................... 3,404 194,879 Medtronic, Inc. .............................................. 3,109 193,535 WMX Technologies.............................................. 6,296 192,815 Amgen, Inc. .................................................. 3,415 190,813 Colgate-Palmolive Co. ........................................ 1,906 189,885 Heinz (H.J.) Company.......................................... 4,772 188,494
143 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- Bank of New York Company, Inc. .............................. 5,091 $ 187,094 Seagram Company Ltd. ........................................ 4,842 185,206 Southern Company (The)....................................... 8,742 184,675 Texas Instruments, Inc. ..................................... 2,465 184,567 Computer Associates International Inc. ...................... 4,734 184,034 Rockwell International Corp. ................................ 2,836 183,985 Kellogg Co. ................................................. 2,735 183,929 Merrill Lynch & Co., Inc.,................................... 2,138 183,601 Union Pacific Corp. ......................................... 3,178 180,351 PNC Bank Corp. .............................................. 4,324 172,960 ConAgra Inc. ................................................ 3,124 169,477 General Re Corporation....................................... 1,072 169,376 McDonnell Douglas Corporation................................ 2,753 167,933 Aetna Inc. .................................................. 1,955 167,886 Automatic Data Processing Inc. .............................. 3,768 157,785 +Dell Computer Corp. ........................................ 2,327 157,363 Gannett Co., Inc. ........................................... 1,829 157,065 Aluminum Co. of America...................................... 2,251 153,068 CPC International, Inc. ..................................... 1,866 153,012 Baxter International, Inc. .................................. 3,542 152,749 Penney (J.C.) Co. ........................................... 3,195 152,162 +Viacom, Inc. (Class B)...................................... 4,592 152,110 International Paper Co. ..................................... 3,895 151,418 +US West Media Group ,Inc. .................................. 8,106 150,974 +Airtouch Communications, Inc. .............................. 6,508 149,684 Burlington Northern Santa Fe Inc. ........................... 1,986 146,964 +Seagate Technology, Inc. ................................... 3,254 146,023 Deere & Co. ................................................. 3,353 145,856 Dean Witter, Discover & Co. ................................. 4,171 145,464 May Department Stores Co. ................................... 3,169 144,189 KeyCorp...................................................... 2,925 142,594 +Boston Scientific Corp. .................................... 2,309 142,581 CIGNA Corporation............................................ 975 142,472 Phillips Petroleum Company................................... 3,416 139,629 +Sun Microsystems, Inc. ..................................... 4,816 139,062 Westinghouse Electric Corporation............................ 7,832 139,018 Norfolk & Southern Corp. .................................... 1,624 138,446 Raytheon Company............................................. 3,063 138,218 CoreStates Financial Corp. .................................. 2,889 137,228 National City Corporation.................................... 2,879 134,233 SunTrust Banks, Inc. ........................................ 2,894 134,209 Walgreen Co. ................................................ 3,193 133,707 Bank of Boston Corp. ........................................ 1,986 133,062 Loews Corporation............................................ 1,493 132,690 Corning, Inc. ............................................... 2,985 132,459 Illinois Tool Works Inc. .................................... 1,608 131,253 CSX Corp. ................................................... 2,815 130,898 General Mills, Inc. ......................................... 2,096 130,214 PPG Industries, Inc. ........................................ 2,379 128,466
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- First Bank Systems, Inc.. ................................... 1,745 $ 127,385 Edison International......................................... 5,622 126,495 Archer-Daniels-Midland Co. .................................. 7,061 126,215 Pennsylvania Gas & Electric Corporation...................... 5,350 125,725 Enron Corp. ................................................. 3,302 125,476 Unocal Corp. ................................................ 3,249 123,868 Mellon Bank Corp. ........................................... 1,680 122,220 Chubb Corporation............................................ 2,259 121,704 MONA Corp. .................................................. 4,336 120,866 Gap, Inc. ................................................... 3,580 119,930 Tyco International, Ltd. .................................... 2,162 118,910 Barnett Banks, Inc. ......................................... 2,532 117,738 Dayton Hudson Corporation (Class A).......................... 2,812 117,401 Conrail, Inc. ............................................... 1,038 117,035 Wachovia Corp. .............................................. 2,144 116,848 Morgan Stanley Group Inc. ................................... 1,977 116,149 +CUC International Inc. ..................................... 5,149 115,853 Duke Power Company........................................... 2,617 115,475 Weyerhaeuser Co. ............................................ 2,573 114,820 United Healthcare Corporation................................ 2,388 113,728 +EMC Corporation............................................. 3,190 113,245 Pitney Bowes, Inc. .......................................... 1,927 113,211 Textron Inc. ................................................ 1,073 112,665 American Brands, Inc. ....................................... 2,209 111,831 Honeywell, Inc. ............................................. 1,641 111,383 Albertson's Inc. ............................................ 3,270 111,180 Halliburton Company.......................................... 1,625 110,094 Barrick Gold Corporation..................................... 4,634 110,058 ITT Hartford Group Inc. ..................................... 1,524 109,919 Micron Technology, Inc. ..................................... 2,711 109,795 Household Interntional, Inc. ................................ 1,257 108,259 +Applied Materials, Inc. .................................... 2,324 107,776 American General Corp. ...................................... 2,639 107,539 Ralston Purina Co. .......................................... 1,375 107,422 Fifth Third Bank............................................. 1,377 106,718 Marsh & McLennan Companies, Inc. ............................ 932 105,549 +Toys "R' Us, Inc. .......................................... 3,769 105,532 Goodyear Tire & Rubber Co. .................................. 2,016 105,336 Occidental Pete Corp. ....................................... 4,268 105,099 FPL Group, Inc. ............................................. 2,375 104,797 USX Marathon Group, Inc. .................................... 3,732 104,029 TCI Communications, Inc. (Class A)........................... 8,662 103,944 USBANCORP., Inc. ............................................ 1,922 102,827 American Electric Power Company, Inc. ....................... 2,433 100,361 Texas Utilities Company...................................... 2,914 99,804 Hershey Foods Corporation.................................... 1,992 99,600 Alcan Aluminum, Ltd. ........................................ 2,936 99,457 +HFS Inc. ................................................... 1,670 98,321 Air Products and Chemicals, Inc. ............................ 1,447 98,215
144 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- AMP, Inc. ................................................... 2,851 $ 98,003 +AMR Corp. .................................................. 1,181 97,433 +Tenet Healthcare Corp. ..................................... 3,911 96,308 Consolidated Edison Company of New York...................... 3,050 91,500 Praxair, Inc. ............................................... 2,030 91,096 Service Corporation.......................................... 3,059 91,005 Williams Companies, Inc. .................................... 2,036 90,602 Avon Products, Inc. ......................................... 1,725 90,563 Mattel, Inc. ................................................ 3,747 89,928 +ITT Corp. .................................................. 1,511 88,960 +Federated Department Store, Inc. ........................... 2,697 88,664 Wrigley (WM) Jr. Co. (Class B)............................... 1,508 88,029 Bankers Trust New York Corp. ................................ 1,061 87,002 Union Pacific Resources Group................................ 3,242 86,723 Tenneco, Inc. ............................................... 2,216 86,424 Aon Corporation.............................................. 1,405 86,056 Georgia Pacific Corp. ....................................... 1,186 85,985 Crown Company, Inc. ......................................... 1,664 85,904 TRW Inc. .................................................... 1,649 85,336 Dominion Resources, Inc. .................................... 2,338 85,045 Panenergy Corporation........................................ 1,960 84,525 American Stores Company...................................... 1,890 84,105 +Tellabs, Inc. .............................................. 2,319 83,774 Lowe's Companies, Inc. ...................................... 2,241 83,757 +Kroger Co. (The)............................................ 1,636 83,027 Marriott International, Inc. ................................ 1,660 82,585 PacifiCorp................................................... 3,825 81,759 Delta Air Lines, Inc. ....................................... 969 81,517 Public Service Enterprise Group, Inc. ....................... 3,094 81,217 ALLTEL Corp. ................................................ 2,461 79,983 Browning-Ferris Industries, Inc. ............................ 2,758 79,637 Sysco Corporation............................................ 2,321 79,204 Comerica Inc. ............................................... 1,395 78,643 Morton International, Inc. .................................. 1,849 78,120 Milton Hotels Corporation.................................... 3,207 77,770 Conseco, Inc. ............................................... 2,183 77,769 +HealthSouth Corp. .......................................... 4,058 77,609 +Federal Express Corp. ...................................... 1,479 77,093 Transamerica Corporation..................................... 860 76,970 Dover Corp. ................................................. 1,460 76,650 Freeport-McMoRan Copper & Gold Inc. (Class B)................ 2,509 76,211 +K Mart Corp. ............................................... 6,279 76,133 Clorox Company............................................... 670 75,124 +COSTCO Companies Inc. ...................................... 2,711 74,891 Masco Corporation............................................ 2,083 74,467 +3Com Corp. ................................................. 2,271 74,375 +Advanced Micro Devices Inc. ................................ 1,773 73,580
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- Entergy Corp. ............................................... 2,997 $ 73,427 Union Carbide Corp. ......................................... 1,653 73,145 Genuine Parts Company........................................ 1,563 72,875 Becton, Dickinson and Company................................ 1,616 72,720 Lincoln National Corp. ...................................... 1,355 72,492 Great Western Financial Corp. ............................... 1,788 72,191 Baker Hughes, Inc. .......................................... 1,876 71,992 Inco Ltd. ................................................... 2,185 71,286 Carolina Power & Light Company............................... 1,965 71,231 Comcast Corporation.......................................... 4,207 70,993 Eaton Corp. ................................................. 1,001 70,946 Salomon Inc. ................................................ 1,415 70,573 Times Mirror Co. ............................................ 1,283 70,084 CINERGY Corp. ............................................... 2,046 69,820 St. Paul Companies, Inc. .................................... 1,076 69,805 UNUM Corporation............................................. 949 69,277 Burlington Resources Inc. ................................... 1,619 69,212 Newell Co. .................................................. 2,061 69,043 Dresser Industries, Inc. .................................... 2,280 68,970 Donnelley (R.R.) & Sons Company.............................. 1,951 68,041 UST, Inc. ................................................... 2,416 67,346 Pioneer Hi-Bred International, Inc. ......................... 1,068 67,150 Rite Aid Corporation......................................... 1,589 66,738 McGraw-Hill, Inc. ........................................... 1,291 66,002 Coastal Corp. ............................................... 1,366 65,568 Providian Corporation........................................ 1,216 65,056 Winn-Dixie Stores, Incorporated.............................. 1,962 64,746 Tribune Co. ................................................. 1,598 64,719 Cognizant Corporation........................................ 2,220 64,658 Limited, Inc. (The).......................................... 3,517 64,625 Quaker Oats Company.......................................... 1,764 64,386 SAFECO Corporation........................................... 1,603 64,120 Amerada Hess Corp. .......................................... 1,208 64,024 Allegheny Teledyne Inc. ..................................... 2,262 63,619 Houston Industries Inc. ..................................... 3,041 63,481 CVS Corporation.............................................. 1,371 63,237 Republic New York Corporation................................ 717 63,186 International Flavors & Fragrances Inc. ..................... 1,436 62,825 Rohm & Haas Co. ............................................. 830 62,146 Consolidated Natural Gas Co. ................................ 1,231 62,012 Ingersoll-Rand Company....................................... 1,420 61,948 Phelps Dodge Corporation..................................... 841 61,498 Sonat Inc. .................................................. 1,119 60,985 +Computer Sciences Corporation............................... 985 60,824 Cooper Industries, Inc. ..................................... 1,401 60,768 Greentree Financial Corp. ................................... 1,783 60,176
145 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- Sherwin-Williams Company .................................... 2,228 $ 60,156 +Thermo Electron Corporation................................. 1,935 59,743 +Cabletron Systems, Inc. .................................... 2,027 59,290 Guidant Corp. ............................................... 962 59,163 PECO Energy Co. ............................................. 2,887 58,823 IKON Office Solutions, Inc. ................................. 1,748 58,558 Central and South West Corp. ................................ 2,736 58,482 +LSI Logic Corporation....................................... 1,671 58,067 Fluer Corporation............................................ 1,085 56,963 Northrop Grumman Corp. ...................................... 749 56,643 Champion International Corp. ................................ 1,240 56,420 Placer Dome Inc. ............................................ 3,108 56,332 Hercules Incorporated........................................ 1,328 56,108 Dun & Bradstreet Corp. ...................................... 2,209 56,053 Laidlaw Inc. ................................................ 4,074 56,017 Interpublic Group of Companies, Inc. ........................ 1,053 55,546 New York Times Co. .......................................... 1,256 55,421 VF Corporation............................................... 826 55,239 General Dynamic Corporation.................................. 819 55,180 +Digital Equipment Corporation............................... 2,010 55,024 Unicom Corp. ................................................ 2,798 54,561 East Chemical Co. ........................................... 1,008 54,180 MGIC Investment Corp. ....................................... 765 54,124 MBIA, Inc. .................................................. 560 53,690 Nucor Corporation............................................ 1,138 52,063 Avery Dennison Corporation................................... 1,352 52,052 Baltimore Gas & Electric Company............................. 1,916 51,253 Reynolds Metals Company...................................... 826 51,212 Grace (W.R.) & Co. .......................................... 1,078 51,070 Grainger (W.W.) Inc. ........................................ 689 50,986 Dow Jones & Company, Inc. ................................... 1,253 50,903 DTE Energy Holdings Company.................................. 1,883 50,606 Torchmark Corporation........................................ 913 50,557 General Public Utilities Corp. .............................. 1,565 50,276 Jefferson Pilot Corp. ....................................... 924 50,242 Newmont Mining Corporation................................... 1,293 50,104 Ahmanson (H.P.) & Co. ....................................... 1,369 49,969 +National Semiconductor Corporation.......................... 1,797 49,417 Union Electric Company....................................... 1,325 48,859 Knight-Ridder, Inc. ......................................... 1,218 48,568 Rubbermaid Inc. ............................................. 1,944 48,357 Case Corp. .................................................. 952 48,314 Raychem Corporation.......................................... 581 47,860 Golden West Financial Corporation, Com....................... 744 46,686 +Humana Inc. ................................................ 2,110 46,420 Dillard Department Stores Inc. .............................. 1,473 46,400 Whirlpool Corporation........................................ 965 45,958 Hasbro, Inc. ................................................ 1,677 45,908
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- +Bay Networks Inc. .......................................... 2,561 $ 45,778 Willamette Industries, Inc. ................................. 725 45,312 Beneficial Corp. ............................................ 697 45,044 +Silicon Graphics, Inc. ..................................... 2,270 44,265 +Autozone, Inc. ............................................. 1,947 43,808 Stanley Works................................................ 1,154 43,708 Dana Corp. .................................................. 1,321 43,428 Johnson Controls, Inc. ...................................... 537 43,228 +Novell, Inc. ............................................... 4,536 43,092 TJX Companies Inc. .......................................... 1,008 43,092 Harcourt General Inc. ....................................... 923 42,920 Brown-Forman Corp. (Class B)................................. 896 42,784 PP&L Resources Inc. ......................................... 2,107 42,667 Union Camp Corp. ............................................ 904 42,601 Northern Status Power Company................................ 896 42,448 Circuit City Stores, Inc. ................................... 1,271 42,420 +Western Atlas, Inc. ........................................ 697 42,256 Andrew Corporation........................................... 1,167 42,158 Ohio Edison Company.......................................... 1,981 41,849 Southwest Airlines Co. ...................................... 1,882 41,639 Columbia Gas System, Inc. ................................... 716 41,439 +Fruit of the Loom, Inc. .................................... 998 41,417 Parker Mannifin Corp. ....................................... 965 41,254 +General Instrument Corp. ................................... 1,777 40,649 +Woolworth Corp. ............................................ 1,733 40,509 Liz Claiborne, Incorporated.................................. 928 40,484 Nordstrom, Inc. ............................................. 1,060 40,147 Block (H&R), Inc. ........................................... 1,349 39,627 Mallinckradt Group Inc. ..................................... 959 39,439 Sigma-Aldrich Corporation.................................... 1,275 39,366 Black & Decker Corporation................................................. 1,224 39,321 Engelhard Corporation........................................ 1,867 39,207 Kerr-Mogee Corporation....................................... 630 38,981 Harris Corp. ................................................ 505 38,822 Frontier Corp. .............................................. 2,123 37,949 Tandy Corp. ................................................. 757 37,945 Temple-Inland Inc. ......................................... 720 37,800 Great Lakes Chemical Corporation............................. 821 37,766 Pall Corporation............................................. 1,628 37,647 Parkin-Elmer Corporation..................................... 560 36,050 Mead Corp. .................................................. 679 35,987 +St. Jude Medical, Inc. ..................................... 1,051 35,077 Armstrong World Industries, Inc. ............................ 536 34,706 Wendy's International, Inc. ................................. 1,679 34,629 Deluxe Corporation........................................... 1,068 34,577 PACCAR Inc. ................................................. 515 34,376 Brunswick Corporation........................................ 1,277 34,319 ITT Industries Inc. ......................................... 1,532 34,279 Ashland Oil Inc. ............................................ 836 33,649 Pacific Enterprises.......................................... 1,103 33,366
146 - ------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) - -------------------------------------------------------------------------------
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- Westvaco Corporation......................................... 1,322 $ 33,215 Whitman Corporation.......................................... 1,346 32,977 Nalco Chemical Company....................................... 874 32,666 James River Corp. of Virginia................................ 1,117 32,533 Reebok International Ltd. ................................... 721 32,355 USF&G Corporation............................................ 1,501 32,271 +Ceridian Corp. ............................................. 896 32,144 +DSC Communications Corp. ................................... 1,526 31,951 Ecolab Inc. ................................................. 838 31,844 Pennzoil Company............................................. 605 31,309 American Greetings Corp. (Class A)........................... 979 31,267 Ryder System, Inc. .......................................... 1,063 31,093 Snap-On, Inc. ............................................... 790 30,612 +ALZA Corp. ................................................. 1,099 30,223 Harnischreger Industries, Inc. .............................. 637 29,621 +FMC Corporation............................................. 482 29,523 Thomas & Betts Corporation................................... 688 29,412 Louisiana-Pacific Corp. ..................................... 1,410 29,257 USX-US Steel Group, Inc. .................................... 1,095 29,154 +Apple Computer Inc. ........................................ 1,590 29,018 Homestake Mining Company..................................... 1,904 28,798 Cyprus Amax Minerals Co. .................................... 1,211 28,761 Bausch & Lomb, Incorporated.................................. 720 28,440 Santa Fe Pacific Gold Corp. ................................. 1,705 28,132 Echlin Inc. ................................................. 804 27,336 Bemis Company, Inc. ......................................... 679 27,160 Tupperware Corporation....................................... 808 27,068 Owens Corning Fiberglass Corp. .............................. 669 26,927 Maytag Corp. ................................................ 1,300 26,812 Cummins Engine Company, Inc. ................................ 513 26,291 +Oryx Energy Co. ............................................ 1,360 26,180 Noram Energy Corp. .......................................... 1,782 26,062 Super Valu, Inc. ............................................ 873 25,972 Moore Corp Ltd. ............................................. 1,297 25,940 Goodrich (B.F.) Comp. ...................................... 697 25,528 Biomet, Incorporated......................................... 1,512 25,515 General Signal Corporation................................... 647 25,314 +Rowan Companies, Inc. ...................................... 1,109 25,091 United States Surgical Corporation........................... 814 24,827 Giant Food, Inc. (Class A)................................... 775 24,800 Allergan, Inc. .............................................. 850 24,756 Sun Company, Inc. ........................................... 947 24,740 Pep Boys-Manny, Moe & Jack................................... 811 24,330 National Service Industries, Inc. ........................... 617 24,140 Millipore Corporation........................................ 561 23,772 Polaroid Corp. .............................................. 590 23,452 Worthington Industries, Inc. ................................ 1,217 23,275 +Harrah's Entertainment, Inc. ............................... 1,335 22,862 Mercantile Stores Company, Inc. ............................. 478 22,167
