<PAGE> 1
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MERRILL LYNCH VARIABLE
-------------------------------------------------------------------------
SERIES FUNDS, INC.
-------------------------------------------------------------------------
INVESTMENT PORTFOLIOS
AVAILABLE WITH THE MERRILL
LYNCH FUNDS RETIREMENT
PLUS VARIABLE ANNUITY:
- -American Balanced Fund
- -Basic Value Focus Fund
- -Developing Capital Markets Focus Fund
- -Domestic Money Market Fund
- -Equity Growth Fund
- -Global Bond Focus Fund
- -Global Strategy Focus Fund
- -Global Utility Focus Fund
- -Government Bond Fund
- -High Current Income Fund
- -Index 500 Fund
- -International Equity Focus Fund
- -Natural Resources Focus Fund
- -Prime Bond Fund
- -Quality Equity Fund
- -Reserve Assets Fund
INVESTMENT PORTFOLIOS
AVAILABLE WITH THE PORTFOLIO
PLUS VARIABLE ANNUITY:
- -American Balanced Fund
- -Basic Value Focus Fund
- -Equity Growth Fund
- -Global Strategy Focus Fund
- -High Current Income Fund
- -Index 500 Fund
- -International Equity Focus Fund
- -Natural Resources Focus Fund
- -Prime Bond Fund
- -Quality Equity Fund
- -Reserve Assets Fund
INVESTMENT PORTFOLIOS
AVAILABLE WITH THE MERRILL
LYNCH FUNDS INVESTOR LIFE,
INVESTOR LIFE PLUS,
ESTATE INVESTOR I & II, PRIME PLAN V,
VI, 7 AND PRIME PLAN INVESTOR
VARIABLE LIFE INSURANCE
POLICIES:
- -Basic Value Focus Fund
- -Developing Capital Markets Focus Fund
- -Equity Growth Fund
- -Global Bond Focus Fund
- -Global Utility Focus Fund
- -Index 500 Fund
- -International Equity Focus Fund
INVESTMENT PORTFOLIOS AVAILABLE
WITH PRIME PLAN I, II, III, IV,
DIRECTED LIFE AND DIRECTED LIFE 2
VARIABLE LIFE INSURANCE POLICIES:
- -Basic Value Focus Fund
- -Developing Capital Markets Focus Fund
- -Equity Growth Fund
- -Global Utility Focus Fund
- -International Equity Focus Fund
Semi-Annual Report
June 30, 1997
<PAGE> 2
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
JUNE 30, 1997
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
RETIREMENT PLUS VARIABLE ANNUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR FIVE YEARS TEN YEARS SINCE
ENDED ENDED ENDED INCEPTION
6/30/97 6/30/97 6/30/97 TO 6/30/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AMERICAN BALANCED FUND +16.39% + 8.65% -- + 8.85%+
- ---------------------------------------------------------------------------------------------------------------------
BASIC VALUE FOCUS FUND +12.77 -- -- +15.34++
- ---------------------------------------------------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND + 7.13 -- -- + 3.67+++
- ---------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH FUND + 0.57 +14.46 + 5.02% --
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL BOND FOCUS FUND*** - 5.63 -- -- + 3.15++
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL STRATEGY FOCUS FUND** +15.40 + 9.30 -- + 9.23++++
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL UTILITY FOCUS FUND + 9.00 -- -- + 8.67++
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GOVERNMENT BOND FUND**** - 1.24 -- -- + 4.08+++
- ---------------------------------------------------------------------------------------------------------------------
HIGH CURRENT INCOME FUND + 5.11 + 8.68 + 9.82 --
- ---------------------------------------------------------------------------------------------------------------------
INDEX 500 FUND -- -- -- +27.62##
- ---------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND + 4.83 -- -- + 6.95++
- ---------------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES FOCUS FUND + 0.79 + 6.65 -- + 3.97+
- ---------------------------------------------------------------------------------------------------------------------
PRIME BOND FUND - 0.64 + 5.05 + 6.65 --
- ---------------------------------------------------------------------------------------------------------------------
QUALITY EQUITY FUND +19.63 +13.81 +10.50 --
- ---------------------------------------------------------------------------------------------------------------------
* Returns are calculated as if the contract were surrendered at the end of the periods shown and assume the Separate Account
had been in existence and a contract had been in force during the periods shown. They reflect Fund operating expenses,
Separate Account charges deducted daily at an annual rate of 1.25% mortality and expense risk charge, and a 0.10%
administrative charge. In addition, a contingent deferred sales charge, incrementally decreasing from 7% in the first year a
premium is invested in the contract to 0% the eighth year and later that the premium remains in the contract, deducted on
the last day of the periods shown, and an annual contract maintenance charge of $40 are reflected. All charges and fees are
described in the product prospectuses. See those prospectuses for more complete information.
** Flexible Strategy Fund merged into Global Strategy Focus Fund on December 9, 1996.
*** International Bond Fund merged into World Income Focus Fund on December 9, 1996 and was renamed Global Bond Focus Fund.
**** Intermediate Government Bond Fund's name changed as of December 9, 1996 to Government Bond Fund.
## The Fund commenced operations on 12/13/96. Average Annual Total Returns for periods of six months or less are calculated on
a cumulative basis, rather than an annual basis, as permitted by regulation.
+ The Fund commenced operations on 6/01/88.
++ The Fund commenced operations on 7/01/93.
+++ The Fund commenced operations on 5/02/94.
++++ The Fund commenced operations on 2/28/92.
</TABLE>
Investment results and principal value will fluctuate so that an investment may
be worth more or less than its original cost. Past performance illustrated
should not be considered a representation of future performance.
1
<PAGE> 3
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
JUNE 30, 1997
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
PORTFOLIO PLUS VARIABLE ANNUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR FIVE YEARS TEN YEARS SINCE
ENDED ENDED ENDED INCEPTION
6/30/97 6/30/97 6/30/97 TO 6/30/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AMERICAN BALANCED FUND + 9.29% + 8.90% -- + 9.25%+
- ---------------------------------------------------------------------------------------------------------------------
BASIC VALUE FOCUS FUND +13.85 -- -- +14.96++
- ---------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH FUND + 2.95 +14.42 + 5.13% --
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL STRATEGY FOCUS FUND +16.77 + 8.93 -- + 8.76+++
- ---------------------------------------------------------------------------------------------------------------------
HIGH CURRENT INCOME FUND + 7.68 + 8.59 + 9.93 --
- ---------------------------------------------------------------------------------------------------------------------
INDEX 500 FUND -- -- -- +33.02++++
- ---------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND + 5.80 -- -- + 6.51++
- ---------------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES FOCUS FUND + 3.18 + 6.55 -- + 4.08+
- ---------------------------------------------------------------------------------------------------------------------
PRIME BOND FUND + 1.65 + 4.92 + 6.76 --
- ---------------------------------------------------------------------------------------------------------------------
QUALITY EQUITY FUND +22.20 +13.76 +10.62 --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Returns are calculated as if the contract were surrendered at the end of
the periods shown. They reflect Fund operating expenses, Separate Account
charges deducted daily at an annual rate of 1.25% mortality and expense
risk charge, and a 0.05% distribution expense charge. (Family Life
Insurance Company contracts are assessed a 1.30% mortality and expense risk
charge and no distribution expense charge.) In addition, a contingent
deferred sales charge of 5% for the first seven years the premium remains
in the contract, deducted on the last day of the period shown, and an
annual contract administration charge of $30 are reflected. All charges and
fees are described in the product prospectuses. See those prospectuses for
more complete information.