SHARES VALUE COMMON STOCKS HELD (NOTE 12) - -------------------------------------------------------------------------------- Timken Company (The)......................................... 406 $ 21,721 Tektronix, Inc. ............................................. 426 21,513 Bard (C.R.) Inc. ............................................ 740 21,090 Louisiana Land & Exploration Co. ............................ 443 20,987 USLIFE Corporation........................................... 448 20,944 NICOR Inc. .................................................. 646 20,672 +USAir Group, Inc. .......................................... 834 20,433 Manor Care, Inc. ............................................ 814 19,841 Cooper Tire & Rubber Company................................. 1,068 19,758 Battle Mountain Gold Company................................. 2,915 19,312 Boise Cascade Corporation.................................... 629 19,185 Alberto-Culver Company (Class B)............................. 724 18,915 Crane Co..................................................... 596 18,700 Foster Wheeler Corp. ........................................ 527 18,643 ENSERCH Corporation.......................................... 905 18,553 +Beverly Enterprises, Inc.................................... 1,288 18,354 +Tandem Computers, Inc....................................... 1,534 18,216 Autodesk, Inc................................................ 574 17,794 +King World Productions, Inc. ............................... 485 17,702 Russell Corp. ............................................... 495 17,696 Briggs & Stratton Corporation................................ 375 16,828 +Santa Fe Energy Resources, Inc. ............................ 1,177 16,331 Darden Restaurants, Inc. .................................... 2,046 16,112 Meredith Corporation......................................... 694 16,049 +Niagara Mohawk Power Corp. ................................. 1,874 15,929 ASARCO, Inc. ................................................ 556 15,638 Potlatch Corporation......................................... 374 15,381 Scientific-Atlanta, Inc. .................................... 1,004 15,311 McDermott International, Inc. ............................... 712 15,219 Peoples Energy Corporation................................... 453 15,006 Helmerich & Payne, Inc. ..................................... 323 14,939 +Amdahl Corporation.......................................... 1,574 14,756 +Unisys Corp. ............................................... 2,269 14,465 Stone Container Corp. ....................................... 1,287 14,318 Shared Medical Systems Corporation........................... 305 14,182 Caliber Systems, Inc. ....................................... 508 13,462 Centex Acceptance Corp. ..................................... 369 13,007 EG&G, Inc. .................................................. 615 12,838 Great Atlantic & Pacific Tea Co., Inc. ...................... 495 12,561 Inland Steel Co. ............................................ 636 12,402 Trinova Corporation.......................................... 363 12,160 Echo Bay Mines Ltd. ......................................... 1,807 11,971 +Bethlehem Steel Corporation................................. 1,450 11,963 Longs Drug Stores Corp. ..................................... 507 11,914 Springs Industries, Inc. .................................... 262 11,724 Fleetwood Enterprises, Inc. ................................. 462 11,550 Jostens, Inc. ............................................... 503 11,380 Safety-Kleen Corp. .......................................... 756 11,151
147 - ------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) - -------------------------------------------------------------------------------
SHARES VALUE COMMON STOCKS HELD (NOTE 1A) - -------------------------------------------------------------------------------- Ball Corporation............................................. 397 $ 10,521 Coors (Adolph) Company, (Class B)................................................... 482 10,243 Cincinnati Milacron, Inc..................................... 518 9,713 Stride Rite Corp. ........................................... 643 9,645 Harland John H. Company (The)................................ 402 9,548 ONEOK, Inc. ................................................. 354 9,204 +Navistar International Corporation.......................... 956 8,962 Pulte Corporation............................................ 302 8,833 +Data General Corporation.................................... 509 8,653 Fleming Companies, Inc. ..................................... 490 8,575 Eastern Enterprises.......................................... 264 8,151 +Charming Shoppes, Inc. ..................................... 1,342 7,213 Kaufman and Broad Home Corp. ................................ 505 6,691 Giddings & Lewis, Inc. ...................................... 440 6,545 +Armco, Inc. ................................................ 1,384 5,536 Nacco Industries Incorporation, (Class A).................... 107 5,270 +Intergraph Corporation...................................... 592 4,588 - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST--78,189,988)--76.4% 75,633,792 - --------------------------------------------------------------------------------
FACE VALUE SHORT-TERM OBLIGATIONS--COMMERCIAL PAPER** AMOUNT (NOTE 1A) - ------------------------------------------------------------------------------- American Home Products Corporation, 5.42% due 4/11/1997............................................ $2,500,000 $ 2,496,236 CSW Credit, Inc., 5.55% due 4/14/1997................. 4,300,000 4,291,382 International Securitization Corp., 5.40% due 4/14/1997............................................ 5,000,000 4,990,250 McKenna Triangle National Corp., 5.57% due 4/04/1997.. 2,500,000 2,498,840 ----------- 14,276,708 - ------------------------------------------------------------------------------- SHORT-TERM OBLIGATIONS--US GOVERNMENT AGENCY OBLIGATIONS** - ------------------------------------------------------------------------------- Federal Home Loan Banks, 5.40% due 4/01/1997.......... 6,965,000 6,965,000 Federal Home Loan Mortgage Corp., 5.26% due 4/18/1997............................................ 3,000,000 2,992,548 ----------- 9,957,548 - ------------------------------------------------------------------------------- TOTAL SHORT-TERM OBLIGATIONS (COST--24,234,256)--24.5% 24,234,256 - ------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST--$102,424,244)--101.1%........ 99,868,048 VARIATION MARGIN ON STOCK INDEX FUTURES CONTRACTS***-- (1.2)%............................................... (1,229,855) OTHER ASSETS LESS LIABILITIES--0.1%................... 112,968 ----------- NET ASSETS--100.0%.................................... $98,751,161 ===========
- ------------------------------------------------------------------------------- + Non-income producing security. ++ Portion of holdings pledged as collateral for open stock index futures contracts. * American Depositary Receipts (ADR). ** Commercial Paper and certain US Government Agency Obligations are traded on a discount basis; the interest rate shown is the discount rate paid at the time of purchase by the Fund. *** Stock index futures contracts purchased as of March 31, 1997 were as follows: - ------------------------------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE CONTRACTS ISSUE DATE (NOTE 1B) - ------------------------------------------------------------------------------------------ 67 S&P 500 Stock Index June 1997 $25,393,000 - ------------------------------------------------------------------------------------------ TOTAL STOCK INDEX FUTURES CONTRACTS PURCHASED (CONTRACT PRICE--$26,906,070).......................... $25,393,000 =========== - ------------------------------------------------------------------------------------------
See Notes to Financial Statements. 148 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
INDEX 500 FUND - ------------------------------------------------------------------------------- ASSETS: Investments, at value (identified cost-- $102,424,244) (Note 1a)........................... $ 99,868,048 Cash............................................... 703,472 Receivables: Securities sold................................... $ 5,555,000 Capital shares sold............................... 695,078 Dividends......................................... 135,600 6,385,678 ------------ Deferred organization expenses (Note 1f)........... 14,852 Prepaid registration fees and other assets (Note 1f)............................................... 7,910 ------------ Total assets...................................... 106,979,960 ------------ - ------------------------------------------------------------------------------- LIABILITIES: Payables: Securities purchased.............................. 6,975,453 Variation margin on stock index futures contracts (Note 1b)........................................ 1,229,855 Investment adviser (Note 2)....................... 5,066 Capital shares redeemed........................... 34 8,210,408 ------------ Accrued expenses and other liabilities............. 18,391 ------------ Total liabilities................................. 8,228,799 ------------ - ------------------------------------------------------------------------------- NET ASSETS......................................... $ 98,751,161 ============ - ------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Common Stock, $0.10 par value, 100,000,000 shares authorized........................................ $ 950,821 Paid-in capital in excess of par................... 101,025,846 Undistributed investment income--net............... 452,226 Undistributed realized capital gains on invest- ments--net........................................ 391,534 Unrealized depreciation on investments--net........ (4,069,266) ------------ NET ASSETS--Equivalent to $10.39 per share based on 9,508,208 shares outstanding...................... $ 98,751,161 ============ - -------------------------------------------------------------------------------
See Notes to Financial Statements. 149 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENT OF OPERATIONS FOR THE PERIOD JANUARY 1, 1997 TO MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
INDEX 500 FUND - ------------------------------------------------------------------------------ INVESTMENT INCOME (NOTES 1d & 1e): Dividends (net of $366 foreign withholding tax)..... $ 245,433 Interest and discount earned........................ 218,743 ----------- Total income........................................ $ 464,176 ----------- - ------------------------------------------------------------------------------ EXPENSES: Investment advisory fees (Note 2)................... 45,906 Registration fees (Note 1f)......................... 4,096 Accounting services (Note 2)........................ 2,699 Custodian fees...................................... 2,280 Amortization of organization expenses (Note 1f)..... 1,962 Professional fees................................... 970 Transfer agent fees (Note 2)........................ 727 Directors' fees and expenses........................ 133 Pricing services.................................... 93 Other............................................... 173 ----------- Total expenses before reimbursement................. 59,039 Reimbursement of expenses (Note 2).................. (47,099) ----------- Expenses after reimbursement........................ 11,940 ----------- Investment income--net.............................. 452,236 ----------- - ------------------------------------------------------------------------------ REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS-- NET (NOTES 1b, 1e, & 3): Realized gain on investment--net.................... 396,577 Change in unrealized appreciation--net.............. (4,222,400) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERA- TIONS.............................................. $(3,373,587) =========== - ------------------------------------------------------------------------------
See Notes to Financial Statements. 150 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
INDEX 500 FUND ------------------------------------ FOR THE PERIOD JANUARY 1, 1997 TO FOR THE PERIOD MARCH 31, DEC. 13, 1996+ TO 1997 DEC. 31, INCREASE (DECREASE) IN NET ASSETS: (UNAUDITED) 1996 - ------------------------------------------------------------------------------- OPERATIONS: Investment income--net................... $ 452,236 $ 16,863 Realized gain (loss) on investments-- net..................................... 396,577 (193) Change in unrealized appreciation on in- vestments--net.......................... (4,222,400) 153,134 ----------- ----------- Net increase (decrease) in net assets re- sulting from operations................. (3,373,587) 169,804 ----------- ----------- - ------------------------------------------------------------------------------- DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g): Investment income--net................... (16,873) -- Realized gain on investments--net........ (4,850) -- ----------- ----------- Net decrease in net assets resulting from dividends and distributions to shareholders............................ (21,723) -- ----------- ----------- - ------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4): Net increase in net assets derived from capital share transactions.............. 91,394,631 582,036 ----------- ----------- - ------------------------------------------------------------------------------- NET ASSETS: Total increase in net assets............. 87,999,321 751,840 Beginning of period...................... 10,751,840 10,000,000 ----------- ----------- End of period*........................... $98,751,161 $10,751,840 =========== =========== - ------------------------------------------------------------------------------- * Undistributed investment income--net... $ 452,226 $ 16,863 =========== =========== - ------------------------------------------------------------------------------- + Commencement of Operations. - -------------------------------------------------------------------------------
See Notes to Financial Statements. 151 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL INDEX 500 FUND STATEMENTS. ------------------------------------ FOR THE PERIOD FOR THE PERIOD JANUARY 1, 1997 TO DEC. 13, 1996+ TO MARCH 31, 1997 DEC. 31, 1996 INCREASE (DECREASE) IN NET ASSET VALUE: (UNAUDITED) - -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period...... $ 10.17 $ 10.00 ------- ------- Investment income--net.................... .05 .02 Realized and unrealized gain on invest- ments--net............................... .19 .15 ------- ------- Total from investment operations.......... .24 .17 ------- ------- Less dividends and distributions: Investment income--net................... (.02) -- Realized gain on investments--net........ -- ## -- ------- ------- Total dividends and distributions......... (.02) -- ------- ------- Net asset value, end of period............ $ 10.39 $ 10.17 ======= ======= - -------------------------------------------------------------------------------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........ 2.37%# 1.70%# ======= ======= - -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............ .08%* .00%* ======= ======= Expenses.................................. .39%* .60%* ======= ======= Investment income--net.................... 2.96%* 3.08%* ======= ======= - -------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $98,751 $10.752 ======= ======= Portfolio turnover........................ .15% .04% ======= ======= Average commission rate paid.............. $ .0161 $ .0120 ======= ======= - --------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. # Aggregate total investment return. ## Amount is less than $.01 per share. See Notes to Financial Statements. 152 - ------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. NOTES TO FINANCIALS STATEMENTS (UNAUDITED) - ------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES: Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end man- agement investment company, which is comprised of 16 separate funds ("Funds" or "Fund") offering 16 separate classes of shares to the Merrill Lynch Life Insurance Company, ML Life Insurance Company of New York (indirect wholly- owned subsidiaries of Merrill Lynch & Co., Inc. "ML & Co."), and other insur- ance companies, which are not affiliated with ML & Co., for their separate ac- counts to fund benefits under certain variable annuity contracts. These unau- dited financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. Each Fund is classified as "diversified", as defined in the Investment Company Act of 1940, except for Developing Capital Markets Focus Fund, Global Bond Focus Fund, Global Strategy Focus Fund, and Natural Resources Focus Fund, all of which are classified as "non-diversified". The following is a summary of sig- nificant accounting policies followed by the Funds. (a) Valuation of investments--Money market securities maturing more than sixty days after the valuation date are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in the securities. When such securities are valued with sixty days or less to maturity, the dif- ference between the valuation existing on the sixty-first day before maturity and maturity value is amortized on a straight-line basis to maturity. Invest- ments maturing within sixty days from their date of acquisition are valued at amortized cost, which approximates market value. Portfolio securities which are traded on stock exchanges are valued at the last sale price as of the close of business on the day the securities are be- ing valued, or lacking any sales, at the closing bid price. Securities traded in the over-the-counter market are valued at the last available bid price prior to the time of valuation. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. Options writ- ten are valued at the last sale price in the case of exchange-traded options or, in the case of option traded in the over-the-counter market, the last asked price. Options purchased are valued at the last sale price in the case of exchange-traded options or, in the case of options traded in the over-the- counter market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. (b) Derivative financial instruments--Certain Funds may engage in various portfolio strategies to seek to increase their returns by hedging its portfo- lio against adverse movements in the equity, debt and currency markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. . Forward foreign exchange contracts--Certain Funds are authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Funds' records. However, the effect on operations is recorded from the date the Funds enter into such contracts. Premium or discount is amortized over the life of the contracts. . Options--Certain Funds may write and purchase call and put options. When a Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid or received is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a clos- ing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. . Financial futures contracts--Certain Funds may purchase or sell futures con- tracts and options on such futures contracts for the purpose 153 - -------------------------------------------------------------------------------- of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a re- alized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. . Foreign currency options and futures--Certain Funds may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-US dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or antici- pated to be purchased by the Fund. (c) Foreign currency transactions--Transactions denominated in foreign curren- cies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of set- tling (realized) or valuing (unrealized) assets and liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Company's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are re- corded on the dates the transactions are entered into (the trade dates). Divi- dend income is recorded on the ex-dividend dates. Dividends from foreign secu- rities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income (including amortization of premium and discount) is recognized on the accrual basis. Real- ized gains and losses on security transactions are determined on the identified cost basis. (f) Deferred organization expenses and prepaid registration fees--Deferred or- ganization expenses are charged to expense on a straight-line basis over a five-year period. Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Funds are recorded on the ex-dividend dates. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Company has entered into an Investment Advisory Agreement with Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which is the limited partner. MLAM is responsible for the management of the Company's portfolios and provides the necessary personnel, facilities, equipment and cer- tain other services necessary to the operations of the Funds. For such services, the Company pays a monthly fee based upon the average daily value of each Funds' net assets at the following annual rates: 0.30% of the av- erage daily net assets of the Index 500 Fund. MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an agree- ment which limits the operating expenses paid by each Fund to 1.25% of its av- erage daily net assets. Any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by MLAM which, in turn, will be reim- bursed by MLLA. For the period January 1, 1997 to March 31, 1997, MLAM earned fees of $45,906 for the Index 500 Fund, all of which was voluntarily waived. In addition, MLAM has also reimbursed the Index 500 Fund $1,193 in additional expenses. Accounting services are provided to the Company by MLAM at cost. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidi- ary of ML & Co., is the Company's transfer agent. 154 - ------------------------------------------------------------------------------- Certain officers and/or directors of the Company are officers and/or direc- tors of MLAM, PSI, MLFDS, Merrill Lynch Funds Distributor, Inc., a wholly- owned subsidiary of Merrill Lynch Group, Inc., which is the Funds' distribu- tor, and/or ML & Co. 3. INVESTMENTS: Purchases and sales of investments, excluding short-term securities, for the period January 1, 1997 to March 31, 1997 were as follows: - --------------------------------------------------------------------------------
PURCHASES SALES - -------------------------------------------------------------------------------- Index 500 Fund.............................................. $68,915,885 $70,709 - --------------------------------------------------------------------------------
Transactions in options written for the period January 1, 1997 to March 31, 1997 were as follows:
INDEX 500 FUND - ------------------------------------------------------------------------------ NOMINAL VALUE/ NUMBER OF CONTRACTS COVERED BY PREMIUMS PUT OPTIONS WRITTEN WRITTEN OPTIONS RECEIVED - ------------------------------------------------------------------------------ Outstanding put options written, beginning of peri- od.................................................. -- -- Options written...................................... 300 $ 5,541 Options closed....................................... (300) (5,541) ---- ------- Outstanding put options written, end of period....... -- -- ==== ======= - ------------------------------------------------------------------------------
At March 31, 1997, net unrealized appreciation/depreciation and aggregate cost for Federal income tax purposes were as follows: - -------------------------------------------------------------------------------
INDEX 500 FUND - ------------------------------------------------------------------------------- Appreciated securities........................................... $ 988,294 Depreciated securities........................................... (3,544,490) ------------ Net unrealized depreciation...................................... $ (2,556,196) ============ Cost for Federal income tax purposes............................. $102,424,244 ============ - -------------------------------------------------------------------------------
At March 31, 1997, net realized and unrealized gains (losses) were as fol- lows: - -------------------------------------------------------------------------------
INDEX 500 FUND --------------------- REALIZED GAINS UNREALIZED (LOSSES) (LOSSES) - ------------------------------------------------------------------------------- Long-term investments................................... $ 4,539 $(2,556,196) Short-term Investments.................................. (936) -- Financial futures contracts............................. 383,535 (1,513,070) Investment options purchased............................ 5,707 -- Investment options written.............................. 3,732 -- -------- ----------- $396,577 $(4,069,266) ======== =========== - -------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS: Transactions in capital shares were as follows:
INDEX 500 FUND - -------------------------------------------------------------------------------- FOR THE PERIOD JANUARY 1, 1997 TO DOLLAR MARCH 31, 1997 (UNAUDITED) SHARES AMOUNT - -------------------------------------------------------------------------------- Shares sold........................................... 9,436,509 $102,247,743 Shares issued to shareholders in reinvestment of divi- dends and distributions.............................. 1,829 18,482 --------- ------------ Total issued.......................................... 9,438,338 102,266,225 Shares redeemed....................................... (987,477) (10,871,594) --------- ------------ Net increase.......................................... 8,450,861 $ 91,394,631 ========= ============ - -------------------------------------------------------------------------------- FOR THE PERIOD DECEMBER 13, 1996+ DOLLAR TO DECEMBER 31, 1996 SHARES AMOUNT - -------------------------------------------------------------------------------- Shares sold........................................... 57,357 $ 582,138 Shares redeemed....................................... (10) (102) --------- ------------ Net increase.......................................... 57,347 $ 582,036 ========= ============ - --------------------------------------------------------------------------------
+ Prior to December 13, 1996 (commencement of operations), the Fund issued 1,000,000 shares to MLA for $10,000,000. 155 PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS Contained in Part A: Financial Highlights: American Balanced Fund for each of the years in the eight-year period ended December 31, 1996 and for the period June 1, 1988 (commencement of operations) to December 31, 1988. Basic Value Focus Fund for each of the years in the three-year period ended December 31, 1996 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Developing Capital Markets Focus Fund for each of the years in the two- year period ended December 31, 1996 and for the period May 2, 1994 (commencement of operations) to December 31, 1994. Domestic Money Market Fund for each of the years in the four-year period ended December 31, 1996 and for the period February 20, 1992 (commencement of operations) to December 31, 1992. Equity Growth Fund for each of the years in the ten-year period ended December 31, 1996. Global Strategy Focus Fund for each of the years in the four-year period ended December 31, 1996 and for the period February 28, 1992 (commencement of operations) to December 31, 1992. Global Utility Focus Fund for each of the years in the three-year period ended December 31, 1996 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Government Bond Fund for each of the years in the two-year period ended December 31, 1996 and for the period May 2, 1994 (commencement of operations) to December 31, 1994. High Current Income Fund for each of the years in the ten-year period ended December 31, 1996. Index 500 Fund for the period December 13, 1996 (commencement of operations) to December 31, 1996 (audited), and for the period January 1, 1997 to March 31, 1997 (unaudited). International Equity Focus Fund for each of the years in the three-year period ended December 31, 1996 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Natural Resources Focus Fund for each of the years in the eight-year period ended December 31, 1996 and for the period June 1, 1988 (commencement of operations) to December 31, 1988. Prime Bond Fund for each of the years in the ten-year period ended December 31, 1996. Quality Equity Fund for each of the years in the ten-year period ended December 31, 1996. Reserve Assets Fund for each of the years in the ten-year period ended December 31, 1996. Global Bond Focus Fund for each of the years in the three-year period ended December 31, 1996 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Contained in Part B: Schedules of Investments as of December 31, 1996. Statements of Assets and Liabilities as of December 31, 1996. Statements of Operations for the periods ended December 31, 1996. Statements of Changes in Net Assets for each of the periods in the two- year period ended December 31, 1996. Index 500 Fund (Unaudited): Schedule of Investments as of March 31, 1997. Statement of Assets and Liabilities as of March 31, 1997 Statement of Operations for the period January 1, 1997 to March 31, 1997. Statement of Changes for the period January 1, 1997 to March 31, 1997. Financial Highlights: American Balanced Fund for each of the years in the five-year period ended December 31, 1996. C-1 Basic Value Focus Fund for each of the years in the three-year period ended December 31, 1996, and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Developing Capital Markets Focus Fund for each of the years in the two- year period ended December 31, 1996 and for the period May 2, 1994 (commencement of operations) to December 31, 1994. Domestic Money Market Fund for each of the years in the four-year period ended December 31, 1996 and for the period February 20, 1992 (commencement of operations) to December 31, 1992. Equity Growth Fund for each of the years in the five-year period ended December 31, 1996. Global Strategy Focus Fund for each of the years in the four-year period ended December 31, 1996 and for the period February 28, 1992 (commencement of operations) to December 31, 1992. Global Utility Focus Fund for each of the years in the three-year period ended December 31, 1996 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Government Bond Fund for each of the years in the two-year period ended December 31, 1996 and for the period May 2, 1994 (commencement of operations) to December 31, 1994. High Current Income Fund for each of the years in the five-year period ended December 31, 1996. Index 500 Fund for the period December 13, 1996 (commencement of operations) to December 31, 1996 and for the period January 1, 1997 to March 31, 1997 (unaudited). International Equity Focus Fund for each of the years in the three-year period ended December 31, 1996 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Natural Resources Focus Fund for each of the years in the five-year period ended December 31, 1996. Prime Bond Fund for each of the years in the five-year period ended December 31, 1996. Quality Equity Fund for each of the years in the five-year period ended December 31, 1996. Reserve Assets Fund for each of the years in the five-year period ended December 31, 1996. Global Bond Focus Fund for each of the years in the three-year period ended December 31, 1996 and the period July 1, 1993 (commencement of operations) to December 31, 1993. (B) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1(a) --Articles of Incorporation of Registrant (a) 1(b) --Form of Articles Supplementary of Registrant (b) 1(c) --Form of Articles of Amendment of Registrant (c) 1(d) --Form of Articles Supplementary of Registrant (d) 1(e) --Form of Articles Supplementary of Registrant (e) 1(f) --Form of Articles Supplementary of Registrant (f) 1(g) --Articles Supplementary to Registrant's Articles of Incorporation relating to the redesignation of shares of common stock as Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch World Income Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock and Merrill Lynch International Equity Focus Fund Common Stock (s) 1(h) --Articles Supplementary to Registrant's Articles of Incorporation relating to the designation of shares of common stock as Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch International Bond Fund Common Stock and Merrill Lynch Intermediate Government Bond Fund Common Stock (u) 1(i) --Articles Supplementary to Registrant's Articles of Incorporation relating to the designation of shares of common stock as Merrill Lynch Index 500 Fund Common Stock (w)
C-2
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1(j) --Form of Articles of Amendment to Registrant's Articles of Incorporation relating to the reclassification of the Merrill Lynch Flexible Strategy Fund Common Stock as Merrill Lynch Global Strategy Focus Fund Common Stock, the reclassification of the Merrill Lynch International Bond Fund Common Stock as Merrill Lynch World Income Focus Fund Common Stock, the change in name of the class of shares of common stock designated as Merrill Lynch Intermediate Government Bond Fund to Merrill Lynch Government Bond Fund, and the change in the name of the class of shares of common stock designated as Merrill Lynch World Income Focus Fund to Merrill Lynch Global Bond Focus Fund (x) 1(k) --Form of Articles of Amendment to Registrant's Articles of Incorporation relating to designation of Class A and Class B shares* 2 --By-Laws of Registrant, as amended (g) 3 --None 4 --Specimen certificate for shares of common stock of Registrant (h) 5(a) --Investment Advisory Agreement for Merrill Lynch Reserve Assets Fund (i) 5(b) --Investment Advisory Agreement for the Merrill Lynch Prime Bond Fund, Merrill Lynch High Current Income Fund, Merrill Lynch Quality Equity Fund and Merrill Lynch Equity Growth Fund (j) 5(c) --Form of Investment Advisory Agreement for Merrill Lynch Index 500 Fund (y) 5(d) --Form of Investment Advisory Agreement for Merrill Lynch Natural Resources Focus Fund and Merrill Lynch American Balanced Fund (l) 5(e) --Form of Investment Advisory Agreement for Merrill Lynch Domestic Money Market Fund and Merrill Lynch Global Strategy Focus Fund (m) 5(f) --Form of Investment Advisory Agreement for Merrill Lynch Basic Value Focus Fund, Merrill Lynch Global Bond Focus Fund, Merrill Lynch Global Utility Focus Fund and Merrill Lynch International Equity Focus Fund (t) 5(g) --Form of Investment Advisory Agreement for Merrill Lynch Developing Capital Markets Focus Fund and Merrill Lynch Government Bond Fund (u) 5(h) --Form of Sub-Advisory Agreement between Merrill Lynch Asset Management L.P. and Merrill Lynch Asset Management U.K. Limited* 6(a) --Form of Distribution Agreement (n) 6(b) --Form of Distribution Agreement relating to the Class B shares* 7 --None 8(a) --Form of Custodian Agreement (o) 8(b) --Form of Custodian Agreement with Brown Brothers Harriman & Co.* 9(a) --Form of Transfer Agency, and Dividend Disbursing Agreement (p) 9(b) --Form of Agreement relating to the use of the "Merrill Lynch" name (q) 9(c) --Form of Participation Agreement (k) 10 --Opinion of Counsel (filed with Rule 24f-2 Notice on February , 1997) 11 --Consent of Deloitte & Touche llp* 12 --None 13 --None 14 --None 15 --Form of Distribution Plan relating to Class B shares* 16 --Calculation of Performance Data (r) 24 --Power of Attorney for Robert S. Salomon, Jr. (v) 27 --Financial Data Schedules*
C-3 - -------- (a) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form N-1 (the "Registration Statement"). (b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 1 to the Registration Statement. (c) Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 7 to the Registration Statement. (d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 10 to the Registration Statement. (e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No. 12 to the Registration Statement. (f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No. 16 to the Registration Statement ("Post-Effective Amendment No. 16"). (g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 11 to the Registration Statement ("Post-Effective Amendment No. 11"). (h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4 to the Registration Statement ("Post-Effective Amendment No. 4"). (i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No. 8 to the Registration Statement ("Post-Effective Amendment No. 8"). (j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No. 8. (k) Incorporated by reference to Exhibit 9(c) to Post-Effective Amendment No. 24 to Registrant's Registration Statement ("Post-Effective Amendment No. 24"). (l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No. 11. (m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No. 16. (n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to Registrant's Registration Statement ("Amendment No. 1"). (o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4 to the Registration Statement. (p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No. 4 to the Registration Statement. (q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1 to the Registration Statement. (r) Incorporated by reference to Exhibit 16 to Post-Effective Amendment No. 13 to the Registration Statement. (s) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No. 20 to the Registration Statement. (t) Incorporated by reference to Exhibit 5(f) to Post-Effective Amendment No. 20 to the Registration Statement. (u) Incorporated by reference to Exhibit 5(g) to Post-Effective Amendment No. 21 to the Registration Statement. (v) Incorporated by reference to Exhibit 24 to Post-Effective Amendment No. 24. (w) Incorporated by reference to Exhibit 1(i) to Post-Effective Amendment No. 27 to the Registration Statement. (x) Incorporated by reference to Exhibit 1(j) to Post-Effective Amendment No. 27 to the Registration Statement. (y) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No. 27 to the Registration Statement. * Filed herewith. C-4 ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. Registrant does not control any other person. Except that substantially all of Registrant's issued and outstanding shares are and will be held by Merrill Lynch Life Insurance Company, ML Life Insurance Company of New York and Family Life Insurance Company for their Separate Accounts, the Registrant is not under common control with any other person. ITEM 26. NUMBERS OF HOLDERS OF SECURITIES.
NUMBER OF HOLDERS OF CLASS A SHARES AS OF DECEMBER 31, TITLE OF CLASS 1993 1996 ------------------- ------------ Common stock, par value $0.10 per share, Merrill Lynch Domestic Money Market Fund Class............................. 3 Common stock, par value $0.10 per share, Merrill Lynch Reserve Assets Fund Class............................................ 8 Common stock, par value $0.10 per share, Merrill Lynch Prime Bond Fund Class.............................................. 4 Common stock, par value $0.10 per share, Merrill Lynch High Current Income Fund Class.................................... 10 Common stock, par value $0.10 per share, Merrill Lynch Quality Equity Fund Class............................................ 9 Common stock, par value $0.10 per share, Merrill Lynch Equity Growth Fund Class............................................ 13 Common stock, par value $0.10 per share, Merrill Lynch Natural Resources Focus Fund Class................................... 8 Common stock, par value $0.10 per share, Merrill Lynch American Balanced Fund Class................................. 9 Common stock, par value $0.10 per share, Merrill Lynch Global Strategy Focus Fund Class.................................... 12 Common stock, par value $0.10 per share, Merrill Lynch Basic Value Focus Fund Class....................................... 8 Common stock, par value $0.10 per share, Merrill Lynch Global Bond Focus Fund Class........................................ 14 Common stock, par value $0.10 per share, Merrill Lynch Global Utility Focus Fund Class..................................... 7 Common stock, par value $0.10 per share, Merrill Lynch International Equity Focus Fund Class........................ 7 Common stock, par value $0.10 per share, Merrill Lynch Developing Capital Markets Focus Fund Class.................. 7 Common stock, par value $0.10 per share, Merrill Lynch Government Bond Fund Class................................... 3 Common stock, par value $0.10 per share, Merrill Lynch Index 500 Fund Class............................................... 1
- -------- The number of holders shown above includes holders of record plus beneficial owners, whose shares are held of record by Merrill Lynch, Pierce, Fenner and Smith Incorporated. ITEM 27. INDEMNIFICATION. Under Section 2-418 of the Maryland General Corporation Law, with respect to any proceedings against a present or former director, officer, agent or employee (a "corporate representative") of the Registrant, except a proceeding brought by or on behalf of the Registrant, the Registrant may indemnify the corporate representative against expenses, including attorneys' fees and judgements, fines and amounts paid in settlement actually and reasonably incurred by the corporate representative in connection with the proceeding, if: (i) he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Registrant; and (ii) with respect to any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. The Registrant is also authorized under Section 2-418 of the Maryland General Corporation Law to indemnify a corporate representative under certain circumstances against expenses incurred in connection with the defense of C-5 a suit or action by or in the right of the Registrant. Under each Distribution Agreement, the Registrant has agreed to indemnify the Distributor against any loss, liability, claim, damage or expense arising out of any untrue statement of a material fact, or an omission to state a material fact, in any registration statement, prospectus or report to shareholders of the Registrant. Reference is made to Article VI of Registrant's Certificate of Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9 of each Distribution Agreement. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to Directors, officers and controlling persons of the Registrant and the principal underwriter pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Director, officer, or controlling person of the Registrant and the principal underwriter in connection with the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person or the principal underwriter in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER. (a) Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), acts as investment adviser for the following open-end investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc.; and the following closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the investment adviser for the following open-end investment companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc. Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and the following closed-end investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield C-6 California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc., and Worldwide DollarVest Fund, Inc. The address of each of these investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for Institutions Series is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of the Manager and FAM is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial Center, North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Set forth below is a list of each executive officer and director of the Investment Adviser indicating each business, profession, vocation or employment of a substantial nature in which each such person has been engaged since February 1, 1993 for his own account or in the capacity of director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is Executive Vice President, and Mr. Richard is Treasurer of all or substantially all of the investment companies described in the preceding paragraph. Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors or officers of one or more of such companies.
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT - ---- ------------------ ---------------------------------- ML&Co................... Limited Partner Financial Services Holding Company; Limited Partner of FAM Princeton Services...... General Partner General Partner of FAM Arthur Zeikel........... President President of FAM; President and Director of Princeton Services; Director of Merrill Lynch Funds Distributors, Inc. ("MLFD"); Executive Vice President of ML&Co. Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; President President and Director of MLFD; Executive Vice President and Director of Princeton Services; President of Princeton Administrators, L.P.; Director of MLFDS. Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services. Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services. Michael J. Senior Vice President Senior Vice President of FAM; Senior Vice Hennewinkel............ President of Princeton Services Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel and General Counsel, Secretary of FAM; Senior Vice President, Director and General Counsel, Director and Secretary of Secretary Princeton Services; Director of MLFD. Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of and Controller FAM; Senior Vice President and Controller of Princeton Services. Richard L. Reller....... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services.
C-7
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT - ---- ------------------ ---------------------------------- Stephen M. M. Miller.... Senior Vice President Executive Vice President of Princeton Administrators, L.P. Joseph T. Monagle....... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services. Michael L. Quinn........ Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services; Managing Director and First Vice President of Merrill Lynch from 1989 to 1995. Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of FAM; and Treasurer Senior Vice President and Treasurer of Princeton Services; Vice President and Treasurer of MLFD. Ronald Welburn.......... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services. Anthony Wiseman......... Senior Vice President Senior Vice President of Princeton Services.