* Charges reflected are for non-qualified contracts. Qualified contracts have
a lower expense risk charge. Average annual total returns for those
contract owners would, therefore, be higher than the returns shown above.
+ The Fund commenced operations on 6/01/88.
++ The Fund commenced operations on 7/01/93.
+++ The Fund commenced operations on 2/28/92.
++++ The Fund commenced operations on 12/13/96.
Investment results and principal value will fluctuate so that an investment may
be worth more or less than its original cost. Past performance illustrated
should not be considered a representation of future performance.
2
<PAGE> 4
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
JUNE 30, 1997
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT AVERAGE ANNUALIZED RETURNS*
- --------------------------------------------------------------------------------
VARIABLE LIFE INSURANCE POLICIES (EXCEPT ESTATE INVESTOR I & II)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR FIVE YEARS TEN YEARS SINCE
ENDED ENDED ENDED INCEPTION
6/30/97 6/30/97 6/30/97 TO 6/30/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC VALUE FOCUS FUND +12.65% -- -- +14.97%+
- ---------------------------------------------------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND + 6.09 -- -- + 2.78++
- ---------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH FUND - 0.07 +14.20% +4.59% --
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL BOND FOCUS FUND++++ - 7.63 -- -- + 2.53+
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL UTILITY FOCUS FUND + 7.53 -- -- + 8.12+
- ---------------------------------------------------------------------------------------------------------------------
INDEX 500 FUND -- -- -- +24.75+++
- ---------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND + 3.53 -- -- + 6.40+
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Returns are calculated as if the contract were surrendered at the end of
the periods shown and assume the Separate Account had been in existence and
a contract in force during the periods shown. They reflect Fund operating
expenses, a Separate Account mortality and expense risk charge deducted
daily at an annual rate at the beginning of the year of 0.90%, and a
deferred contract load of 9%. They do not reflect quarterly cost of
insurance. Returns would be lower if they reflected the deduction for cost
of insurance, which can vary by age, sex, and underwriting class of the
insured, and by each contract's net amount at risk. Some contract owners
have lower mortality and expense risk charges and/or lower deferred
contract loads than those reflected above. Returns for those contract
owners would, therefore, be higher than the returns shown above. Some
contract owners pay administrative fees that could have the effect of
reducing the returns shown above. All charges and fees are described in the
product prospectuses. Certain Funds are not available to all variable life
insurance products. Not all Funds were made available to all products on
the same date. See those prospectuses for more complete information.
+ Fund commenced operations on 7/01/93.
++ Fund commenced operations on 5/02/94.
+++ Fund commenced operations on 12/13/96.
++++ International Bond Fund merged into World Income Focus Fund on December 9,
1996 and was renamed Global Bond Focus Fund.
Investment results and principal value will fluctuate so that an investment may
be worth more or less than its original cost. Past performance illustrated
should not be considered a representation of future performance.
3
<PAGE> 5
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
JUNE 30, 1997
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT AVERAGE ANNUALIZED RETURNS*
- --------------------------------------------------------------------------------
ESTATE INVESTOR I & II VARIABLE LIFE INSURANCE POLICIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR FIVE YEARS TEN YEARS SINCE
ENDED ENDED ENDED INCEPTION
6/30/97 6/30/97 6/30/97 TO 6/30/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC VALUE FOCUS FUND +21.65% -- -- +16.62%+
- ---------------------------------------------------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND +15.09 -- -- + 5.53++
- ---------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH FUND + 8.93 +15.43% +5.61% --
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL BOND FOCUS FUND++++ + 1.37 -- -- + 4.62+
- ---------------------------------------------------------------------------------------------------------------------
GLOBAL UTILITY FOCUS FUND +16.53 -- -- + 10.04+
- ---------------------------------------------------------------------------------------------------------------------
INDEX 500 FUND -- -- -- + 44.19+++
- ---------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND +12.53 -- -- + 8.35+
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Returns assume the Separate Account had been in existence and a contract
had been in force during the periods shown. They reflect Fund operating
expenses, a Separate Account mortality and expense risk charge deducted
daily at an annual rate at the beginning of the year of 0.90%. Returns do
not reflect contract loading or quarterly cost of insurance, which can vary
by age, sex and underwriting class of the insured and the contract's net
amount of risk. Returns would be lower if these two charges were reflected.
Refer to the product prospectus which contains a more complete description
of all charges and fees.
When contract loading is reflected, the returns for One Year, Five Years,
Ten Years and/or Since Inception, respectively, would be: Basic Value Focus
Fund, -39.18%, N/A, N/A, -1.94%; Developing Capital Markets Focus Fund,
-42.46%, N/A, N/A, -15.23%; Equity Growth Fund, -45.53%, 0.49%, 4.71%;
Global Bond Focus Fund, -49.32%, N/A, N/A, -12.04%; Global Utility Focus
Fund, -41.74%, N/A, N/A, -7.48%; Index 500 Fund, N/A, N/A, N/A, -60.87%;
International Equity Focus Fund, -43.73%, N/A, N/A, -8.90%.
+ Fund commenced operations on 7/01/93.
++ Fund commenced operations on 5/02/94.
+++ Fund commenced operations on 12/13/96.
++++ International Bond Fund merged into World Income Focus Fund on December 9,
1996 and was renamed Global Bond Focus Fund.
Investment results and principal value will fluctuate so that an investment may
be worth more or less than its original cost. Past performance illustrated
should not be considered a representation of future performance.
4
<PAGE> 6
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, American Balanced Fund's total
investment return was +7.72%, based on a change in per share net asset value
from $16.01 to $15.26, and assuming reinvestment of $0.603 per share income
dividends and $1.229 per share capital gains distributions.
For the one-year and five-year periods ended June 30, 1997, the Fund's average
annual total returns were +15.34% and +10.67%, respectively. For the period
since inception (June 1, 1988) through June 30, 1997, the Fund's average annual
total return was +10.45%. (Total returns do not include the effect of insurance-
related fees and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the quarter's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although real gross domestic product growth for the first quarter
of the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
will remain positive.
PORTFOLIO MATTERS
As of June 30, 1997, the asset allocation of American Balanced Fund was: US
bonds, 45% of net assets; US stocks, 53%; and cash reserves, 2%.
During the six-month period ended June 30, 1997, we raised the equity
weighting from 42% of net assets to 53% after the maximum allowable allocation
to equities was raised from 50% to 65%. However, we became increasingly cautious
in our view of the US stock market, and held the equity weighting below the new
ceiling. Our stance toward the US equity market reflected our concern that a
slower US economy in upcoming quarters could lead to earnings disappointments.