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub- adviser for the following registered investment companies; Merrill Lynch EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch International Equity Fund and Merrill Lynch Short-Term Global Income Fund, Inc. The address of each of these investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England. Set forth below is a list of each executive officer and director of MLAM U.K. indicating each business profession, vocation or employment of a substantial nature in which each such person had been engaged since July 1, 1994, for his or her own account or in the capacity of director, officer, partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and Yardley are officers of one or more of the registered investment companies listed in the first two paragraphs of this Item 28:
OTHER SUBSTANTIAL BUSINESS, POSITION WITH PROFESSION, VOCATION NAME MLAM U.K. OR EMPLOYMENT ---- ------------- --------------------------- Arthur Zeikel........... Director and Chairman President of the Manager and FAM; President and Director of Princeton Services, Director of MLFD; Executive Vice President of ML & Co. Alan J. Albert.......... Senior Managing Vice President of the Manager Director Terry K. Glenn.......... Director Executive Vice President of the Manager and FAM; Executive Vice President and Director of Princeton Services; President and Director of MLFD; Director of MLFDS; President of Princeton Administrators, L.P. Adrian Holmes........... Managing Director Director of Merrill Lynch Global Asset Management Andrew John Bascand..... Director Director of Merrill Lynch Global Asset Management Edward Gobora........... Director Director of Merrill Lynch Global Asset Management Richard Kilbride........ Director Managing Director of Merrill Lynch Global Asset Management Robert M. Ryan.......... Director Vice President, Institutional Marketing Debt and Equity Group, Merrill Lynch Capital Markets from 1989 to 1994
C-8
OTHER SUBSTANTIAL BUSINESS, POSITION WITH PROFESSION, VOCATION NAME MLAM U.K. OR EMPLOYMENT ---- ------------- --------------------------- Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of the Manager and FAM; Senior Vice President and Treasurer of Princeton Services; Vice President and Treasurer of MLFD Stephen J. Yardley...... Director Director of Merrill Lynch Global Asset Management Carol Ann Langham....... Company Secretary None Debra Anne Scarle....... Assistant Company None Secretary
ITEM 29. PRINCIPAL UNDERWRITERS. (a) MLFD acts as the principal underwriter for the Registrant and for each of the investment companies referred to in the first paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest, Inc. (b) Set forth below is information concerning each director and officer of MLFD. The principal business address of each such person is Box 9081, Princeton, New Jersey 08543-9081, except that the address of Officers Crook, Aldrich, Brady, Breen, Fatseas and Wasel, is One Financial Center, Boston, Massachusetts 02111-2646.
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 None President Robert W. Crook.................. Senior Vice None President Kevin Boman...................... Vice President None Michael J. Brady................. Vice President None William M. Breen................. Vice President None Michael Clark.................... Vice President Mark A. DeSario.................. Vice President None James T. Fatseas................. Vice President None Debra W. Landsman-Yaros.......... Vice President None Michelle T. Lau.................. Vice President None Gerald M. Richard................ Vice President Treasurer and Treasurer Sal Venezia...................... Vice President None William Wasel.................... Vice President None Robert Harris.................... Secretary None
(c) Not applicable. C-9 ITEM 30. LOCATION OF ACCOUNTS AND RECORDS. All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder will be maintained at the offices of the Registrant, its Investment Adviser and its Custodian and Transfer Agent. ITEM 31. MANAGEMENT SERVICES. Other than as set forth under the captions "Directors" and "Investment Adviser" in the Prospectus constituting Part A of the Registration Statement and under the captions "Management of the Company" and "Investment Advisory Arrangements" in the Statement of Additional Information constituting Part B of the Registration Statement, Registrant is not a party to any management- related service contract. ITEM 32. UNDERTAKINGS. The Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request, and without charge. The Company hereby undertakes to comply with the restrictions on indemnification set forth in Investment Company Act Release No. IC-11330, September 2, 1980. C-10 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS OF THIS AMENDMENT PURSUANT TO ARTICLE 485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 25 DAY OF APRIL, 1997. Merrill Lynch Variable Series Fund, Inc. (Registrant) /s/ Arthur Zeikel By: _________________________________ (ARTHUR ZEIKEL, President) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Arthur Zeikel President and - ------------------------------------- Director (Principal April 25, 1997 (ARTHUR ZEIKEL) Executive Officer) * Treasurer (Principal - ------------------------------------- Financial and (GERALD M. RICHARD) Accounting Officer) * Director - ------------------------------------- (WALTER MINTZ) * Director - ------------------------------------- (MELVIN R. SEIDEN) * Director - ------------------------------------- (STEPHEN B. SWENSRUD) * Director - ------------------------------------- (JOE GRILLS) * Director - ------------------------------------- (ROBERT S. SALOMON, JR.) /s/ Arthur Zeikel By: _________________________________ April 25, 1997 (ARTHUR ZEIKEL) Attorney-in-Fact C-11 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. ------- ----------- ---------- 1(k) --Form of Articles of Amendment to Registrant's Articles of Incorporation relating to designation of Class A and Class B shares. 5(h) --Form of Sub-Advisory Agreement between Merrill Lynch Asset Management L.P. and Merrill Lynch Asset Management U.K. Limited.* 6(b) --Form of Distribution Agreement relating to the Class B shares. 8(b) --Form of Custodian Agreement with Brown Brother Harriman & Co. 11 --Consent of Deloitte & Touche llp* 15 --Form of Distribution Plan relating to Class B shares.* 27 --Financial Data Schedules*
- -------- * Filed herewith. EX-27.A 2 ART. 6 FDS FOR AMERICAN BALANCED FUND
6 1 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. AMERICAN BALANCED FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 198570157 210545210 1938079 4434 0 212487723 166848 0 273861 440709 0 175872424 13242862 14031432 3604288 0 20595249 0 11975053 212047014 1833183 6807063 0 (1300476) 7339770 21869723 (9430963) 19778530 0 (7882096) (328715) 0 578134 (1921234) 554530 (865200) 4146614 (945759) 0 0 1186936 0 1300476 214633679 15.17 .53 .89 (.56) (.02) 0 16.01 .60 0 0
EX-27.B 3 ART. 6 FDS FOR BASIC VALUE FOCUS FUND
6 2 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. BASIC VALUE FOCUS FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 479759239 522663382 4699070 3234 0 527365686 1672743 0 762779 2435522 0 425900034 35622430 23391429 3224622 0 52901365 0 42904143 524930164 5869178 2321975 0 (2657872) 5533281 56406548 13550612 75490441 0 (4571085) (16947347) 0 11000199 (493551) 1724353 218467271 2262426 13442164 0 0 2414605 0 2657872 400247112 13.10 .17 2.37 (.18) (.72) 0 14.74 .66 0 0
EX-27.C 4 ART. 6 FDS FOR DEVELOPING CAP MKTS FOCUS FUND
6 3 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. DEVELOPING CAPITAL MARKETS FOCUS FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 91897323 96192191 1515167 751693 0 98459051 2753565 0 106584 2860149 0 93613225 9508063 5922009 1752408 0 (4054029) 0 4287298 95598902 2257621 557486 0 (957147) 1857960 (156983) 4829141 6530118 0 (1385673) 0 0 4462492 (1027712) 151274 40390272 1184973 (3801898) 0 0 765718 0 1009535 76155616 9.32 .20 .76 (.23) 0 0 10.05 1.33 0 0
EX-27.D 5 ART. 6 FDS FOR DOMESTIC MONEY MARKET FUND
6 4 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. DOMESTIC MONEY MARKET FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 278879751 278860287 1069959 12762 0 279943008 3197475 0 1989519 5186994 0 274775478 274775478 303773546 0 0 0 0 (19464) 274756014 0 15317537 0 (1507384) 13810153 12359 (157747) 13664765 0 (13810153) (12359) 0 103681145 (146504203) 13824990 (29155815) 0 0 0 0 1386726 0 1507384 275090278 1.00 .05 0 (.05) 0 0 1.00 .54 0 0
EX-27.E 6 ART. 6 FDS FOR EQUITY GROWTH FUND
6 5 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. EQUITY GROWTH FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 398248668 451805311 2225736 3163 0 454034210 561675 0 443270 1004945 0 376008263 17274795 12146738 1422632 0 22041727 0 53556643 453029265 2359527 2906699 0 (3240858) 2025368 22199518 5970999 30195885 0 (1882603) (43561906) 0 3897758 (639891) 1870190 113108111 1279867 43404115 0 0 3010613 0 3240858 399233385 27.98 .13 1.84 (.14) (3.59) 0 26.22 .81 0 0
EX-27.F 7 ART. 6 FDS FOR GLOBAL BOND FOCUS
6 6 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GLOBAL BOND FOCUS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 101153795 100348183 4903714 73348 0 105325245 11126689 0 408646 11535335 0 95937891 9609151 8360366 118851 0 (1230690) 0 (1036142) 93789910 68036 7362977 42863 (593766) 6880110 830715 (706098) 7004727 0 (6810949) 0 0 2727984 (2183963) 704764 11945278 765308 (2777024) 0 0 518022 0 593766 86337033 9.79 .78 (.03) (.78) 0 0 9.76 .69 0 0
EX-27.G 8 ART. 6 FDS FOR GLOBAL STRATEGY FOCUS FUND
6 7 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GLOBAL STRATEGY FOCUS FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 793370058 867228567 8608293 15782325 0 891619185 16114249 0 5302118 21416367 0 752325064 62723303 43064280 20579673 0 26215075 0 71083006 870202818 8177095 11236222 4675 (4077255) 15340737 60957413 24598652 100896802 0 (12699527) 0 0 24825472 (6200613) 1034164 329961205 7489615 (23380052) 0 (369180) 3715122 0 4077255 568403505 12.55 .28 1.33 (.29) 0 0 13.87 .71 0 0
EX-27.H 9 ART. 6 FDS FOR GLOBAL UTILITY FOCUS FUNDS
6 8 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GLOBAL UTILITY FOCUS FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 117339737 142177130 542283 28934 0 142748347 0 0 310546 310546 0 119096028 11686930 13113525 1132021 0 (2628376) 0 24838128 142437801 6059957 659024 0 (970696) 5748285 1196792 10430510 17375587 0 (6739387) 0 0 858704 (2881155) 595856 (5787476) 2159534 (3861578) 0 0 880959 0 970696 146028617 11.30 .46 .95 (.52) 0 0 12.19 .66 0 0
EX-27.I 10 ART. 6 FDS FOR GOVERMENT BOND FUND
6 9 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GOVERNMENT BOND FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 86879714 87831280 1785251 1493 0 89618024 0 0 37232 37232 0 88299037 8617002 3800136 484603 0 (154414) 0 951566 89580792 0 3898013 7464 (89566) 3815911 (154413) (1012273) 2649225 0 (3530361) (137668) 0 4677811 (215188) 354243 48584365 199053 137666 0 0 297926 0 353780 59261332 10.79 .65 (.36) (.64) (.04) 0 10.40 .59 0 0
EX-27.J 11 ART. 6 FDS FOR HIGH CURRENT INCOME FUND
6 10 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. HIGH CURRENT INCOME FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 410311227 410867543 6691745 5893 0 417565181 0 0 2950263 2950263 0 415750453 36389781 31687165 3786391 0 (5478242) 0 556316 414614918 883127 37867841 254493 (2096102) 36909359 (3777610) 8565962 41697711 0 (36130450) 0 0 3441094 (1968366) 3229888 58262978 2822298 (1515448) 0 0 1881541 0 2096102 385538021 11.25 1.08 .12 (1.06) 0 0 11.39 .54 0 0
EX-27.K 12 ART. 6 FDS FOR INDEX 500 FUND
6 11 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. INDEX 500 FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 10696027 10844116 10748 14852 0 10869716 63798 0 54078 117876 0 10582036 1057347 1000000 16863 0 (193) 0 153134 10751840 7276 9587 0 0 16863 (193) 153134 169804 0 0 0 0 57357 (10) 0 751840 0 0 0 0 1638 0 3289 10517648 10.00 .02 .15 0 0 0 10.17 .60 0 0
EX-27.L 13 ART. 6 FDS FOR INTERNATIONAL EQUITY FOCUS FUND
6 12 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. INTERNATIONAL EQUITY FOCUS FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 336367941 348267624 1133242 880884 0 350281750 604180 0 597741 1201921 0 332576648 30027594 24017864 7472278 0 (2769970) 0 11800873 349079829 5353531 3616175 0 (2802938) 6166768 9939138 2510537 18616443 0 (3669329) 0 0 6562205 (886963) 334488 83477588 4974839 (7433489) 0 (5275618) 2358140 0 2802938 312709965 11.06 .23 .49 (.15) 0 0 11.63 .89 0 0
EX-27.M 14 ART. 6 FDS FOR NATURAL RESOURCES FOCUS FUND
6 13 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. NATURAL RESOURCES FOCUS FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 40722448 45411176 99361 910 0 45511447 220652 0 93800 314452 0 37313945 3443783 3608317 221415 0 2970842 0 4690793 45196995 939896 75317 0 (358882) 656331 2957459 2057873 5671663 0 (722544) (740711) 0 450602 (737357) 122221 2094644 315714 726008 0 0 297742 0 358882 45561447 11.95 .18 1.40 (.20) (.21) 0 13.12 .78 0 0
EX-27.N 15 ART. 6 FDS FOR PRIME BOND FUND
6 14 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. PRIME BOND FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 526023169 529710728 14025377 8148 0 543744253 4996751 0 353774 5350525 0 547307573 45211583 39351063 3129844 0 (15731248) 0 3687559 538393728 0 35506054 58223 (2418846) 33145431 215210 (21044224) 12316417 0 (32511472) 0 0 5521436 (2399918) 2739002 48555760 2495885 (15946458) 0 0 2160063 0 2418846 493156994 12.45 .80 (.55) (.79) 0 0 11.91 .49 0 0
EX-27.O 16 ART. 6 FDS FOR QUALITY EQUITY FUND
6 15 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. QUALITY EQUITY FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 695726967 794534036 1592651 5780 0 796132467 1289280 0 567959 1857239 0 653510482 24194244 19676238 5217038 0 36740639 0 98807069 794275228 11052176 5883776 3074 (3495231) 13443795 36740820 67969744 118154359 0 (14235069) (84325410) 0 1934738 (895337) 3478605 149724627 6008129 84325412 0 0 3136852 0 3495231 704943669 32.76 .58 4.44 (.66) (4.29) 0 32.83 .49 0 0
EX-27.P 17 ART. 6 FDS FOR RESERVE ASSETS FUND
6 16 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. RESERVE ASSETS FUND 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 23070540 23070288 128583 8659 0 23207530 299763 0 22396 322159 0 22885623 22885622 25535919 0 0 0 0 (252) 22885371 0 1323908 0 (144685) 1179223 3049 (14201) 1168071 0 (1179223) (3049) 0 6967844 (10800490) 1182349 (2664498) 0 0 0 0 118827 0 144685 23572806 1.00 .05 0 (.05) 0 0 1.00 .61 0 0
EX-99.1K 18 FORM OF ARTICLES OF AMENDMENT Exhibit 99.1(k) MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FORM OF ARTICLES OF AMENDMENT Merrill Lynch Variable Series Funds, Inc. a Maryland corporation, having its principle office in Baltimore City, Maryland (which is hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Corporation is registered as an open-ended company under the Investment Company Act of 1940. SECOND: The Corporation desires to amend its Charter as currently in effect. THIRD: The following provisions are all of the provisions of the Charter as amended: (a) Article II of the Charter be and hereby is amended as follows: The Board of Directors of the Corporation, acting in accordance with Section 2-605(a)(4) of the General Corporation Law of the State of Maryland, hereby designates all issued and unissued shares of the following funds as Class A Shares: Aggregate Number Funds of Class B Shares Merrill Lynch American Balanced Fund Common Stock 100,000,000 Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000 Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000 Merrill Lynch Developing Capital Markets Focus Fund Common Stock 100,000,000 Merrill Lynch Equity Growth Fund Common Stock 100,000,000 Merrill Lynch Global Bond Focus Fund Common Stock 200,000,000 Merrill Lynch Global Strategy Focus Fund Common Stock 200,000,000 Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000 Merrill Lynch Government Bond Fund Common Stock 100,000,000 Merrill Lynch High Current Income Fund Common Stock 100,000,000 Merrill Lynch Index 500 Fund Common Stock 100,000,000 Merrill Lynch International Equity Focus Fund Common Stock 100,000,000 Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000 Merrill Lynch Prime Bond Fund Common Stock 100,000,000 Merrill Lynch Quality Equity Fund Common Stock 100,000,000 Merrill Lynch Reserve Assets Fund Common Stock 500,000,000 (b) The Board of Directors of the Corporation, acting in accordance with Section 2-105(c) of the General Corporation Law of the State of Maryland, hereby increases the number of authorized shares of capital stock of the Corporation by 3,400,000,000, all of which shall be designated as Class B Shares and shall be classified as follows: Aggregate Number Funds of Class A Shares Merrill Lynch American Balanced Fund Common Stock 100,000,000 Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000 Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000 Merrill Lynch Developing Capital Markets Focus Fund Common Stock 100,000,000 Merrill Lynch Equity Growth Fund Common Stock 100,000,000 Merrill Lynch Global Bond Focus Fund Common Stock 200,000,000 Merrill Lynch Global Strategy Focus Fund Common Stock 200,000,000 Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000 Merrill Lynch Government Bond Fund Common Stock 100,000,000 Merrill Lynch High Current Income Fund Common Stock 100,000,000 Merrill Lynch Index 500 Fund Common Stock 100,000,000 Merrill Lynch International Equity Focus Fund Common Stock 100,000,000 Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000 Merrill Lynch Prime Bond Fund Common Stock 100,000,000 Merrill Lynch Quality Equity Fund Common Stock 100,000,000 2 Merrill Lynch Reserve Assets Fund Common Stock 500,000,000 (c) All of the Class B Shares, as classified and designated continue to have preferences, conversions and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption as set forth in Article V of the Articles of Incorporation of the Corporation. FOURTH: (a) Before giving effect to this Amendment, the Corporation has the authority to issue 3,400,000,000 shares of stock as follows: Number of Authorized Funds Shares Merrill Lynch American Balanced Fund Common Stock 100,000,000 Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000 Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000 Merrill Lynch Developing Capital Markets Focus Fund Common Stock 100,000,000 Merrill Lynch Equity Growth Fund Common Stock 100,000,000 Merrill Lynch Global Bond Focus Fund Common Stock 200,000,000 Merrill Lynch Global Strategy Focus Fund Common Stock 200,000,000 Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000 Merrill Lynch Government Bond Fund Common Stock 100,000,000 Merrill Lynch High Current Income Fund Common Stock 100,000,000 Merrill Lynch Index 500 Fund Common Stock 100,000,000 Merrill Lynch International Equity Focus Fund Common Stock 100,000,000 Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000 Merrill Lynch Prime Bond Fund Common Stock 100,000,000 Merrill Lynch Quality Equity Fund Common Stock 100,000,000 Merrill Lynch Reserve Assets Fund Common Stock 500,000,000 3 (b) All shares of the Corporation's capital stock have a par value of $0.10 per share. The aggregate par value of all the shares of all classes of the Corporation's capital stock is currently Three Hundred Forty Million Dollars ($340,000,000). (c) After the redesignation of all of the Corporation's issued and unissued shares of Common Stock contemplated in Article THIRD(a) hereof and the increase in the number of authorized shares of capital stock of the Corporation and classification and designation of such shares pursuant to Article THIRD(b) hereof, the Corporation will have authority to issue 6,800,000,000 shares of the Corporation as follows: Number of Authorized Funds Shares Merrill Lynch American Balanced Fund Common Stock -- Class A 100,000,000 Merrill Lynch Basic Value Focus Fund Common Stock -- Class A 100,000,000 Merrill Lynch Domestic Money Market Fund Common Stock -- 1,300,000,000 Class A Merrill Lynch Developing Capital Markets Focus Fund Common Stock -- Class A 100,000,000 Merrill Lynch Equity Growth Fund Common Stock -- Class A 100,000,000 Merrill Lynch Global Bond Focus Fund Common Stock -- Class A 200,000,000 Merrill Lynch Global Strategy Focus Fund Common Stock - -- Class A 200,000,000 Merrill Lynch Global Utility Focus Fund Common Stock -- Class A 100,000,000 Merrill Lynch Government Bond Fund Common Stock -- Class A 100,000,000 Merrill Lynch High Current Income Fund Common Stock - -- Class A 100,000,000 Merrill Lynch Index 500 Fund Common Stock -- Class A 100,000,000 Merrill Lynch International Equity Focus Fund Common Stock - -- Class A 100,000,000 Merrill Lynch Natural Resources Focus Fund Common Stock - -- Class A 100,000,000 Merrill Lynch Prime Bond Fund Common Stock -- Class A 100,000,000 Merrill Lynch Quality Equity Fund Common Stock -- Class A 100,000,000 Merrill Lynch Reserve Assets Fund Common Stock -- Class A 500,000,000 4 Merrill Lynch American Balanced Fund Common Stock -- Class B 100,000,000 Merrill Lynch Basic Value Focus Fund Common Stock -- Class B 100,000,000 Merrill Lynch Domestic Money Market Fund Common Stock -- Class B 1,300,000,000 Merrill Lynch Developing Capital Markets Focus Fund Common Stock -- Class B 100,000,000 Merrill Lynch Equity Growth Fund Common Stock -- Class B 100,000,000 Merrill Lynch Global Bond Focus Fund Common Stock -- Class B 200,000,000 Merrill Lynch Global Strategy Focus Fund Common Stock -- Class B 200,000,000 Merrill Lynch Global Utility Focus Fund Common Stock -- Class B 100,000,000 Merrill Lynch Government Bond Fund Common Stock -- Class B 100,000,000 Merrill Lynch High Current Income Fund Common Stock -- Class B 100,000,000 Merrill Lynch Index 500 Fund Common Stock -- Class B 100,000,000 Merrill Lynch International Equity Focus Fund Common Stock - -- Class B 100,000,000 Merrill Lynch Natural Resources Focus Fund Common Stock -- Class B 100,000,000 Merrill Lynch Prime Bond Fund Common Stock -- Class B 100,000,000 Merrill Lynch Quality Equity Fund Common Stock -- Class B 100,000,000 Merrill Lynch Reserve Assets Fund Common Stock -- Class B 500,000,000 FIFTH: All of the shares of Class A and Class B Common Stock shall have a par value of $0.10 per share. After this increase in the number of authorized shares of capital stock of the Corporation and designation of those shares as Class B Shares, the aggregate par value of all the shares of all classes of the Corporation's capital stock will be Six Hundred Eighty Million Dollars ($680,000,000). SIXTH: The foregoing amendments to the charter of the Corporation set forth in Article THIRD (a) hereof are limited to changes expressly permitted by Section 2-605(a)(4) of the Maryland General Corporation Law. 5 SEVENTH: The foregoing amendments to the charter of the Corporation set forth in Article THIRD (b) hereof have been approved by the Board of Directors and the amendments are limited to changes expressly permitted by the Maryland General Corporation Law to be made without action by the stockholders. 6 IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has caused these present to be signed in its name and on its behalf by its President and witnesses by its Secretary on , 1997. --------- WITNESS MERRILL LYNCH VARIABLE SERIES FUNDS, INC. - -------------------------- -------------------------- Name: Name: Title: Title. THE UNDERSIGNED, President of Merrill Lynch Variable Series Funds, Inc. who executed on behalf of the Corporation the foregoing Articles of Amendment of which this Certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles of Amendment to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information, and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under penalties of perjury. ----------------------- President 7 EX-99.5H 19 FORM OF SUB-ADVISORY AGREEMENT Exhibit 99.5(h) SUB-ADVISORY AGREEMENT AGREEMENT made as of the _____ day of __________, 1997, by and between MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership (hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a corporation organized under the laws of England and Wales (hereinafter referred to as "MLAM U.K."). W I T N E S S E T H: - - - - - - - - - - WHEREAS, MERRILL LYNCH VARIABLE SERIES FUND, INC. (the "Fund") is a Maryland corporation engaged in business as an open-end management investment company with separate portfolios (the "Portfolios") and is registered under the Investment Company Act of 1940, as amended (hereinafter referred to as the "Investment Company Act"); and WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering investment advisory services and are registered as investment advisers under the Investment Advisers Act of 1940, as amended; and WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory Organization, a self-regulating organization recognized under the Financial Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"), and the conduct of its investment business is regulated by IMRO; and WHEREAS, MLAM has entered into investment advisory agreements (the "Advisory Agreements") pursuant to which MLAM provides management and investment and advisory services to the Fund; and WHEREAS, MLAM U.K. is willing to provide investment advisory services to MLAM in connection with the Fund's operations on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, MLAM U.K. and MLAM hereby agree as follows: ARTICLE I Duties of MLAM U.K. MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and to furnish, or arrange for affiliates to furnish, the investment advisory services described below, subject to the broad supervision of MLAM and the Fund, for the period and on the terms and conditions set forth in this Agreement. MLAM U.K. hereby accepts such employment and agrees during such period, at its own expense, to render, or arrange for the rendering of, such services and to assume the obligations herein set forth for the compensation provided for herein. MLAM and its affiliates shall for all purposes herein be deemed a Professional Investor as defined under the rules promulgated by IMRO (hereinafter referred to as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. MLAM U.K. shall have the right to make unsolicited calls on MLAM and shall provide MLAM with such investment research, advice and supervision as the latter may from time to time consider necessary for the proper supervision of the assets of the Fund; shall furnish continuously an investment program for the Fund and shall make recommendations from time to time as to which securities shall be purchased, sold or exchanged and what portion of the 2 assets of each Portfolio of the Fund shall be held in the various securities in which the Portfolio invests, options, futures, options on futures or cash; all of the foregoing subject always to the restrictions of the Articles of Incorporation and By-Laws of the Fund, as they may be amended and/or restated from time to time, the provisions of the Investment Company Act and the statements relating to the Portfolio's investment objective(s), investment policies and investment restrictions as the same are set forth in the currently effective prospectus and statement of additional information relating to the shares of the Fund under the Securities Act of 1933, as amended (the "Prospectus" and "Statement of Additional Information", respectively). MLAM U.K. shall make recommendations and effect transactions with respect to foreign currency matters, including foreign exchange contracts, foreign currency options, foreign currency futures and related options on foreign currency futures and forward foreign currency transactions. MLAM U.K. shall also make recommendations or take action as to the manner in which voting rights, rights to consent to corporate action and any other rights pertaining to the portfolio securities of the Fund shall be exercised. MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will MLAM U.K. be the registered holder of the registered investments of MLAM or the Fund or be the custodian of documents or other evidence of title. ARTICLE II Allocation of Charges and Expenses MLAM U.K. assumes and shall pay for maintaining the staff and personnel necessary to perform its obligations under this Agreement and shall at its own expense provide the office space, equipment and facilities which it is obligated to provide under Article I hereof 3 and shall pay all compensation of officers of the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K. ARTICLE III Compensation of MLAM U.K. For the services rendered, the facilities furnished and expenses assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be determined from time to time by MLAM and MLAM U.K. but in no event in excess of the amount that MLAM actually receives for providing services to the Fund pursuant to the Advisory Agreements. ARTICLE IV Limitation of Liability of MLAM U.K. MLAM U.K. shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the performance of subadvisory services rendered with respect to the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing services for MLAM contemplated hereby and directors, officers and employees of MLAM U.K. and such affiliates. ARTICLE V Activities of MLAM U.K. The services of MLAM U.K. to the Fund are not to be deemed to be exclusive, MLAM U.K. and any person controlled by or under common control with MLAM U.K.(for purposes of this Article V referred to as "affiliates") being free to render services to others. It 4 is understood that Directors, officers, employees and shareholders of the Fund are or may become interested in MLAM U.K. and its affiliates, as directors, officers, employees and shareholders or otherwise and that directors, officers, employees and shareholders of MLAM U.K. and its affiliates are or may become similarly interested in the Fund, and that MLAM U.K. and directors, officers, employees, partners and shareholders of its affiliates may become interested in the Fund as shareholders or otherwise. ARTICLE VI MLAM U.K. Statements Pursuant to IMRO Rules Any complaints concerning MLAM U.K. should be in writing addressed to the attention of the Managing Director of MLAM U.K. MLAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO directly. MLAM U.K. may make recommendations, subject to the investment restrictions referred to in Article I herein, regarding Investments Not Readily Realisable (as that term is used in the IMRO Rules) or investments denominated in a currency other than British pound sterling. There can be no certainty that market makers will be prepared to deal in unlisted or thinly traded securities and an accurate valuation may be hard to obtain. The value of investments recommended by MLAM U.K. may be subject to exchange rate fluctuations which may have favorable or unfavorable effects on investments. MLAM U.K. may make recommendations, subject to the investment restrictions referred to in Article I herein, regarding options, futures or contracts for differences. Markets can be highly volatile and such investments carry a high degree of risk of loss exceeding the original investment and any margin on deposit. 5 ARTICLE VII Duration and Termination of this Agreement This Agreement shall become effective with respect to each Portfolio as of the date first above written and shall remain in force until the date of termination of the Advisory Agreement relating to such Portfolio (but not later than two years after the date hereof) and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Directors of the Fund or by the vote of a majority of the outstanding voting securities of such Portfolio and (ii) a majority of those Directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated with respect to a Portfolio at any time, without the payment of any penalty, by MLAM or by vote of a majority of the outstanding voting securities of such Portfolio, or by MLAM U.K., on sixty days' written notice to the other party. This Agreement shall automatically terminate with respect to each Portfolio in the event of its assignment or in the event of the termination of the Advisory Agreement relating to such Portfolio. Any termination shall be without prejudice to the completion of transactions already initiated. ARTICLE VIII Amendments of this Agreement This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Directors of the Fund or by the vote of a majority of outstanding voting securities of each Portfolio and (ii) a majority of those Directors who are not parties to 6 this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. ARTICLE IX Definitions of Certain Terms The terms "vote of a majority of the outstanding voting securities", "assignment", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted by the Securities and Exchange Commission under said Act. ARTICLE X Governing Law This Agreement shall be construed in accordance with the laws of the State of New York and the applicable provisions of the Investment Company Act. To the extent that the applicable laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the lnvestment Company Act, the latter shall control. 7 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. MERRILL LYNCH ASSET MANAGEMENT, L.P. By: Princeton Services, Inc., its General Partner By: ----------------------------- Name: Title: MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED By: ----------------------------- Name: Title: 8 EX-99.6B 20 FORM OF DISTRIBUTION AGREEMENT RELATING TO CLASS B Exhibit 99.6(b) CLASS B SHARES DISTRIBUTION AGREEMENT AGREEMENT made this day of , , ------ ------------------ ---- between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a corporation organized under the laws of Maryland (the "Company"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation ("MLFD"); W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company is registered under the Investment Company Act of 1940, as amended to date (the "Investment Company Act"), as a diversified open-end investment company and it is affirmatively in the interest of the Company to offer its shares for sale continuously to the separate accounts (the "Separate Accounts") of insurance companies (the "Insurance Companies") pursuant to a currently effective prospectus (the "Prospectus") under the Securities Act of 1933 (the "Securities Act"); and WHEREAS, the Company comprises sixteen separate funds (the "Funds"), each of which pursues its own investment objective through separate investment policies, and may in the future comprise one or more additional funds; and WHEREAS, MLFD is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Company and MLFD wish to enter into an agreement with each other with respect to the continuous offering to the Insurance Companies for their Separate Accounts of shares of the Class B Common Stock, par value $.10 per share, of each Fund (the "Class B Shares"), in order to promote the growth of the Funds and facilitate the distribution of their Class B Shares. NOW, THEREFORE, the parties agree as follows: Section 1. Appointment of MLFD. The Company hereby appoints MLFD as ------------------- the principal underwriter and distributor of the Funds to sell their Class B Shares to the Insurance Companies for their Separate Accounts and MLFD hereby accepts such appointment. The Company, during the term of this Agreement, shall sell its Class B Shares to MLFD upon the terms and conditions set forth below. Section 2. Exclusive Nature of Duties. MLFD shall be the exclusive -------------------------- representative of the Company to act as principal underwriter and distributor of the Class B Shares. Section 3. Purchase of Class B Shares from the Company. ------------------------------------------- (a) The Company will offer its Class B Shares and MLFD shall have the right to buy from the Company the Class B Shares needed, but not more than the Class B Shares needed (except for clerical errors in transmission) to fill unconditional orders for the Class B Shares placed with MLFD by the Insurance Companies for their Separate Accounts. The price which MLFD shall pay for the Class B Shares so purchased from the Company shall be the net asset value per share, determined as set forth in Section 3(c) hereof. (b) The Class B Shares are to be resold by MLFD to the Insurance Companies for their Separate Accounts at the net asset value per share. (c) The net asset value of the Class B Shares shall be determined as of fifteen minutes following the close of trading on 2 each day the New York Stock Exchange is open for business, in accordance with the method set forth in the Prospectus of the Company and guidelines established by the Board of Directors of the Company. The Company may also cause the net asset value of the Class B Shares to be determined in substantially the same manner or estimated in such manner and as of such other hour or hours as may from time to time be agreed upon in writing by the Company and MLFD. All payments to the Company hereunder shall be made in the manner set forth in Section 3(e). (d) The Company shall have the right to suspend the sale of the Class B Shares at times when redemption of any Class B Shares is suspended pursuant to the condition set forth in Section 4(b) hereof. The Company shall also have the right to suspend the sale of the Class B Shares if trading on the New York Stock Exchange shall have been suspended, if a banking moratorium shall have been declared by Federal or New York authorities, or if there shall have been some other extraordinary event which, in the judgment of the Company, makes it impracticable to sell Class B Shares. (e) The Company, or any agent of the Company designated in writing by the Company, shall be promptly advised of all purchase orders for the Class B Shares received by MLFD. The Company (or its agent) will confirm orders upon their receipt, will make appropriate book entries and, upon receipt by the Company (or its agent) of payment therefor, will deliver deposit receipts or certificates for such Class B Shares pursuant to the instructions of MLFD. Payment shall be made to the Company in New York Clearing 3 House funds. MLFD agrees to cause such payment and such instructions to be delivered promptly to the Company (or its agent). Section 4. Repurchase or Redemption of Class B Shares by the Company. --------------------------------------------------------- (a) Any of the outstanding Class B Shares may be tendered for redemption at any time, and the Company agrees to repurchase or redeem any such Class B Shares so tendered in accordance with its obligations as set forth in Article VII of its Articles of Incorporation, as amended from time to time, and in accordance with the applicable provisions set forth in the Prospectus of the Company. The price to be paid to redeem or repurchase Class B Shares shall be equal to the net asset value per share calculated in accordance with the provisions of Section 3(c) hereof. All payments by the Company hereunder shall be made in the manner set forth below. The Company shall pay the total amount of the redemption price as defined in the above paragraph pursuant to the instructions of MLFD in New York Clearing House funds on or before the third business day subsequent to its having received the notice of redemption in proper form. (b) Redemption of Class B Shares of a Fund or payment therefor may be suspended for any period during which trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission or such Exchange is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Securities and 4 Exchange Commission as a result of which disposal of securities or determination of the net asset value of such Fund is not reasonably practicable, and for such other periods as the Securities and Exchange Commission may by order permit for the protection of shareholders of the Fund. Section 5. Duties of the Company. (a) The Company shall furnish to MLFD copies of all information, financial statements and other papers which MLFD may reasonably request for use in connection with the distribution of Class B Shares of the Company, and this shall include one certified copy, upon request by MLFD, of all financial statements prepared for the Company by independent public accountants. The Company shall make available to MLFD such number of copies of its Prospectus as MLFD shall reasonably request. (b) The Company shall take, from time to time, but subject to the necessary approval of its shareholders, all necessary action to fix the number of its authorized Class B Shares and to register Class B Shares under the Securities Act, to the end that there will be available for sale such number of Class B Shares as investors may reasonably be expected to purchase. (c) The Company shall use its best efforts to qualify and maintain the qualification of an appropriate number of the Class B Shares for sale under the securities laws of such states as MLFD and the Company may approve, if such qualification is required by such securities laws. Any such qualification may be withheld, terminated or withdrawn by the Company at any time in its discretion. As provided in Section 7(b) hereof, the expense of 5 qualification and maintenance of qualification of the Class B Shares shall be borne by the Company for the account of each Fund. MLFD shall furnish such information and other material relating to its affairs and activities as may be required by the Company in connection with such qualification. (d) The Company will furnish, in reasonable quantities upon request by MLFD, copies of annual and interim reports of the Company. Section 6. Duties of MLFD. (a) MLFD shall devote reasonable time and effort to effect sales of Class B Shares of the Company, but shall not be obligated to sell any specific number of Class B Shares. The services of MLFD hereunder are not to be deemed exclusive and nothing herein contained shall prevent MLFD from entering into distribution arrangements with other investment companies so long as the performance of its obligations hereunder is not impaired thereby. (b) In selling the Class B Shares of the Company, MLFD shall use its best efforts in all respects duly to conform with the requirements of all federal and state laws and regulations and the regulations of the National Association of Securities Dealers, Inc. (the "NASD"), relating to the sale of such securities. Neither MLFD nor any Insurance Company nor any other person is authorized by the Company to give any information or to make any representations, other than those contained in the registration statement or related Prospectus and any sales literature specifically approved by the Company. 6 (c) MLFD shall require each Insurance Company to which it sells, and which purchases, Class B Shares to enter into a Sub-Agreement with the Company substantially in the form attached to the Distribution Plan agreed to by MLFD in accordance with Rule 12b-1 under the Investment Company Act, which authorizes the payment of a distribution fee to such Insurance Company. Section 7. Payment of Expenses. ------------------- (a) The Company shall bear all costs and expenses of the Company relating to the Funds, including fees and disbursements of its counsel and auditors, in connection with the preparation and filing of any required registration statements and prospectuses under the Investment Company Act, the Securities Act, and all amendments and supplements thereto, and the expense of preparing, printing, mailing and otherwise, distributing prospectuses, annual or interim reports to shareholders and proxy materials. (b) The Company shall bear, for the account of the Funds, the costs and expenses of qualification of the Class B Shares for sale, and, if necessary or advisable in connection Therewith, the Company shall bear the cost and expense of qualifying the Company as a broker or dealer, in such states of the United States or other jurisdictions as shall be selected by the Company and MLFD pursuant to Section 5(c) hereof and the cost and expenses payable to each such state for continuing qualification therein until the Company decides to discontinue such qualification pursuant to Section 5(c) hereof. Section 8. Indemnification. --------------- 7 (a) The Company shall, for the account of the Funds, indemnify and hold harmless MLFD and each person, if any, who controls MLFD against any loss, liability, claim, damage or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damage or expense and reasonable counsel fees incurred in connection therewith) arising by reason of any person acquiring any Class B Shares, which may be based upon the Securities Act, or on any other statute or at common law, on the ground that the registration statement or related prospectus, as from time to time amended and supplemented, or the annual or interim reports to shareholders of the Company relating to the Funds, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, information furnished to the Company in connection therewith by or on behalf of MLFD; provided, however that --------- ------- in no case (i) is the indemnity of the Company in favor of MLFD and any such controlling persons to be deemed to protect MLFD or any such controlling persons thereof against any liability to the Company or its security holders to which MLFD or any such controlling persons would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under this Agreement; or (ii) is the Company to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against MLFD or any such controlling persons, unless 8 MLFD or such controlling persons, as the case may be, shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information or the nature of the claim shall have been served upon MLFD or such controlling persons (or after MLFD or such controlling persons shall have received notice of such service on any designated agent), but failure to notify the Company of any such claim shall not relieve it from any liability which it may have to the person against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Company will be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it and satisfactory to MLFD or such controlling person or persons, defendant or defendants in the suit. In the event the Company elects to assume the defense of any such suit and retain such counsel, MLFD or such controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, but, in case the Company does not elect to assume the defense of any such suit, it will reimburse MLFD or such controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Company shall promptly notify MLFD of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Class B Shares. 