The largest concentration of assets remains in the financial services,
technology, energy and healthcare sectors. New positions in these sectors
included: Intel Corporation and Microsoft Corp. in technology; Nationwide
Financial Services, Inc. and MGIC Investment Corporation in financial services;
Smith International, Inc. in energy; and Tenet Healthcare Corporation in
healthcare.
In the US bond sector, we increased the Fund's average duration from 4 years
in March to 7 years as of June 30, 1997. The extension of the duration resulted
from increasing evidence of a slowing US economy. This trend reduced the
potential for an acceleration of inflation, thereby improving the reward/risk
relationship for US fixed-income securities.
IN CONCLUSION
We appreciate your investment in American Balanced Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Thomas R. Robinson
Thomas R. Robinson
Vice President and Portfolio Manager
August 13, 1997
5
<PAGE> 7
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 28,800 AlliedSignal Inc. .......... $ 2,132,673 $ 2,419,200 1.2%
27,460 United Technologies
Corp. .................... 1,235,582 2,279,180 1.1
------------ ------------ ------
3,368,255 4,698,380 2.3
- ---------------------------------------------------------------------------------------------------------------------
AIRLINES 16,000 +US Airways Group Inc. ..... 563,026 560,000 0.3
- ---------------------------------------------------------------------------------------------------------------------
AUTO--RELATED 59,500 +Hertz Corp. (Class A)...... 1,916,588 2,142,000 1.1
- ---------------------------------------------------------------------------------------------------------------------
BANKING 44,887 Banc One Corporation........ 1,972,514 2,174,214 1.1
52,300 Bank of New York, Co.,
Inc. ..................... 1,353,566 2,275,050 1.1
32,100 BankAmerica Corporation..... 1,714,033 2,072,456 1.0
9,900 Chase Manhattan
Corporation............... 1,017,386 960,919 0.5
------------ ------------ ------
6,057,499 7,482,639 3.7
- ---------------------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 73,200 +Tele-Communications, Inc.
(Class A)................. 1,075,413 1,084,275 0.5
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS 34,600 Du Pont (E.I.) de Nemours &
Co........................ 1,920,327 2,175,475 1.1
- ---------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 70,600 +WorldCom, Inc. ............ 1,895,225 2,254,787 1.1
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER 36,100 +Cabletron Systems, Inc. ... 1,234,556 1,022,081 0.5
23,100 +Compaq Computer
Corporation............... 1,785,854 2,292,675 1.2
6,600 International Business
Machines Corp. ........... 383,499 595,238 0.3
------------ ------------ ------
3,403,909 3,909,994 2.0
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 44,400 +BMC Software, Inc. ........ 1,740,296 2,458,650 1.2
43,100 Computer Associates
International, Inc. ...... 1,803,946 2,400,131 1.2
5,200 +Microsoft Corp. ........... 565,862 657,475 0.3
28,550 +Oracle Corp. .............. 980,550 1,436,422 0.7
------------ ------------ ------
5,090,654 6,952,678 3.4
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER GOODS 29,700 Philip Morris Companies,
Inc. ..................... 1,127,700 1,317,938 0.7
- ---------------------------------------------------------------------------------------------------------------------
CONTAINERS 69,100 +Owens-Illinois, Inc. ...... 2,060,288 2,142,100 1.1
- ---------------------------------------------------------------------------------------------------------------------
ELECTRIC & GAS 91,400 Edison International........ 1,756,605 2,273,575 1.1
- ---------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 56,800 Sunbeam Corporation, Inc.... 1,972,310 2,144,200 1.1
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONICS 15,400 Intel Corporation........... 2,139,801 2,180,063 1.1
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 28,100 American Express Company.... 1,514,930 2,093,450 1.1
36,300 First Data Corp. ........... 1,325,037 1,594,931 0.8
49,000 MGIC Investment
Corporation............... 1,862,768 2,348,938 1.2
------------ ------------ ------
4,702,735 6,037,319 3.1
- ---------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 34,600 Black & Decker
Corporation............... 1,181,145 1,286,688 0.7
- ---------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 34,700 +Oxford Health Plans,
Inc. ..................... 2,165,124 2,489,725 1.3
79,200 +Tenet Healthcare
Corporation............... 2,084,693 2,341,350 1.2
------------ ------------ ------
4,249,817 4,831,075 2.5
- ---------------------------------------------------------------------------------------------------------------------
INSURANCE 23,100 Aetna Inc. ................. 1,785,379 2,364,863 1.2
32,200 Allstate Corp. ............. 1,414,212 2,350,600 1.2
60,300 +Hartford Life, Inc. (Class
A)........................ 2,022,762 2,261,250 1.1
62,000 Nationwide Financial
Services, Inc. (Class
A)........................ 1,679,097 1,646,875 0.8
35,200 Travelers Group, Inc. ...... 1,895,669 2,219,800 1.1
6,300 Travelers Property Casualty
Corp. (Class A)........... 243,815 251,212 0.1
50,000 UNUM Corporation............ 1,606,530 2,100,000 1.1
------------ ------------ ------
10,647,464 13,194,600 6.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 8
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LEISURE & TOURISM 72,300 Brunswick Corporation....... $ 1,851,165 $ 2,259,375 1.1%
11,105 TCI Pacific Communications
(Convertible Preferred)... 1,054,744 1,138,262 0.6
------------ ------------ ----------
2,905,909 3,397,637 1.7
- ---------------------------------------------------------------------------------------------------------------------
MACHINERY 34,000 +American Standard
Companies, Inc. .......... 1,109,533 1,521,500 0.8
37,400 Ingersoll-Rand Company...... 1,735,448 2,309,450 1.2
------------ ------------ ----------
2,844,981 3,830,950 2.0
- ---------------------------------------------------------------------------------------------------------------------
NATURAL GAS 48,000 Enron Corp. ................ 1,878,729 1,959,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
NATURAL GAS PIPELINES 19,800 IMC Global, Inc. ........... 715,263 693,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
OIL SERVICES 59,700 Dresser Industries, Inc. ... 1,267,850 2,223,825 1.1
33,400 +Smith International,
Inc. ..................... 1,592,276 2,029,050 1.0
------------ ------------ ----------
2,860,126 4,252,875 2.1
- ---------------------------------------------------------------------------------------------------------------------
PAPER 36,600 Kimberly-Clark
Corporation............... 1,406,069 1,820,850 0.9
- ---------------------------------------------------------------------------------------------------------------------
PETROLEUM 15,800 Pennzoil Co. ............... 691,909 1,212,650 0.6
34,100 Unocal Corp. ............... 1,164,083 1,323,506 0.7
------------ ------------ ----------
1,855,992 2,536,156 1.3
- ---------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 21,500 Abbott Laboratories......... 683,915 1,435,125 0.7
32,500 American Home Products
Corporation............... 1,977,661 2,486,250 1.3
21,900 Merck & Co., Inc. .......... 803,514 2,266,650 1.1
------------ ------------ ----------
3,465,090 6,188,025 3.1
- ---------------------------------------------------------------------------------------------------------------------
RAILROADS 18,600 Burlington Northern Santa Fe
Inc. ..................... 1,559,995 1,671,675 0.8
- ---------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS 55,200 Prentiss Properties Trust... 1,242,693 1,414,500 0.7
- ---------------------------------------------------------------------------------------------------------------------
RETAIL 42,900 Sears, Roebuck & Co. ....... 1,856,333 2,305,875 1.2
- ---------------------------------------------------------------------------------------------------------------------
RETAIL--DRUG STORES 43,760 Rite Aid Corporation........ 1,513,691 2,182,530 1.1
- ---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 35,200 +Airtouch Communications,
Inc. ..................... 990,748 963,600 0.5
- ---------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 59,400 Carnival Corp. (Class A).... 1,760,392 2,450,250 1.2
30,000 Starwood Lodging Trust...... 1,350,000 1,280,625 0.7
------------ ------------ ----------
3,110,392 3,730,875 1.9
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 37,200 El Paso Natural Gas
Company................... 1,927,997 2,046,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 85,262,769 105,661,334 53.2
- ---------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT FIXED-INCOME INVESTMENTS
---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES $ 2,000,000 General Electric Capital
Corp., 8.75% due
5/21/2007................. 2,249,100 2,252,080 1.1