9 (b) MLFD shall indemnify and hold harmless the Company and each of its directors and officers and each person, if any, who controls the Company against any loss, liability, claim, damage or expense described in the foregoing indemnity contained in subsection (a) of this Section, but only with respect to statements or omissions made in reliance upon, and in conformity with, information furnished to the Company with respect to the Funds in writing by or on behalf of MLFD for use in connection with the registration statement or related prospectus, as from time to time amended, or the annual or interim reports to shareholders. In case any action shall be brought against the Company or any person so indemnified, in respect of which indemnity may be sought against MLFD, MLFD shall have the rights and duties given to the Company, and the Company and each person so indemnified shall have the rights and duties given to MLFD by the provisions of subsection (a) of this Section 8. Section 9. Duration and Termination of this Agreement. This Agreement ------------------------------------------ shall become effective as of the date first above written and shall remain in force as to each Fund until the second anniversary and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding voting securities of the Fund, cast in person or by proxy, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting upon such approval. 10 This Agreement may be terminated at any time as to a Fund, without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding voting securities of the Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. The terms "vote of a majority of the outstanding voting securities," "assignment," "affiliated person" and "interested person," when used in this Agreement, shall have the respective meanings specified in the Investment Company Act. Section 10. Amendments of this Agreement. This Agreement may be ------------------------------- amended by the parties only if such amendment is specifically approved by (i) the Board of Directors of the Company, or by the vote of a majority of outstanding voting securities of the Funds affected by the amendment, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. Section 11. Governing Law. This Agreement shall be construed in ------------- accordance with the laws of the State of New York and the applicable provisions of the Investment Company Act. To the extent the applicable law of the State of New York, or any of the 11 provisions herein, conflicts with the applicable provisions of the Investment Company Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written in New York, New York. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By -------------------------------- President MERRILL LYNCH FUNDS DISTRIBUTOR, INC. BY ---------------------------------- President 12 EX-99.8B 21 FORM OF CUSTODIAN AGREEMENT EXHIBIT 99.8b AGREEMENT BETWEEN BROWN BROTHERS HARRIMAN & CO. AND MERRILL LYNCH VARIABLE SERIES FUNDS, INC. - DEVELOPING CAPITAL MARKETS FOCUS FUND CUSTODIAN AGREEMENT AGREEMENT made this 10th day of July, 1996, between MERRILL LYNCH VARIABLE SERIES FUNDS, INC.-DEVELOPING CAPITAL MARKETS FOCUS FUND (the "Fund") and Brown Brothers Harriman & Co. (the "Custodian"). WITNESSETH: That in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. The Fund hereby employs and appoints the Custodian as a custodian for the term and subject to the provisions of this Agreement. The Custodian shall not be under any duty or obligation to require the Fund to deliver to it any securities or funds owned by the Fund and shall have no responsibility or liability for or on account of securities or funds not so delivered. The Fund will deposit with the Custodian copies of the Certificate of Incorporation and By-Laws (or comparable documents) of the Fund and all amendments thereto, and copies of such votes and other proceedings of the Fund as may be necessary for or convenient to the Custodian in the performance of its duties. 2. Except for securities and funds held by subcustodians appointed pursuant to the provisions of Section 3 hereof, the Custodian shall have and perform the following powers and duties: A. Safekeeping - To keep safely the securities of the Fund that have been ----------- delivered to the Custodian and from time to time -1- to receive delivery of securities for safekeeping. -2- B. Manner of Holding Securities - To hold securities of tbe Fund (1) ---------------------------- by physical possession of the share certificates or other instruments representing such securities in registered or bearer form, or (2) in book-entry form by a Securities System (as said term is defined in Section 2S). C. Registered Name; Nominee - To hold registered securities of the ------------------------ Fund (l) in the name or any nominee name of the Custodian or the Fund, or in the name or any nominee name of any agent appointed pursuant to Section 5E, or (2) in street certificate form, so-called, and in any case with or without any indication of fiduciary capacity. D. Purchases - Upon receipt of Proper Instructions, as defined in Section V --------- on Page 14, insofar as funds are available for the purpose, to pay for and receive securities purchased for the account of the Fund, payment being made only upon receipt of the securities (1) by the Custodian, or (2) by a clearing corporation of a national securities exchange of which the Custodian is a member, or (3) by a Securities System. However, (i) in the case of repurchase agreements entered into by the Fund, the Custodian may release funds to a Securities System or to a Subcustodian prior to the receipt of advice from the Securities System or Subcustodian that the securities underlying such repurchase agreement have been transferred by book entry into the Account (as defined in Section 2S) of the Custodian maintained with such Securities System or Subcustodian, so long -3- as such payment instructions to Securities System or Subcustodian include a requirement that delivery is only against payment of securities, and (ii) in the case of time deposits, call account, deposits, currency deposits, and other deposits, contracts or options pursuant to Sections 2K, 2L and 2M, the Custodian may make payment therefor without receiving an instrument evidencing said deposit so long as such payment inetructions detail specific securities to be acquired. E. Exchanges - Upon receipt of proper instructions, to exchange securities --------- held by it for the account of the Fund for other securities in connection with any reorganization, recapitalization, split-up of shares, change of par value, conversion or other event, and to deposit any such securities in accordance with the terms of any reorganization or protective plan. Without such instructions, the Custodian may surrender securities in temporary form for definitive securities, may surrender securities for transfer into a name or nominee name as permitted in Section 2C, and may surrender securities for a different number of certificates or instruments representing the same number of shares or same principal amount of indebtedness, provided the securities to be issued are to be delivered to the Custodian and further provided custodian shall at the time of surrendering securities or instruments receive a receipt or other evidence of ownership thereof. F. Sales of Securities - Upon receipt of proper ------------------- -4- instructions, to make delivery of securities which have been sold for the account of the Fund, but only against payment therefor (1) in cash, by a certified check, bank cashier's check, bank credit, or bank wire transfer, or (2) by credit to the account of the Custodian with a clearing corporation of a national securities exchange of which the Custodian is a member, or (3) by credit to the account of the Custodian or an Agent of the Custodian with a Securities System. G. Depositary Receipts - Upon receipt of proper instructions, to instruct a ------------------- subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an agent of the Custodian appointed pursuant to Section 5E hereof (an "Agent") to surrender securities to the depositary used by an issuer of American Depositary Receipts or International Depositary Receipts (hereinafter collectively referred to as "ADRs") for such securities against a written receipt therefor adequately describing such securities and written evidence satisfactory to the Subcustodian or Agent that the depositary has acknowledged receipt of instructions to issue with respect to such securities ADRs in the name of the Custodian, or a nominee of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at such other place as the Custodian may from time to time designate. Upon receipt of proper instructions, to surrender ADRs to the issuer thereof against a written receipt therefor -5- adequately describing the ADRs surrendered and written evidence satisfactory to the Custodian that the issuer of the ADRs has acknowledged receipt of instructions to cause its depositary to deliver the securities underlying such ADRs to a Subcustodian or an Agent. H. Exercise of Rights; Tender Offers - Upon timely receipt of proper instructions, to deliver to the issuer or trustee thereof, or to the agent of either, warrants, puts, calls, rights or similar securities for the purpose of being exercised or sold, provided that the new securities and cash, if any, acquired by such action are to be delivered to the Custodian, and, upon receipt of proper instructions, to deposit securities upon invitations for tenders of securities, provided that the consideration is to be paid or delivered or the tendered securities are to be returned to the Custodian. I. Stock Dividends, Riqhts, Etc. - To receive and collect all stock dividends, rights and other items of like nature; and to deal with the same pursuant to proper instructions relative thereto. J. Borrowings - Upon receipt of proper instructions, to deliver securities of the Fund to lenders or their agents as collateral for borrowings effected by the Fund, provided that such borrowed money is payable to or upon the Custodian's order as Custodian for the Fund. K. Demand Deposit Bank Accounts - To open and operate an -6- account or accounts in the name of the Fund on the Custodian's books subject only to draft or order by the Custodian. All funds received by the Custodian from or for the account of the Fund shall be deposited in said account(s). The responsibilities of the Custodian to the Fund for deposits accepted on the Custodian's books shall be that of a U. S. bank for a similar deposit. If and when authorized by proper instructions, the Custodian may open and operate an additional account(s) in such other banks or trust companies as may be designated by the Fund in such instructions (any such bank or trust company so designated by the Fund being referred to hereafter as a "Banking Institution"), provided that such account(s) shall be in the name of the Custodian for account of the Fund and subject only to the Custodian's draft or order. Such accounts may be opened with Banking Institutions in the United States and in other countries and may be denominated in either U. S. Dollars or other currencies as the Fund may determine. All such deposits shall be deemed to be portfolio securities of the Fund and accordingly the responsibility of the Custodian therefore shall be the same as and neither lesser nor greater than the Custodian's responsibility in respect of other portfolio securities of the Fund. L. Interest Bearing Call or Time Deposits - To place interest bearing fixed term and call deposits with such banks and -7- in such amounts as the Fund may authorize pursuant to proper instructions. Such deposits may be placed with the Custodian or with Subcustodians or other Banking Institutions as the Fund may determine. Deposits may be denominated in U. S. Dollars or other currencies and need not be evidenced by the issuance or delivery of a certificate to the Custodian, provided that the Custodian shall include in its records with respect to the assets of the Fund, appropriate notation as to the amount and currency of each such deposit, the accepting Banking Institution, and other appropriate details. Such deposits, other than those placed with the Custodian, shall be deemed portfolio securities of the Fund and the responsibilities of the Custodian therefor shall be the same as those for demand deposit bank accounts placed with other banks, as described in Section K of this agreement. The responsibility of the Custodian for such deposits accepted on the Custodian's books shall be that of a U. S. bank for a similar deposit. M. Foreign Exchange Transactions and Futures Contracts - Pursuant to proper --------------------------------------------------- instructions, to enter into foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery on behalf and for the account of the Fund. Such transactions may be undertaken by the Custodian with such Banking Institutions, including the Custodian and Subcustodian(s) as principals, as approved and authorized by the Fund. Foreign exchange contracts and options other than those -8- executed with the custodian, shall be deemed to be portfolio securities of the Fund and the responsibilities of the Custodian therefor shall be the same as those for demand deposit bank accounts placed with other banks as described in Section 2-K of this agreement. Upon receipt of proper instructions, to receive and retain confirmations evidencing the purchase or sale of a futures contract or an option on a futures contract by the Fund; to deposit and maintain in a segregated account, for the benefit of any futures commission merchant or to pay to such futures commission merchant, assets designated by the fund as initial, maintenance or variation "margin" deposits intended to secure the Fund's performance of its obligations under any futures contracts purchased or sold or any options on futures contracts written by the Fund, in accordance with the provisions of any agreement or agreements among any of the Fund, the Custodian and such futures commission merchant, designated to comply with the rules of the Commodity Futures Trading Commission and/or any contract market, or any similar organization or organizations, regarding such margin deposits; and to release and/or transfer assets in such margin accounts only in accordance with any such agreements or rules. N. Stock Loans - Upon receipt of proper instructions to deliver securities ----------- of the Fund, in connection with loans of securities by the Fund, to the borrower thereof upon the receipt of the cash collateral, if any, for such borrowing. In the event -9- U.S. Government securities are to be used as collateral, the Custodian will not release the securities to be loaned until it has received confirmation that such collateral has been delivered to the Custodian. The Custodian and Fund understand that the timing of receipt of such confirmation will normally require that the delivery of securities to be loaned will be made one day after receipt of the U. S. Government collateral. O. Collections - To collect, receive and deposit in said account or ----------- accounts all income and other payments with respect to the securities held hereunder, and to execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to securities of the Fund or in connection with transfer of securities, and pursuant to proper instructions to take such other actions with respect to collection or receipt of funds or transfer of securities which involve an investment decision. P. Dividends, Distributions and Redemptions - Upon receipt of proper ---------------------------------------- instructions from the Fund, or upon receipt of instructions from the Fund's shareholder servicing agent or agent with comparable duties (the "Shareholder Servicing Agent") (given by such person or persons and in such manner on behalf of the Shareholder Servicing Agent as the Fund shall have authorized), the Custodian shall release funds or securities to the Shareholder Servicing Agent or otherwise apply funds or -10- securities, insofar as available, for the payment of dividends or other distributions to Fund shareholders. Upon receipt of proper instructions from the Fund, or upon receipt of instructions from the Shareholder Servicing Agent (given by such person or persons and in such manner on behalf of the Shareholder Servicing Agent as the Fund shall have authorized), the Custodian shall release funds or securities, insofar as available, to the Shareholder Servicing Agent or as such Agent shall otherwise instruct for payment to Fund shareholders who have delivered to such Agent a request for repurchase or redemption of their shares of capital stock of the Fund. Q. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all ---------------------- forms of proxies and all notices of meetings and any other notices or announcements affecting or relating to securities owned by the Fund that are received by the Custodian, and upon receipt of proper instructions, to execute and deliver or cause its nominee to execute and deliver such proxies or other authorizations as may be required. Neither the Custodian nor its nominee shall vote upon any of such securities or execute any proxy to vote thereon or give any consent or take any other action with respect thereto (except as otherwise herein provided) unless ordered to do so by proper instructions. R. Bills - Upon receipt of proper instructions from the Administrator, to ----- pay or cause to be paid, insofar as funds are available for the purpose, bills, statements, or other obligations of the Fund. -11- S. Deposit of Fund Assets in Securities Systems - The Custodian may deposit -------------------------------------------- and/or maintain securities owned by the Fund in (i) The Depository Trust Company, (ii) any book-entry system as provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry regulations of federal agencies substantially in the form of Subpart O, or (iii) any other domestic clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934 which acts as a securities depository and whose use the Fund has previously approved in writing (each of the foregoing being referred to in this Agreement as a "Securities System"). Utilization of a Securities System shall be in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) The Custodian may deposit and/or maintain Fund securities, either directly or through one or more Agents appointed by the Custodian (provided that any such agent shall be qualified to act as a custodian of the Fund pursuant to the Investment Company Act of 1940 and the rules and regulations thereunder), in a Securities System provided that such securities are represented in an account ("Account") of the Custodian or such Agent in the Securities System which shall not include any assets of the Custodian or Agent other than assets held as a fiduciary, custodian, or otherwise for customers; -12- 2) The records of the Custodian with respect to securities of the Fund which are maintained in a Securities System shall identify by book-entry those securities belonging to the Fund; 3) The Custodian shall pay for securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall Transfer securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian or an Agent as referred to above, and be provided to the Fund at its request. The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund on the next business day; 4) The Custodian shall provide the Fund with any report obtained by the Custodian or any Agent as referred to above on -13- the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System; and the Custodian and such Agents shall send to the Fund such reports on their own systems of internal accounting control as the Fund may reasonably request from time to time. 5) At the written request of the Fund, the Custodian will terminate the use of any such Securities System on behalf of the Fund as promptly as practicable. T. Other Transfers - Upon receipt of Proper Instructions, to deliver securities, funds and other property of the Fund to a Subcustodian or another custodian of the Fund; and, upon receipt of proper instructions, to make such other disposition of securities, funds or other property of the Fund in a manner other than or for purposes other than as enumerated elsewhere in this Agreement, provided that the instructions relating to such disposition shall include a statement of the purpose for which the delivery is to be made, the amount of securities to be delivered and the name of the person or persons to whom delivery is to be made. U. Investment Limitations - In performing its duties generally, and more particularly in connection with the purchase, sale and exchange of securities made by or for the Fund, the Custodian may assume unless and until notified in writing to the contrary that proper instructions received by it are not in -14- conflict with or in any way contrary to any provisions of the Fund's Certificate of Incorporation or By-Laws (or comparable documents) or votes or proceedings of the shareholders or Directors of the Fund. The Custodian shall in no event be liable to the Fund and shall be indemnified by the Fund for any violation which occurs in the course of carrying out instructions given by the Fund of any investment limitations to which the Fund is subject or other limitations with respect to the Fund's powers to make expenditures, encumber securities, borrow or take similar actions affecting its portfolio. V. Proper Instructions - Proper instructions shall mean a tested telex from the Fund or a written request, direction, instruction or certification signed or initialled on behalf of the Fund by two or more persons as the Board of Directors of the Fund shall have from time to time authorized, provided, however, that no such instructions directing the delivery of securities or the payment of funds to an authorized signatory of the Fund shall be signed by such person. Those persons authorized to give proper instructions may be identified by the Board of Directors by name, title or position and will include at least one officer empowered by the Board to name other individuals who are authorized to give proper instructions on behalf of the Fund. Telephonic or other oral instructions given by any one of the above persons will be considered proper instructions if the Custodian reasonably believes them to have been given by a person -15- authorized to give such instructions with respect to the transaction involved. Oral instructions will be confirmed by tested telex or in writing in the manner set forth above but the lack of such confirmation shall in no way affect any action taken by the Custodian in reliance upon such oral instructions. The Fund authorizes the Custodian to tape record any and all telephonic or other oral instructions given to the Custodian by or on behalf of the Fund (including any of its officers, Directors, employees or agents) and will deliver to the Custodian a similar authorization from any investment manager or adviser or person or entity with similar reponsibilities which is authorized to give proper instructions on behalf of the Fund to the Custodian. Proper instructions may relate to specific transactions or to types or classes of transactions, and may be in the form of standing instructions. Proper instructions may include communications effected directly between electro-mechanical or electronic devices or systems, in addition to tested telex, provided that the Fund and the Custodian agree to the use of such device or system. 