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 9
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US GOVERNMENT & AGENCY $ 3,046,679 Federal Home Loan Mortgage
OBLIGATIONS Corp., 7.50% due
6/01/2007++............... $ 3,104,757 $ 3,102,251 1.6%
Federal National Mortgage
Association:++
4,015,892 6% due 11/01/2000........... 3,975,733 3,960,834 2.0
8,873,492 6% due 6/01/2001............ 8,783,370 8,711,639 4.4
5,156,218 6% due 2/01/2004............ 5,094,988 5,089,032 2.6
23,500,000 US Treasury Bonds, 6.625%
due 2/15/2027............. 22,052,891 22,993,340 11.6
US Treasury Notes:
18,000,000 6.50% due 5/31/2002......... 18,120,938 18,073,080 9.1
25,000,000 6.625% due 5/15/2007........ 25,154,687 25,207,000 12.7
------------ ------------ ------
86,287,364 87,137,176 44.0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS 88,536,464 89,389,256 45.1
- ---------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* 2,148,000 General Motors Acceptance
Corp., 6.25% due
7/01/1997................. 2,147,627 2,147,627 1.1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 2,147,627 2,147,627 1.1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $175,946,860 197,198,217 99.4
============
OTHER ASSETS LESS
LIABILITIES............... 1,285,630 0.6
------------ ------
NET ASSETS.................. $198,483,847 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
++ Subject to principal paydowns.
See Notes to Financial Statements.
8
<PAGE> 10
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$175,946,860) (Note 1a).................... $197,198,217
Cash............................................................................... 952
Receivables:
Securities sold.................................................................. $1,516,667
Interest......................................................................... 1,001,791
Dividends........................................................................ 81,063
Capital shares sold.............................................................. 972 2,600,493
---------
Prepaid expenses and other assets.................................................. 3,441
------------
Total assets....................................................................... 199,803,103
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased............................................................. 1,040,521
Capital shares redeemed.......................................................... 167,298
Investment adviser (Note 2)...................................................... 93,050 1,300,869
---------
Accrued expenses and other liabilities............................................. 18,387
------------
Total liabilities.................................................................. 1,319,256
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS......................................................................... $198,483,847
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized....................... $ 1,300,841
Paid-in capital in excess of par................................................... 170,522,202
Undistributed investment income--net............................................... 3,430,336
Undistributed realized capital gains on investments--net........................... 1,979,111
Unrealized appreciation on investments--net........................................ 21,251,357
------------
NET ASSETS--Equivalent to $15.26 per share based on 13,008,409 shares
outstanding...................................................................... $198,483,847
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE> 11
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Interest and discount earned.................................................................. $ 3,391,912
Dividends..................................................................................... 641,705
-----------
Total income.................................................................................. 4,033,617
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............................................................. $549,874
Accounting services (Note 2).................................................................. 21,507
Custodian fees................................................................................ 13,716
Professional fees............................................................................. 13,122
Transfer agent fees (Note 2).................................................................. 2,313
Directors' fees and expenses.................................................................. 1,674
Pricing services.............................................................................. 261
Other......................................................................................... 805
--------
Total expenses................................................................................ 603,272
-----------
Investment income--net........................................................................ 3,430,345
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1d & 3):
Realized gain on investments--net............................................................. 2,039,919
Change in unrealized appreciation on investments--net......................................... 9,276,304
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................................... $14,746,568
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE> 12
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net.......................................................... $ 3,430,345 $ 7,339,770
Realized gain on investments--net............................................... 2,039,919 21,869,723
Change in unrealized appreciation/depreciation on investments--net.............. 9,276,304 (9,430,963)
------------ ------------
Net increase in net assets resulting from operations............................ 14,746,568 19,778,530
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net.......................................................... (3,604,297) (7,882,096)
Realized gain on investments--net............................................... (20,656,057) (328,715)
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders............................................... (24,260,354) (8,210,811)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share transactions.............. (4,049,381) (12,432,919)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets.................................................... (13,563,167) (865,200)
Beginning of period............................................................. 212,047,014 212,912,214
------------ ------------
End of period*.................................................................. $198,483,847 $212,047,014
============ ============
- ---------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.......................................... $ 3,430,336 $ 3,604,288
============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE> 13
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL FOR THE SIX
STATEMENTS. MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 16.01 $ 15.17 $ 13.08 $ 14.08 $ 12.85
-------- -------- -------- -------- -------
Investment income--net................................ .26 .53 .59 .48 .32
Realized and unrealized gain (loss) on
investments--net.................................... .82 .89 2.06 (1.06) 1.37
-------- -------- -------- -------- -------
Total from investment operations...................... 1.08 1.42 2.65 (.58) 1.69
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net.............................. (.27) (.56) (.56) (.37) (.34)
Realized gain on investments--net................... (1.56) (.02) -- -- (.12)
In excess of realized gain on investments--net...... -- -- -- (.05) --
-------- -------- -------- -------- -------
Total dividends and distributions..................... (1.83) (.58) (.56) (.42) (.46)
-------- -------- -------- -------- -------
Net asset value, end of period........................ $ 15.26 $ 16.01 $ 15.17 $ 13.08 $ 14.08
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................... 7.72%+ 9.73% 20.81% (4.19%) 13.49%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................. .60%* .60% .61% .63% .70%
======== ======== ======== ======== =======
Investment income--net................................ 3.43%* 3.39% 4.22% 3.95% 3.20%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $198,484 $212,047 $212,912 $158,951 $115,420
======== ======== ======== ======== =======
Portfolio turnover.................................... 97.57% 236.50% 38.40% 35.36% 12.55%
======== ======== ======== ======== =======
Average commission rate paid++........................ $ .0605 $ .0610 -- -- --
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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.
See Notes to Financial Statements.
12
<PAGE> 14
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. American Balanced Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued
at amortized cost, which approximates market value. 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--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity and debt markets. Losses may arise due to
changes in the value of the contract or if the counterparty does not perform
under the contract.
- - Options--The Fund may write covered call options. When the 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 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
gain or loss to the extent the cost of the closing transaction exceeds the
premium received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund'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.
(d) 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. 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.
(e) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.55% of the average daily value of the
Fund's net assets.
13
<PAGE> 15
- --------------------------------------------------------------------------------
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $138 in commissions on the
execution of portfolio security transactions.
For the six months ended June 30, 1997, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $150 for providing security price
quotations to compute the Fund's net asset value.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $167,576,337 and $192,077,059, respectively.
Net realized and unrealized gains as of June 30, 1997 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Realized Unrealized
Gains Gains
- ---------------------------------------------------------
<S> <C> <C>
Long-term investments................... $2,039,904 $21,251,357
Short-term investments.................. 15 --
---------- -----------
Total................................... $2,039,919 $21,251,357
========== ===========
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $21,251,357, of which $21,817,281 related to appreciated securities
and $565,924 related to depreciated securities. At June 30, 1997, the aggregate
cost of investments for Federal income tax purposes was $175,946,860.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$4,049,381 and $12,432,919 for the six months ended June 30, 1997 and the year
ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- ---------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 32,449 $ 473,227
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,723,036 24,260,354
---------- ------------
Total issued......................... 1,755,485 24,733,581
Shares redeemed...................... (1,989,938) (28,782,962)
---------- ------------
Net decrease......................... (234,453) $ (4,049,381)
========== ============
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- ---------------------------------------------------------
<S> <C> <C>
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)
========== ============
- ---------------------------------------------------------
</TABLE>
14
<PAGE> 16
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Basic Value Focus Fund's total
investment return was +12.93%, based on a change in per share net asset value
from $14.74 to $14.83, and assuming reinvestment of $0.667 per share income
dividends and $0.943 per share capital gains.
For the one-year period ended June 30, 1997, the Fund's annual total return
was +22.76%. For the period since inception (July 1, 1993) through June 30,
1997, the Fund's average annual total return was +17.68%. (Total returns do not
include the effect of insurance-related fees and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the period's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although gross domestic product growth for the first quarter of
the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors are uncertain regarding the viability of economic and monetary union,
while scandals continue to depress investor confidence in Japan. At present, it
appears that the US economy is perceived most favorably by investors for its
ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
should remain positive.
PORTFOLIO MATTERS
Following the first 10% market correction in seven years, the US stock market
staged an incredible recovery starting in April. This rally was fueled by
expectations that a Federal budget deal in Washington would eventually lead to
lower interest rates, strong first quarter earnings reports, and indications of
a slowing economy with no signs of inflation. The economic environment and
interest rate outlook continue to be cloudy, and as a result, we expect
continued stock price volatility.
Although the Fund underperformed the unmanaged Standard & Poor's 500 Index
(S&P 500) for the six months ended June 30, 1997, it had little to do with the
earnings performance of our companies, but rather investor preference for
large-capitalization equities. During the six-month period ended June 30, 1997,
only six of our holdings reported lower-than-expected earnings for the first
quarter. In some cases, despite better-than-expected earnings for companies like
Pharmaceutical Product Development, Inc. and Tandem Computers Inc., the stocks
declined. We believe the disparity in performance had to do with the "indexing"
phenomenon in which the best-performing stocks continued to be the biggest
companies within the S&P 500. For example, the top 50 stocks in the S&P 500
contributed 70% of the overall gain in the Index. Although this has been a
frustrating period for value-oriented investors, we remain committed to finding
securities which meet our valuation parameters.
Investment activity was extensive in the six-month period ended June 30, 1997
in response to increased market volatility. On the buy side, we added 14 new
companies to the portfolio. These included AT&T Corp., Compuserve Corporation,
Digital Equipment Corp., Dow Jones & Company, Inc., Dresser Industries, Inc.,
Eastman Chemical Company, Great Lakes Chemical Corporation, Harrah's
Entertainment, Inc., Integrated Device Technology, Inc., Novell, Inc., Pharmacia
& Upjohn, Inc., TIG Holdings, Inc., Toys 'R' Us, Inc. and Wells Fargo & Company.
Taking a closer look at a few of these new investments, we purchased AT&T
Corp. following the company's announcement that 1997 results would be far lower
than analysts' expectations as a result of higher capital spending
15
<PAGE> 17
- --------------------------------------------------------------------------------
amidst increased competition. We think the worst is over for the company, and
with the stock trading at a 4% yield and 12.7 times estimated 1997 earnings, we
believe this stock discounts much of the bad news.
Compuserve Corporation, a leading provider of on-line/internet, business
network, and intranet access services, faced a difficult year as its main
competitor, America Online, launched a fixed monthly price for its members. We
expect several announcements from Compuserve over the next several months,
including a new chief executive officer and either a possible sale of the
company or a spinout of the company from its parent, H&R Block. Compuserve is
currently trading at 1.4 times book value per share and one times sales per
share, valuation parameters we view as quite attractive.
Dresser Industries, Inc. stock, along with many other oil service companies,
corrected nearly 15% since the beginning of the year. Dresser makes highly
engineered products for the energy and natural resource industries, and despite
the recent decline in its share price, earnings estimates continue to increase.
We purchased Eastman Chemical Company, the largest producer of polyester
resins for beverages and food containers, following the company's stock price
decline resulting from oversupply concerns and pricing pressures throughout
Eastman's highly profitable PET operations. With the stock trading at 13.8 times
trough earnings per share estimated for 1997 and a 3.3% yield, we believed the
shares offered outstanding appreciation potential over the next several years.
Pharmacia & Upjohn, Inc. was formed in November 1995 through the merger of The
Upjohn Company and the Swedish drug company, Pharmacia AB. The stock had come
under pressure in response to negative currency trends and slow sales resulting
from the company's relatively old product portfolio. Looking forward, we expect
a new chief executive officer to be hired, a cost containment program to take
effect, and new products such as Detrustiol, a urinary incontinence medicine, to
help fuel a recovery for the stock.
Toys 'R' Us, Inc. was purchased following a disappointing Christmas season. We
expect 1997 to be a better year for the company as we expect a new video game
product cycle to aid the company's profitability.
Finally, we purchased Wells Fargo & Company following a first-quarter earnings
report which highlighted disappointing loan growth. We expect revenue growth to
accelerate throughout the remainder of the year.
We completed sales in 21 companies during the six months ended June 30, 1997,
with major gains recorded in Advanced Micro Devices, Inc., Allwaste Inc.,
Greater New York Corp., ITT Corp., Micron Technology, Inc., National
Semiconductor Corp., PFF Bancorp, Inc., Reebok International Ltd., Storage
Technology Corp., Student Loan Marketing Association., Texas Instruments, Inc.
and Transitional Hospitals Corp. Evans Withycombe Residential, Inc., GTE Corp.
and Marine Drilling Companies Inc. were sold at modest profits, while Beazer
Homes USA, Inc., Micronics Computers, Inc. and Total Petroleum Ltd. were sold at
modest losses. Hanson PLC and The Energy Group PLC were sold as it became
apparent that the demerger plan, which Hanson announced a year ago, did little
to create shareholder value. Finally, Hechinger Co. proved to be one of our
biggest disappointments as the company continued to suffer from competition from
The Home Depot, Inc.