3. Securities, funds and other property of the Fund may be held by subcustodians appointed pursuant to the provisions of this Section 3 (a "Subcustodian"). The Custodian may, at any time and from time to time, appoint any bank or trust company (meeting the requirements of a custodian or a foreign custodian under the Investment Company Act of 1940 and the rules and -16- regulations thereunder) to act as a Subcustodian for the Fund, provided that the Fund shall have approved in writing (1) any such bank or trust company and the subcustodian agreement to be entered into between such bank or trust company and the Custodian, and (2) if the subcustodian is a bank organized under the laws of a country other than the United States, the holding of securities, cash and other property of the Fund in the country in which it is proposed to utilize the services of such subcustodian. Upon such approval by the Fund, the Custodian is authorized on behalf of the Fund to notify each Subcustodian of its appointment as such. The Custodian may, at any time in its discretion, remove any bank or trust company that has been appointed as a Subcustodian but will promptly notify the Fund of any such action. Those Subcustodians, their offices or branches which the Fund has approved to date are set forth on Appendix A hereto. Such Appendix shall be amended from time to time as Subcustodians, branches or offices are changed, added or deleted. The Fund shall be responsible for informing the Custodian sufficiently in advance of a proposed investment which is to be held at a location not listed on Appendix A, in order that there shall be sufficient time for the Fund to give the approval required by the preceding paragraph and for the Custodian to put the appropriate arrangements in place with such Subcustodian pursuant to such subcustodian agreement. -17- Although the Fund does not intend to invest in a country before the foregoing procedures have been completed, in the event that an investment is made prior to approval, if practical, such security shall be removed to an approved location or if not practical such security shall be held by such agent as the Custodian may appoint. In such event, the Custodian shall be liable to the Fund for the actions of such agent if and only to the extent the Custodian shall have recovered from such agent for any damages caused the Fund by such agent and provided that the Custodian shall pursue its rights against such agent. In the event that any Subcustodian appointed pursuant to the provisions of this Section 3 fails to perform any of its obligations under the terms and conditions of the applicable subcustodian agreement, the Custodian shall use its best efforts to cause such Subcustodian to perform such obligations. In the event that the Custodian is unable to cause such Subcustodian to perform fully its obligations thereunder, the Custodian shall forthwith upon the Fund's request terminate such Subcustodian and, if necessary or desirable, appoint another subcustodian in accordance with the provisions of this Section 3. At the election of the Fund, it shall have the right to enforce, to the extent permitted by the subcustodian agreement and applicable law, the Custodian's rights against any such Subcustodian for loss or damage caused the Fund by such Subcustodian. At the written request of the Fund, the Custodian will -18- terminate any subcustodian Appointed pursuant to the provisions of this Section 3 in accordance with the termination provisions under the applicable subcustodian agreement. The Custodian will not amend any subcustodian agreement or agree to change or permit any changes thereunder except upon the prior written approval of the Fund. In the event the Custodian receives a claim from a Subcustodian under the indemnification provisions of any subcustodian agreement, the Custodian shall promptly give written notice to the Fund of such claim. No more than thirty days after written notice to the Fund of the Custodian's intention to make such payment, the Fund will reimburse the Custodian the amount of such payment except in respect of any negligence or misconduct of the Custodian. 4. The Custodian may assist generally in the preparation of reports to Fund shareholders and others, audits of accounts, and other ministerial matters of like nature. 5. A. The Custodian shall not be liable for any action taken or omitted in reliance upon proper instructions believed by it to be genuine or upon any other written notice, request, direction, instruction, certificate or other instrument believed by it to be genuine and signed by the proper party or parties. The Chairman of the Board of the Fund shall certify to the Custodian the names, signatures and scope of authority of all persons authorized to give proper instructions or any other such -19- notice, request, direction instruction, certificate or instrument on behalf of the Fund, the names and signatures of the officers of the Fund, the name and address of the Shareholder Servicing Agent, and any resolutions, votes, instructions or directions of the Fund's Board of Directors or shareholders. Such certificate may be accepted and relied upon by the Custodian as conclusive evidence of the facts set forth therein and may be considered in full force and effect until receipt of a similar certificate to the contrary. So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Agreement. The Custodian shall be entitled, at the expense of the Fund, (but only to the extent such expenses are reasonable) to receive and act upon advice of counsel (who may be counsel for the Fund) on all matters, and the Custodian shall be without liability for any action reasonably taken or omitted pursuant to such advice. B. With respect to the portfolio securities, cash and other property of the Fund held by a Securities System, the Custodian shall be liable to the Fund only for any loss or damage to the Fund resulting from use of the Securities System if caused by any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from any -20- failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System. C. The Custodian shall be liable to the Fund for any loss or damage to the Fund caused by or resulting from the acts or omissions of any Subcustodian if such acts or omissions would be deemed to be negligence, gross negligence or willful misconduct hereunder if such acts or omissions were those of the Custodian taken or omitted by the Custodian in the country in which the Subcustodian is operating. The Custodian shall also be liable to the Fund for its own negligence in transmitting any instructions received by it from the Fund and for its own negligence in connection with the delivery of any securities or funds held by it to any Subcustodian. D. Except as may otherwise be set forth in this Agreement with respect to particular matters, the Custodian shall be held only to the exercise of reasonable care and diligence in carrying out the provisions of this Agreement, provided that the Custodian shall not thereby be required to take any action which is in contravention of any applicable law. However, nothing herein shall exempt the Custodian from liability due to its own negligence or willful misconduct. The Fund agrees to indemnify and hold harmless the Custodian and its nominees from all claims and liabilities (including reasonable counsel fees) incurred or assessed against it or its nominees in connection with the performance of this Agreement, except such as may arise from its -21- or its nominee's breach of the relevant standard of conduct set forth in this Agreement. Without limiting the foregoing indemnification obligation of the Fund, the Fund agrees to indemnify the Custodian and its nominees against any liability the Custodian or such nominee may incur by reason of taxes assessed to the Custodian or such nominee or other costs, liability or expense incurred by the Custodian or such nominee resulting directly or indirectly from the fact that portfolio securities or other property of the Fund is registered in the name of the Custodian or such nominee. In order that the indemnification provisions contained in this Paragraph 5-C shall apply, however, it is understood that if in any case the Fund may be asked to indemnify or hold the Custodian harmless, the Fund shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the Custodian will use all reasonable care to identify and notify the Fund promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the Fund. The Fund shall have the option to defend the Custodian against any claim which may be the subject of this indemnification, and in the event that the Fund so elects it will so notify the Custodian, and thereupon the Fund shall take over complete defense of the claim, and the Custodian shall in such situation initiate no further legal or other expenses for which -22- it shall seek indemnification under this Paragraph 5-C. The Custodian shall in no case confess any claim or make any compromise in any case in which the Fund will be asked to indemnify the Custodian except with the Fund's prior written consent. It is also understood that the Custodian shall not be liable for any loss involving any securities, currencies, deposits or other property of the Fund, whether maintained by it, a Subcustodian, an agent of the Custodian or a Subcustodian, a Securities System, or a Banking Institution, or a loss arising from a foreign currency transaction or contract, resulting from a Sovereign Risk. A "Sovereign Risk" shall mean nationalizaton, expropriation, devaluation, revaluation, confiscation, seizure, cancellation, destruction or similar action by any governmental authority, de facto or de jure; or enactment, promulgation, imposition or enforcement by any such governmental authority of currency restrictions, exchange controls, taxes, levies or other charges affecting the Fund's property; or acts of war, terrorism, insurrection or revolution; or any other similar act or event beyond the Custodian's control. E. The Custodian shall be entitled to receive reimbursement from the Fund on demand, in the manner provided in Section 6, for its cash disbursements, expenses and charges (including the fees and expenses of any Subcustodian or any Agent) in connection with this Agreement, but excluding salaries and usual overhead expenses. -23- F. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company as its agent (an "Agent") to carry out such of the provisions of this Agreement as the Custodian may from time to time direct, provided, however, that the appointment of such Agent (other than an Agent appointed pursuant to the third paragraph of Section 3) shall not relieve the Custodian of any of its responsibilities under this agreement. G. Upon request, the Fund shall deliver to the Custodian such proxies, powers of attorney or other instruments as may be reasonable and necessary or desirable in connection with the performance by the Custodian or any Subcustodian of their respective obligations under this Agreement or any applicable subcustodian agreement. 6. The Fund shall pay the Custodian a custody fee based on such fee schedule as may from time to time be agreed upon in writing by the Custodian and the Fund. Such fee, together with all amounts for which the Custodian is to be reimbursed in accordance with Section 5D, shall be billed to the Fund in such a manner as to permit payment by a direct cash payment to the Custodian. 7. This Agreement shall continue in full force and effect until terminated by either party by an instrument in writing delivered or mailed, postage prepaid, to the other party, such termination to take effect not sooner than seventy five (75) days -24- after the date of such delivery or mailing. In the event of termination the Custodian shall be entitled to receive prior to delivery of the securities, funds and other property held by it all accrued fees and unreimbursed expenses the payment of which is contemplated by Sections 5D and 6, upon receipt by the Fund of a statement setting forth such fees and expenses. In the event of the appointment of a successor custodian, it is agreed that the funds and securities owned by the Fund and held by the Custodian or any Subcustodian shall be delivered to the successor custodian, and the Custodian agrees to cooperate with the Fund in execution of documents and performance of other actions necessary or desirable in order to substitute the successor custodian for the Custodian under this Agreement. 8. This Agreement constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof. No provision of this Agreement may be amended or terminated except by a statement in writing signed by the party against which enforcement of the amendment or termination is sought. In connection with the operation of this Agreement, the Custodian and the Fund may agree in writing from time to time on such provisions interpretative of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. No interpretative or additional provisions made as provided in the -25- preceding sentence shall be deemed to be an amendment of this Agreement. 9. This instrument is executed and delivered in The Commonwealth of Massachusetts and shall be governed by and construed according to the laws of said Commonwealth. 10. Notices and other writings delivered or mailed postage prepaid to the Fund addressed to the Fund in care of Merrill Lynch Asset Management, Inc., 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Mailing address: Post Office Box 9011, Princeton, New Jersey 08543, Attention: Mr. Gerald M. Richard, Senior Vice President/Treasurer, or to such other address as the Fund may have designated to the Custodian in writing, or to the Custodian at 40 Water Street, Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to such other address as the Custodian may have designated to the Fund in writing, shall be deemed to have been properly delivered or given hereunder to the respective addressee. 11. This Agreement shall be binding on and shall inure to the benefit of the Fund and the Custodian and their respective successors and assigns, provided that neither party hereto may assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party. 12. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. This Agreement shall become effective when one or more counterparts have been signed and delivered by each of the parties. -26- IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf on the day and year first above written. MERRILL LYNCH VARIABLE SERIES FUNDS, INC.- DEVELOPING CAPITAL MARKETS FOCUS FUND BROWN BROTHERS HARRIMAN & CO. By /s/ Gerald M. Richard per/pro /s/ Stockley P. Towles ------------------------------ ------------------------------ GERALD M. RICHARD, TREASURER Partner Stokley P. Towles, Partner -27- AMENDMENT TO THE CUSTODIAN AGREEMENT AMENDMENT entered into as of this lOth day of July, 1996 to the Custodian Agreement between MERRILL LYNCH VARLABLE SERIES FUNDS, INC.- MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND. (the "Fund") and BROWN BROTHERS HARRIMAN & CO. (the "Custodian") dated as of July 10, 1996 (the "Agreement"). In consideration of the Custodian's offering custodial services to the Fund in Russia, the Fund and the Custodian agree that the Agreement is hereby amended as follows: 1. Section 2.A, Safekeeping, is amended by the addition of the following at the end of said Section: "provided, however, that the Custodian's responsibility for safekeeping equity securities of Russian issuers ("Russian Equities") hereunder shall be limited to the safekeeping of relevant share extracts from the share registration books maintained by the entities providing share registration services to issuers of Russian Equities (each a "Registrar") indicating an investor's ownership of such securities (each a "Share Extract"). In the event the Fund purchases corporate debt instruments or other forms of securities other than those referred to herein, such instruments or other securities will be held in accordance with market practice or as otherwise agreed upon by the Fund and the Custodian." 2. Section 2.C, Registered Name; Nominee, is amended by the addition of the following at the end of said Section: "However, with respect to Russian Equities, the Custodian shall instruct a Subcustodian to confirm that registration thereof shall be reflected on the books of the issuer's Registrar, subject to the following conditions, but shall in no event be liable for losses or costs incurred as a result of delays or failures in the registration process not caused by the negligence of the Custodian, Subcustodian, affiliated Russian Agent or l other affiliate of the Custodian (it being understood that an affiliated entity as used herein shall mean an entity in which the Custodian or Russian Agent has majority ownership), including without limitation the inability to obtain or enforce relevant Share Extracts. Such registration may be in the name of a nominee of a Subcustodian. In the event registration is in the name of the Fund such entity hereby acknowledges that only the Subcustodian may give instructions to the Registrar to transfer or engage in other transactions involving the Russian Equities so registered. A Subcustodian may from time to time enter into contracts with Registrars with respect to the registration of Russian Equities ("Registrar Contracts"). Such Registrar Contracts may provide for (i) regular share confirmations by the Subcustodian, (ii) reregistrations within set timeframes, (iii) use of a Subcustodian's nominee name, (iv) direct access by auditors of the Subcustodian or its clients to share registers, and (v) specification of the Registrar's responsibilities and liabilities. The Custodian does not represent or warrant that such Registrar Contracts are enforceable. If the Fund instructs the Custodian to settle a purchase of a Russian Equity, the Custodian will instruct a Subcustodian to reregister the Russian Equity and obtain a Share Extract in a timely manner. After completion of reregistration of a Russian Equity in respect of which a Subcustodian has entered into a Registrar Contract, the Custodian shall instruct the Subcustodian to monitor such registrar and to notify the Custodian upon the Subcustodian's obtaining knowledge of the occurrence of any of the following events ("Registrar Events"): (i) a Registrar has eliminated a shareholder from the register or has altered registration records; (ii) a Registrar has refused to register securities in the name of a particular purchaser and the purchaser or seller has alleged that the Registrar's refusal to so register was unlawful; (iii) a Registrar holds for its own account shares of an issuer for which it serves as Registrar; (iv) if a Registrar Contract is in effect with a Registrar, the Registrar notifies the Subcustodian that it will no longer be able materially to comply with the terms of the Registrar Contract; or (v) if a Registrar Contract is in effect with a Registrar, the Registrar has materially breached such Contract. The Custodian shall inform the Fund of the occurrence of a Registrar Event provided the Custodian has in fact received actual notice thereof from the Subcustodian. It shall be the responsibility of the Fund to contact the Custodian prior to executing any transaction in a Russian Equity to determine whether a Registrar Contract exists in respect of such issuer. The Custodian shall send to the Fund a list of issuers in respect of which a Registrar Contract has been executed and thereafter the Custodian shall notify the Fund promptly upon the execution of additional Registrar Contracts. If the Fund instructs the Custodian by Proper Instruction to settle a purchase of a Russian Equity in respect of which the Subcustodian has not entered into a Registrar Contract, then the Custodian shall instruct the Subcustodian to settle such transaction in accordance with the Proper Instruction and with the provisions of Section 2.D of this Agreement, notwithstanding the absence of any such Registrar Contract and without the Custodian being required to notify the Fund that no such Registrar Contract is then in effect, and it being understood that neither the Custodian nor the Subcustodian shall be required to follow the procedure set forth in the second preceding paragraph." 2 3. Section 2.D, Purchases, is amended by the addition of the following at the ---------------------- end of said Section: "Without limiting the generality of the foregoing, the following provisions shall apply with respect to settlement of purchases of securities in Russia. Unless otherwise instructed by Proper Instructions acceptable to the Custodian, the Custodian shall only authorize a Subcustodian to make payment for purchases of Russian Equities upon receipt of the relevant Share Extract in respect of the Fund's purchases. With respect to securities other than Russian Equities, settlement of purchases shall be made in accordance with securities processing or settlement practices which the Custodian in its discretion determines to be a market practice. The Custodian shall only be responsible for securities purchased upon actual receipt of such securities at the premises of its Subcustodian, provided that the Custodian's responsibility for securities represented by Share Extracts shall be limited to the safekeeping of the relevant Share Extract upon actual receipt of such Share Extract at the premises of the Subcustodian." 4. Section 2.E, Exchanges, is amended by inserting after the word "exchange" ---------------------- in the second line thereof, the following phrase: ", in accordance with the registration procedures described in Section 2.C of this Agreement," 5. Section 2.F, Sales of Securities, is amended by the addition of the -------------------------------- following at the end of said Section: "Without limiting the generality of the foregoing, the following provisions shall apply with respect to settlement of sales of securities in Russia. Unless otherwise expressly instructed by Proper Instructions acceptable to the Custodian, settlement of sales of securities shall be made in accordance with securities processing or settlement practices which the Custodian in its discretion determines to be a market practice. The Fund hereby expressly acknowledges that such market practice might require delivery of securities prior to receipt of payment and that the Fund bears the risk of payment in instances where delivery of securities is made prior to receipt of payment therefor in accordance with Proper Instructions received by the Custodian or pursuant to the Custodian's determination in its discretion that such delivery is in accordance with market practice. The Custodian shall not be responsible for any securities delivered from the premises of the Subcustodian from the time they leave such premises." 