IN CONCLUSION
We appreciate your investment in Basic Value Focus Fund of Merrill Lynch
Variable Series Fund, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Kevin M. Rendino
Kevin M. Rendino
Vice President and Portfolio Manager
August 13, 1997
16
<PAGE> 18
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOW PRICE TO BOOK VALUE
- ---------------------------------------------------------------------------------------------------------------------
METALS--NON FERROUS 450,000 ASARCO Inc. ................ $ 12,726,022 $ 13,781,250 2.4%
OIL--DOMESTIC 420,500 +American Exploration
Co. ...................... 4,819,426 6,149,813 1.1
INFORMATION PROCESSING 500,000 +Apple Computer, Inc. ...... 10,692,683 7,093,750 1.3
RETAIL 1,554,600 +Charming Shoppes, Inc. .... 6,266,779 8,113,069 1.4
COMPUTER SERVICES 500,000 +Compuserve Corporation..... 5,229,992 5,375,000 0.9
INFORMATION PROCESSING 250,000 +Digital Equipment Corp. ... 7,991,780 8,859,375 1.6
RETAIL 300,000 Dillard's Inc. (Class A).... 9,320,727 10,387,500 1.8
TECHNOLOGY 700,000 +Exabyte Corp. ............. 8,830,638 8,968,750 1.6
SEMICONDUCTORS 720,400 +Integrated Device
Technology, Inc. ......... 8,006,160 7,564,200 1.3
RETAIL 700,000 +Kmart Corporation.......... 7,405,329 8,575,000 1.5
SOFTWARE 1,000,000 +Mentor Graphics
Corporation............... 9,830,976 9,250,000 1.6
AIRLINES 850,000 +Mesa Air Group, Inc. ...... 7,040,323 4,568,750 0.8
SOFTWARE 950,000 +Novell, Inc. .............. 7,228,409 6,560,938 1.2
METALS--NON FERROUS 100,000 Phelps Dodge Corporation.... 5,934,785 8,518,750 1.5
COMPUTER SERVICES 1,050,000 Scitex Corp. Ltd.
(ADR) (a)................. 12,672,323 9,121,875 1.6
BEVERAGE & ENTERTAINMENT 250,000 Seagram Company Ltd.
(The)..................... 8,856,649 10,062,500 1.8
INSURANCE 300,000 TIG Holdings, Inc. ......... 8,582,748 9,375,000 1.6
INFORMATION PROCESSING 800,000 +Tandem Computers Inc. ..... 9,163,093 16,200,000 2.8
RETAIL 250,000 +Toys 'R' Us, Inc. ......... 6,409,889 8,750,000 1.5
TELECOMMUNICATIONS 450,000 +U S West Media Group,
Inc. ..................... 7,815,940 9,112,500 1.6
STEEL 1,057,000 +WHX Corp. ................. 10,359,779 8,059,625 1.4
BANKING 50,000 Wells Fargo & Company....... 12,746,277 13,475,000 2.4
OIL--INTERNATIONAL 450,000 Yacimientos Petroliferos
Fiscales S.A. (ADR) (a)... 8,832,840 13,837,500 2.4
------------ ------------ ------
196,763,567 211,760,145 37.1
- ---------------------------------------------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO
- ---------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 200,000 Black & Decker Corporation
(The)..................... 6,281,320 7,437,500 1.3
TECHNOLOGY 1,250,000 +Computervision Corp. ...... 10,935,027 5,781,250 1.0
AUTOMOTIVE 225,000 Ford Motor Co. ............. 7,212,498 8,493,750 1.5
AUTOMOTIVE 175,000 General Motors Corp. ....... 8,284,788 9,745,312 1.7
CHEMICALS 285,000 Great Lakes Chemical
Corporation............... 12,256,019 14,926,875 2.6
ENTERTAINMENT 400,000 +Harrah's Entertainment,
Inc. ..................... 7,441,910 7,300,000 1.3
BANKING 800,000 Hibernia Corporation (Class
A)........................ 9,447,866 11,150,000 2.0
INFORMATION PROCESSING 160,000 International Business
Machines Corp. ........... 10,402,968 14,430,000 2.5
RETAIL 500,000 +Woolworth Corp. ........... 6,339,630 12,000,000 2.1
------------ ------------ ------
78,602,026 91,264,687 16.0
- ---------------------------------------------------------------------------------------------------------------------
ABOVE-AVERAGE YIELD
- ---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 225,000 AT&T Corp. ................. 8,001,225 7,889,062 1.4
BANKING 125,000 Bankers Trust New York
Corp. .................... 8,547,600 10,875,000 1.9
PHARMACEUTICALS 80,000 Bristol-Myers Squibb Co. ... 3,296,133 6,480,000 1.1
PUBLISHING 250,000 Dow Jones & Company,
Inc. ..................... 9,220,689 10,046,875 1.8
OIL SERVICES 300,000 Dresser Industries, Inc. ... 9,279,090 11,175,000 2.0
CHEMICALS 100,000 Eastman Chemical Company.... 5,568,500 6,350,000 1.1
PHOTOGRAPHY 80,000 Eastman Kodak Co. .......... 5,954,867 6,140,000 1.1
MACHINERY 400,000 ITT Industries Inc. ........ 9,221,079 10,300,000 1.8
FOREST PRODUCTS & PAPER 225,000 International Paper Co. .... 8,818,832 10,926,562 1.9
FOREST PRODUCTS & PAPER 425,000 Louisiana-Pacific Corp. .... 10,193,822 8,978,125 1.6
CHEMICALS 450,000 Millennium Chemicals
Inc. ..................... 8,438,821 10,237,500 1.8
OIL--DOMESTIC 535,300 Occidental Petroleum
Corp. .................... 11,471,641 13,415,956 2.4
PHARMACEUTICALS 400,000 Pharmacia & Upjohn, Inc. ... 13,263,413 13,900,000 2.4
STEEL 350,000 USX-US Steel Group.......... 10,061,180 12,271,875 2.1
------------ ------------ ------
121,336,892 138,985,955 24.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SPECIAL SITUATIONS
- ---------------------------------------------------------------------------------------------------------------------
HEALTH MAINTENANCE 500,000 +Humana, Inc. .............. $ 9,539,413 $ 11,562,500 2.0%
ORGANIZATIONS
MEDICAL SERVICES 475,000 +Pharmaceutical Product
Development, Inc. ........ 8,413,711 10,212,500 1.8
------------ ------------ ------
17,953,124 21,775,000 3.8
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS 414,655,609 463,785,787 81.3
- ---------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
---------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $ 25,469,000 CIT Group Holdings, Inc.,
6.15% due 7/01/1997....... 25,464,649 25,464,649 4.5
15,000,000 CSW Credit, Inc., 5.55% due
7/29/1997................. 14,932,937 14,932,937 2.6
20,000,000 Eureka Securitization, Inc.,
5.54% due 7/30/1997....... 19,907,667 19,907,667 3.5
10,000,000 Falcon Asset Securitization
Corp., 5.55% due
7/15/1997................. 9,976,875 9,976,875 1.8
10,000,000 Lehman Brothers Holdings,
Inc., 5.67% due
7/11/1997................. 9,982,675 9,982,675 1.8
11,000,000 Preferred Receivables
Funding Corp., 5.57% due
7/02/1997................. 10,996,596 10,996,596 1.9
------------ ------------ ------
91,261,399 91,261,399 16.1
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY Federal National Mortgage
OBLIGATIONS* Association:
7,000,000 5.41% due 7/10/1997....... 6,989,481 6,989,481 1.2
7,000,000 5.42% due 7/10/1997....... 6,989,461 6,989,461 1.2
------------ ------------ ------
13,978,942 13,978,942 2.4
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM
SECURITIES................ 105,240,341 105,240,341 18.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $ 519,895,950 569,026,128 99.8
============
OTHER ASSETS LESS
LIABILITIES................. 1,037,579 0.2
------------ ------
NET ASSETS.................. $ 570,063,707 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ 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).
See Notes to Financial Statements.
18
<PAGE> 20
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $519,895,950) (Note 1a).......................... $ 569,026,128
Cash....................................................................................... 269,129
Receivables:
Capital shares sold...................................................................... $ 558,620
Dividends................................................................................ 551,805
Securities sold.......................................................................... 343,139 1,453,564
--------
Deferred organization expenses (Note 1e)................................................... 1,440
Prepaid expenses and other assets.......................................................... 1,794
------------
Total assets............................................................................... 570,752,055
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased..................................................................... 365,456
Investment adviser (Note 2).............................................................. 285,423
Capital shares redeemed.................................................................. 1,689 652,568
--------
Accrued expenses and other liabilities..................................................... 35,780
------------
Total liabilities.......................................................................... 688,348
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................. $ 570,063,707
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized............................... $ 3,843,539
Paid-in capital in excess of par........................................................... 459,384,855
Undistributed investment income--net....................................................... 3,099,824
Undistributed realized capital gains on investments--net................................... 54,605,311
Unrealized appreciation on investments--net................................................ 49,130,178
------------
NET ASSETS--Equivalent to $14.83 per share based on 38,435,387 shares outstanding.......... $ 570,063,707
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE> 21
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Dividends (net of $27,011 foreign withholding tax)........................................ $ 3,083,508
Interest and discount earned.............................................................. 1,679,269
-----------
Total income.............................................................................. 4,762,777
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)......................................................... $ 1,549,611
Accounting services (Note 2).............................................................. 57,013
Custodian fees............................................................................ 24,717
Professional fees......................................................................... 21,839
Directors' fees and expenses.............................................................. 4,552
Transfer agent fees (Note 2).............................................................. 2,256
Registration fees (Note 1e)............................................................... 1,162
Amortization of organization expenses (Note 1e)........................................... 325
Pricing services.......................................................................... 161
Other..................................................................................... 1,290
----------
Expenses.................................................................................. 1,662,926
-----------
Investment income--net.................................................................... 3,099,851
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1d & 3):
Realized gain on investments--net......................................................... 55,840,747
Change in unrealized appreciation on investments--net..................................... 6,226,035
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................................... $ 65,166,633
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 22
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net............................................................... $ 3,099,851 $ 5,533,281
Realized gain on investments--net.................................................... 55,840,747 56,406,548
Change in unrealized appreciation on investments--net................................ 6,226,035 13,550,612
------------ ------------
Net increase in net assets resulting from operations................................. 65,166,633 75,490,441
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net............................................................... (3,224,649) (4,571,085)
Realized gain on investments--net.................................................... (54,136,801) (16,947,347)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders....................................................................... (57,361,450) (21,518,432)
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions................... 37,328,360 164,495,262
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets......................................................... 45,133,543 218,467,271
Beginning of period.................................................................. 524,930,164 306,462,893
------------ ------------
End of period*....................................................................... $570,063,707 $524,930,164
============ ============
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net............................................... $ 3,099,824 $ 3,224,622
============ ============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
21
<PAGE> 23
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE YEAR ENDED FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED DECEMBER 31, JULY 1, 1993+ TO
JUNE 30, ------------------------------------------------ DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 14.74 $ 13.10 $ 11.10 $ 10.95 $ 10.00
-------- -------- -------- -------- -------
Investment income--net....................... .08 .17 .18 .17 .04
Realized and unrealized gain on
investments--net........................... 1.62 2.37 2.49 .08 .91
-------- -------- -------- -------- -------
Total from investment operations............. 1.70 2.54 2.67 .25 .95
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net..................... (.09) (.18) (.19) (.10) --
Realized gain on investments--net.......... (1.52) (.72) (.48) -- --
-------- -------- -------- -------- -------
Total dividends and distributions............ (1.61) (.90) (.67) (.10) --
-------- -------- -------- -------- -------
Net asset value, end of period............... $ 14.83 $ 14.74 $ 13.10 $ 11.10 $ 10.95
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 12.93%++ 20.69% 25.49% 2.36% 9.50%++
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................... .64%* .66% .66% .72% .86%*
======== ======== ======== ======== =======
Investment income--net....................... 1.20%* 1.37% 1.68% 2.08% 1.69%*
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $570,064 $ 524,930 $ 306,463 $ 164,307 $ 47,207
======== ======== ======== ======== =======
Portfolio turnover........................... 52.77% 68.41% 74.10% 60.55% 30.86%
======== ======== ======== ======== =======
Average commission rate paid++++............. $ .0545 $ .0549 -- -- --
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
See Notes to Financial Statements.
22
<PAGE> 24
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Basic Value Focus Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued
at amortized cost, which approximates market value. 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--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity and debt markets. Losses may arise due to
changes in the value of the contract or if the counterparty does not perform
under the contract.
- - Options--The Fund may write covered call options. When the 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 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
gain or loss to the extent the cost of the closing transaction exceeds the
premium received).
Written options are non-income producing investments.
(c) Income taxes--It is the Fund'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.
(d) 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. 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.
(e) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a five-year period.
(f) Dividends and distributions to shareholders--Dividends and distributions
paid by the Fund 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
23
<PAGE> 25
- --------------------------------------------------------------------------------
personnel, facilities, equipment and certain other services necessary to the
operations of the Fund. For such services, the Fund pays a monthly fee at the
annual rate of 0.60% of the average daily value of the Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $4,032 in commissions on the execution of
portfolio security transactions.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $241,224,022 and $272,208,259, respectively.