3 6. Section 2.H, Exercise of Rights; Tender Offers, is amended by the addition ---------------------------------------------- of the following paragraph at the end of the present Section 2.H: ----------- With respect to Russia, upon timely receipt of Proper Instructions, the Custodian shall take any lawful action required by the terms of a rights offer, tender offer, put, call, merger, consolidation, reorganization or other corporate action affecting securities held on behalf of the Fund, provided however that the Custodian will not be held liable for any losses or costs incurred as a result of such actions or as a result of the Custodian's or Subcustodian's inability for reasons beyond its control to take the actions requested by such Proper Instructions." 7. Section 2.I, Stock Dividends, Rights, Etc., is modified by the addition of ----------- ----------------------------- the following paragraph at the end of said Section: "With respect to Russian Equities, to request a Subcustodian to obtain a Share Extract with respect to all Russian Equities issued by reason of a stock dividend, bonus issue or other distribution resulting from a corporate action not requiring instructions from the shareholder of the security, provided that the Custodian shall not be responsible for its inability to obtain any such Share Extract or for the failure of a non-affiliated Registrar or non-affiliated Russian Agent (it being understood that non- affiliated as used herein shall mean less than majority ownership) or any agent thereof to record the Fund's ownership on the issuer's records." 8. Section 3 is modified by the insertion of the following at the end of the --------- first paragraph of said Section: "With respect to Russia, the Fund hereby expressly acknowledges that a Subcustodian for Russian securities may from time to time delegate any of its duties and responsibilities to a sub-subcustodian (collectively, "Russian Agent") in Russia, including without limitation Rosvneshtorgbank (also called Vneshtorgbank RF) ("VTB"). The Fund acknowledges that the rights of the Subcustodian against any such Russian Agent may consist only of a contractual claim against the Russian Agent. In the event of a loss of securities, which loss is not caused in whole or in significant part by the negligent act or omission of the Custodian or Subcustodian or an affiliate of the Custodian, held on behalf 4 of the Fund through any Russian Agent whose use is required or customary by law or by market practice including without limitation the VTB, the Custodian shall be responsible to the Fund with respect to such losses to the extent it or the Subcustodian in fact recovers from the Russian Agent, provided that, notwithstanding the foregoing, the Custodian shall be responsible to the Fund to the extent provided herein for losses due to its own negligence or the negligence of the Subcustodian or that of an affiliate of the Custodian. In the event of such loss, the Custodian shall use, or shall cause the Subcustodian to use, reasonable care under the circumstances to seek recovery of such loss from the Russian Agent." 9. Section 5.C is amended by the addition of the following paragraphs at the ----------- end of the present first paragraph of said Section: "With respect to securities issued by Russian issuers or settlement in Russia of securities transactions, reasonable care shall mean reasonable practices under the circumstances as measured by custodial practices among international financial institutions in Russia, and negligence as used herein shall mean the failure to exercise reasonable care as defined in this sentence. The Custodian shall in no event be liable for consequential or indirect losses or from loss of goodwill. "It is understood that no Registrar, whether or not any such Registrar has entered into a contract or other arrangement with a Subcustodian, is or shall be considered or deemed to be an agent of the Custodian or any Subcustodian, and accordingly neither the Custodian nor the Subcustodian shall be responsible for or liable to the Fund for the acts or omissions of any such non-affiliated Registrar." 10. Section 5.C is amended by the addition of the following paragraph at the ----------- end of the present Section: "Notwithstanding the foregoing, the Custodian shall have no liability in respect of any loss, damage or expense suffered by the Fund or any shareholder of the Fund insofar as such loss, damage or expense arises from investment risk inherent in investing in capital markets or in holding assets in a particular country or jurisdiction, including without limitation, (i) political, legal, economic, settlement and custody infrastructure, and currency and exchange rate risks; (ii) investment and repatriation restrictions; (iii) a Fund's inability to protect and enforce any local legal rights including rights of title and beneficial ownership; (iv) corruption and crime in the local market; (v) unreliable information which emanates from the local market; (vi) volatility of banking and financial systems and infrastructure; (vii) bankruptcy and insolvency risks of any and all non- affiliated local banking agents, counterparties to cash and securities transactions or 5 non-affiliated registrars or non-affiliated transfer agents; and (vii) risk of issuer insolvency or default. 11. A new Section 5.H as follows is added of the last paragraph of the present ----------- Section 5.G: - ----------- "H. It is also agreed that the Fund shall be responsible for preparation and filing of tax returns, reports and other documents on any activities it undertakes in Russia which are to be filed with any relevant governmental or other authority and for the payment of any taxes, levies, duties or similar liability the Fund incurs in respect of property held or sold in Russia or of payments or distributions received in respect thereof in Russia. Accordingly, the Fund hereby agrees to indemnify and hold harmless the Custodian from any loss, cost or expense resulting from the imposition or assessment of any such tax, duty, levy or liability or any expenses related thereto." 12. A new Section 13, Risk Disclosure Acknowledgment, is added at the end of ---------- ------------------------------ the present Section 12: ---------- "The Fund hereby acknowledges that it has received, has read and has understood the Custodian's Risk Disclosure Statement, a copy of which is attached hereto and is incorporated herein by reference. The Fund acknowledges that the Risk Disclosure Statement is not comprehensive. The parties hereto acknowledge that the Custodian's offering sub-custodial services in Russia is not intended to and shall not be construed to be a recommendation by the Custodian that investment in Russia is appropriate or inappropriate for the Fund or is consistent or inconsistent with legal or regulatory requirements pertaining to the establishment or administration of mutual funds, with the Fund's prospectus or constitutive documents or with the Fund's duties to shareholders." Except as amended above, all the provisions of the Agreement as heretofore in effect shall remain in full force and effect. 6 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first set forth above. MERRILL LYNCH VARIABLE SERIES FUNDS, INC.-MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND BROWN BROTHERS HARRIMAN & CO. /s/ Gerald M. Richard /s/ Stokley P. Towles - ---------------------------------- ------------------------------ Name: Gerald M. Richard Name: Stokley P. Towles Title: Treasurer Title: Partner 7 RISK DISCLOSURE STATEMENT In connection with your consideration of investment in Russia, we bring to your attention the following risks which, although they exist in many markets around the world, we believe deserve special consideration in Russia. This list is not comprehensive and is intended only to highlight some of the risks inherent in investing in Russia which appear to be greater than those in other established markets. These risks include, without limitation: POLITICAL AND ECONOMIC RISKS There is no history of stability in this market and no guarantee of future stability. The emerging nature of the Russian political system in its current democratic form leaves it more vulnerable to break down in the event of economic instability or popular unrest. The recent resurgence of the Communists and the beginnings of a trend away from privatization highlights the risk of a reversal of democratic reforms and reacquisition, nationalization or expropriation of foreign-owned assets. The dynamic nature of the political environment makes the future uncertain. The economic infrastructure is poor, and the country maintains a high level of external and internal debt. Tax regulations are ambiguous and unclear, and there is a risk of imposition of arbitrary or onerous taxes due to the lack of a fair and economically-rational tax regime. COMMERCIAL AND CREDIT RISKS Banks and other financial systems are not well developed or regulated, and as a result tend to be untested and have low credit ratings. Organized crime and corruption are a feature of the business environment, and bankruptcy and insolvency are commonplace as businesses are learning how to cope in new conditions. In terms of cash, securities and other investment transactions, the risk of broker, counterparty and other third party default is high. The same holds true for issuers, where the risk of default is high. Insurance is expensive and difficult to obtain in light of the volatility of the commercial environment. LIQUIDITY RISKS Foreign investment is affected by restrictions in terms of repatriation and convertibility of the currency. The ruble is only convertible internally, and the value of investments may be affected by fluctuations in available currency rates and exchange control regulations. The repatriation of profits may be restricted in some cases. For example, proceeds from the sale of some government bonds cannot be repatriated. Due to the undeveloped nature of the banking system, considerable delays can occur in transferring funds, converting rubles into other currencies and remitting funds out of Russia. LEGAL AND REGULATORY RISKS Russia's legal system is evolving and is not as developed as that of a western country. It is based on a civil code with no system of judicial precedents. The regulatory environment is sometimes uncertain since the total law can encompass the civil code, legislative laws, presidential decrees, and ministry resolutions. The code, laws, decrees, and resolutions ("Regulations") are promulgated at separate times and are not necessarily consistent. The issuance of Regulations does not always keep pace with market developments, thereby creating ambiguities and inconsistencies. Regulations governing securities investment may not exist or may be interpreted and applied in an arbitrary or inconsistent manner. There may be a risk of conflict between the rules and regulations of the local, regional, and national governments. The concept of share ownership rights and controls may not be in place or be enforceable. The independence of the courts from economic, political, or national influence is basically untested and the courts and judges are not experienced in business and corporate law. Foreign investors cannot be guaranteed redress in a court of law for a breach of local laws, regulations or contracts. The securities market regulatory body, the Federal Commission on Securities and Capital Markets, was established in 1995 and is responsible for overseeing market participants, including registrars. However, the monitoring of and enforcement of the obligations of registrar companies is difficult due to geographic dispersion and inconsistent interpretation and application of regulations. OPERATIONAL RISKS Shareholder Title to Securities: Shareholder risk is a major risk for equity investment in Russia. For example, shares are dematerialized and the only legal evidence of ownership is the shareholder's name entered in the register of the company. The concept of fiduciary duty on the part of companies' management is generally non-existent. Therefore, shareholders may suffer a dilution or loss of investment, due to arbitrary changes in the shareholder register, with little or no recourse or redress available. Local laws and regulations may not prohibit or restrict a company's management from materially changing the company's structure without the consent of shareholders. Legislation prohibiting insider trading activities is rudimentary. Clearing and Settlement: Settlements in Russia are non-DVP. For equity settlements, the payments are usually handled offshore in USD after the shares are reregistered on the books of the company or its registrar. However, the only evidence of the registration is a company "extract" which is a photocopy of the appropriate page from the register reflecting the new shareholder's name. The extract does not have a legal basis for establishing ownership in the event of a loss. For Ministry of Finance (MinFin) bond settlements, payments are made offshore in USD upon settlement of the bearer bonds at Vneshtorgbank's (VTB) office in Moscow. The bonds are transported between the local subcustodian and VTB. Therefore, the investor is exposed to transportation risk as the MinFins are bearer bonds and are not replaceable in the event they are lost, stolen, or destroyed. Foreign investors can also invest in treasury issues with maturities greater than one year through the Moscow Interbank Currency Exchange (MICEX). These issues settle book-entry at MICEX in rubles only and at present, proceeds from MICEX instruments are not able to be repatriated. Transparency: The rules regulating corporate governance may not exist or are underdeveloped and offer little protection to minority shareholders. Disclosure and reporting requirements are not to the expected level of most developed western nations. The accounting standards generally used in Russia are not international standards and in many cases may be a cash based, nonaccrual method of accounting. The quality, reliability, and availability of information on companies in Russia is lower than in most western markets. Because of these and other risks inherent in Russia, the custody services available in Russia are not of the same standard as those available in developed markets. As with all markets, the fund must consider and accept these risks when it decides to invest in the market. As you know, the risks associated with investing in emerging markets deserve special attention as they are considerably higher than those in more developed markets. This Risk Disclosure Statement should not be the sole source of information for risk with respect to the Russian market. We suggest that you review the market independently and consult with your own legal advisors. 10th day of July 1996 Acknowledged: MERRILL LYNCH VARIABLE SERIES FUNDS, INC. DEVELOPING CAPITAL MARKETS FOCUS FUND /s/ Gerald M. Richard - ------------------------------------- Name: Gerald M. Richard Title: Treasurer EX-99.11 22 CONSENT OF INDEPENDENT AUDITORS INDEPENDENT AUDITORS' CONSENT Merrill Lynch Variable Series Funds, Inc.: We consent to the use in Post-Effective Amendment No. 27 to Registration Statement No. 2-74452 of our report dated February 21, 1997 appearing in the Statement of Additional Information, which is a part of such Registration Statement, and to the reference to us under the caption "Financial Highlights" appearing in the Prospectus, which is also a part of such Registration Statement. Deloitte & Touche LLP Princeton, New Jersey April 25, 1997 EX-99.15 23 FORM OF DISTRIBUTION PLAN RELATING TO CLASS B EXHIBIT 99.15 DISTRIBUTION PLAN OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC. PURSUANT TO RULE 12b-1 DISTRIBUTION PLAN made as of the _____ day of __________, 1997, by and between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a Maryland corporation (the "Company"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation ("MLFD"). W I T N E S S E T H: ------------------- WHEREAS, the Company engages in business as an open-end investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and WHEREAS, the Company comprises sixteen separate funds (the "Funds"), each of which pursues its own investment objective through separate investment policies, and may in the future comprise one or more additional funds; and WHEREAS, MLFD is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Company has entered into a Distribution Agreement with MLFD, pursuant to which MLFD acts as the exclusive distributor and representative of the Company in the offer and sale of shares of the Class B Common Stock of each Fund (collectively, the "Class B Shares") of the Company; and WHEREAS, the Company desires to adopt this Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Company will pay a distribution fee to, or at the direction of, MLFD in connection with the distribution of Class B Shares of each Fund; and WHEREAS, Class B Shares of the Company's Funds are sold to the separate accounts ("Separate Accounts") of various insurance companies (the "Insurance Companies") that issue variable annuity or variable life contracts; and WHEREAS, the Directors of the Company have determined that there is a reasonable likelihood that adoption of this Distribution Plan will benefit the Company and its Class B shareholders. NOW, THEREFORE, the Company hereby adopts, and the Distributor hereby agrees to the terms of, this Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the Investment Company Act on the following terms and conditions: 1. The Company hereby authorizes MLFD to arrange for the Company to enter into Sub-Agreements substantially in the form attached hereto with Insurance Companies (the "Participating Insurance Companies"). Such Sub- Agreement shall provide that the Participating Insurance Companies shall provide MLFD with such information as is reasonably necessary to permit MLFD to comply with the reporting requirements set forth in Paragraph 3 hereof. 2. Upon effectiveness of the this Plan with respect to the Class B Shares of a Fund, the Company, on behalf of such Fund, shall pay to each of the Participating Insurance Companies a distribution fee under the Plan at the end of each [month] equal to 0.15% of the average daily net asset value of the Class B Shares of such Fund held by such Participating Insurance Company. Such distribution fee shall be paid to the Participating Insurance Companies as compensation for providing distribution related services to the Company's shareholders, including, but not limited to the following: (a) printing and mailing of Company prospectuses, statements of additional information, any supplements thereto and shareholder reports for existing and prospective Separate Account owners; (b) services relating to the development, preparation, printing and mailing of Company advertisements, sales literature and other promotional materials describing and/or relating to the Company and including materials intended for use within the Participating Insurance Company, or for broker- dealer only use or retail use; (c) holding seminars and sales meetings designed to promote the distribution of the Class B Shares of the Funds; (d) obtaining information and providing explanations to Separate Account owners regarding the investment objectives and policies and other information about the Company and its Funds, including the performance of the Funds; (e) training sales personnel regarding the Company and the Funds; (f) compensating sales personnel in connection with the allocation of cash values and premiums of the Separate Accounts to the Company; (g) providing personal services and/or maintenance of the Separate Accounts with respect to Class B Shares of the Funds attributable to such accounts; and 2 (h) financing any other activity that the Company's Board of Directors determines is primarily intended to result in the sale of the Class B Shares. Only distribution expenditures properly attributable to the sale of Class B Shares of a Fund will be used to justify any fee paid by the Company with respect to that Fund pursuant to this Plan, and, to the extent that such expenditures relate to more than one Fund, the expenditures will be allocated between or among the affected Funds in a manner deemed appropriate by the Board of Directors of the Company. 3. MLFD shall provide the Company for review by the Board of Directors, and the Directors shall review, at least quarterly, a written report complying with the requirements of Rule 12b-1 regarding the disbursement of the distribution fee during such period. 4. This Plan shall not take effect until it has been approved, together with the provisions of any related agreements, by votes of a majority of both (a) the Directors of the Company and (b) those Directors of the Company who are not "interested persons" of the Company, as defined in the Investment Company Act, and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the purpose of voting on this Plan and such related agreements. 5. This Plan shall continue in effect for so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Paragraph 4. 6. This Plan may be terminated with respect to a Fund at any time by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the outstanding Class B voting securities of that Fund. 7. This Plan may not be amended to increase materially the rate of distribution payments provided for in Paragraph 2 hereof unless such amendment is approved in the manner provided for initial approval in Paragraph 4 hereof and by a vote of at least a majority, as defined in the Investment Company Act, of the outstanding Class B voting securities of each Fund affected by the amendment, and no material amendment to the Plan shall be made unless approved in the manner provided for approval and annual renewal of Paragraph 4 hereof. 8. While this Plan is in effect, the selection and nomination of Directors who are not interested persons, as defined in the Investment Company Act, of the Company shall be committed to the discretion of the Directors who are not interested persons [and a majority of the Directors shall be Rule 12b-1 Directors.] 3 9. The Company shall preserve copies of this Plan and any related agreements and all reports made pursuant to Paragraph 3 hereof, for a period of not less than six years from the date of this Plan, or the agreements or such report, as the case may be, the first two years in an easily accessible place. IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan as of the date first above written. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By:______________________________________ MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By:_____________________________________ 4 -----END PRIVACY-ENHANCED MESSAGE-----