Net realized and unrealized gains as of June 30, 1997 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Realized Unrealized
Gains Gains
- ---------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $55,840,722 $49,130,178
Short-term investments................. 25 --
----------- -----------
Total.................................. $55,840,747 $49,130,178
=========== ===========
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $49,130,178, of which $69,365,241 related to appreciated securities
and $20,235,063 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments for Federal income tax purposes was $519,895,950.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$37,328,360 and $164,495,262 for the six months ended June 30, 1997 and for the
year ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- ---------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 4,715,198 $ 64,658,716
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 4,361,868 57,361,450
---------- ------------
Total issued......................... 9,077,066 122,020,166
Shares redeemed...................... (6,264,109) (84,691,806)
---------- ------------
Net increase......................... 2,812,957 $ 37,328,360
========== ============
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- ---------------------------------------------------------
<S> <C> <C>
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
========== ============
- ---------------------------------------------------------
</TABLE>
24
<PAGE> 26
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Developing Capital Markets Focus
Fund's total investment return was +17.29%, based on a change in per share net
asset value from $10.05 to $11.57, and assuming reinvestment of $0.186 per share
income dividends.
For the one-year period ended June 30, 1997, the Fund's annual total return
was +16.14%. For the period since inception (May 2, 1994) through June 30, 1997,
the Fund's average annual total return was +6.50%. (Total returns do not include
the effect of insurance-related fees and expenses.)
PORTFOLIO MATTERS
During the six-month period ended June 30, 1997, the total return for Merrill
Lynch Developing Capital Markets Focus Fund was +17.29%. The unmanaged Morgan
Stanley Capital International Emerging Markets Free Ex-Taiwan Index rose 16.86%
during the same period. Beneficial to performance were the Fund's overweighted
positions in Hungary and Russia whose markets performed well, with total returns
of +56.43% and +117.75%, respectively. The Fund's underweighted positions in the
Philippines and Thailand, whose markets fell 11.68% and 35.70%, respectively,
also limited any negative effects of the Fund's performance during the same
period.
During the six-month period ended June 30, 1997, performance was strong in
most of the markets we invest in, with the exception of the Philippines,
Malaysia, Poland, the Czech Republic and Thailand.
Within the Middle East region, the Israeli market rose 25.94% despite investor
concerns about the scandals surrounding Prime Minister Netanyahu and the violent
outbreaks at the beginning of April. As local investors began to focus on
favorable developments such as the narrowing of the budget deficit, the strong
performance in the industrial sector and the ongoing privatizations in the
financial sector, trading volumes and share prices picked up. One of our largest
holdings is Bank Hapoalim, Ltd., the largest bank in Israel. With the majority
of its shares still held by the government, its potential privatization is
likely to enable cost reductions and rationalization which would enhance its
profitability. The bank has assets of US$48 billion and indirectly controls 8%
of Israel's gross domestic product through its investments, which include Clal
Industries Ltd. and Koor Industries Ltd., Israel's largest industrial
conglomerates.
All of the Latin American markets performed well, having benefited from the
improving economic fundamentals, especially in Argentina and Mexico, declining
interest rates in Mexico and Chile, increased fund flows and reasonable stock
valuations. In addition to the positive domestic economic developments in
Mexico, the performance of stocks there had tended to follow changing investor
expectations for US interest rates and the periods of volatility which ensue.
During the six-month period, these two factors combined to drive a 30.71% rise
in the market. We added to our investment in Grupo Televisa, S.A. de C.V., the
media conglomerate in Mexico, based on our expectation that the company's
revenues from advertising would flourish as the economy recovered.
In Brazil, the main impetus to the market's 54.11% rise was the quickening
pace of reforms, long awaited in this country. Among these were the
privatization of the mining conglomerate Companhia de Vale do Rio Doce S.A.
(CVRD) and the partial sale of the integrated electric power company for the
state of Minas Gerais, Companhia Energetica de Minas Gerais S.A. (CEMIG). In
addition, new oil and gas legislation has been submitted to the Brazilian
congress which should benefit the petroleum company, Petroleo Brasilerio
S.A.--Petrobras, one of the Fund's largest holdings with a weighting of 2.8% of
total net assets at June 30, 1997.
We have maintained a large position in the Indian stock market since the start
of the year, a position that has contributed substantially to performance.
During the six-month period, this market's return of +37.58% topped that of the
major Asian markets. Behind this performance were the prospect of improving
industrial production, declining interest rates as inflation has been
well-contained, high dividend yields and low stock valuations, and ebbing
concerns regarding political change.
In Thailand, the market's decline accelerated during the six months under
review, dropping 35.70% over the six-month period ended June 30, 1997 and 11.42%
in June alone. Behind this decline were heightened speculative pressure on the
currency, the baht, the possibility of further political turmoil, and investor
concerns about the long-term prospects of Thai companies. We maintain a small
position in the Thai
25
<PAGE> 27
- --------------------------------------------------------------------------------
stock market, 1.4% of net assets at June 30, 1997.
Among the emerging European stock markets, the Hungarian and Russian markets
showed the highest gains during the period. The Hungarian stock market, in which
we have maintained a substantial investment (4.4% of net assets at June 30,
1997), rose 56.43% during the period. The economic outlook is improving in
Hungary, and we added to the Fund's investments in MATAV Ltd. and OTP Bank to
seek to enhance the Fund's participation in this turnaround. MATAV is the
national telecommunications operator, and OTP is a leading commercial bank.
The Russian market rose 117.75% as foreign investors became increasingly
comfortable with the country's leadership and considered the likelihood of its
addressing the widespread problem of non-payment throughout the Russian economic
system. Rostelecom--RDC, the dominant provider of domestic and international
long distance telephone service in Russia, is one of the Fund's main investments
in this country.
IN CONCLUSION
We thank you for your investment in Developing Capital Markets Focus Fund of
Merrill Lynch Variable Series Funds, Inc., and we look forward to sharing our
investment outlook and strategies with you in our upcoming annual report to
shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Grace Pineda
Grace Pineda
Vice President and Portfolio Manager
August 13, 1997
26
<PAGE> 28
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
AFRICA INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH AFRICA BEVERAGE & 159,500 Rembrandt Group Limited..... $ 1,684,888 $ 1,702,647 1.2%
TOBACCO 26,741 South African Breweries
Ltd. ..................... 691,795 821,280 0.6
11,888 South African Breweries
Ltd. (ADR) (a)............ 396,515 364,367 0.2
2,800 South African Breweries Ltd.
(ADR) (a)(f).............. 71,204 85,820 0.1
------------ ------------ -----
2,844,402 2,974,114 2.1
-----------------------------------------------------------------------------------------------------
COAL 70,600 Ingwe Coal Corporation
Ltd. ..................... 510,335 451,566 0.3
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 263,070 Rembrandt Controlling
COMPANIES Investments Ltd. ......... 1,804,958 1,740,648 1.2
-----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 6,200 Anglo American Corp. of
South Africa, Ltd. (ADR)
(a)....................... 389,005 372,775 0.3
239,400 First National Bank Holdings
Ltd. ..................... 1,399,147 2,059,241 1.4
40,527 Nedcor Ltd. (Ordinary)...... 493,826 898,316 0.6
------------ ------------ -----
2,281,978 3,330,332 2.3
-----------------------------------------------------------------------------------------------------
MACHINERY 65,500 Gencor Limited.............. 287,135 301,930 0.2
231,300 Gencor Limited (ADR) (a).... 983,766 1,026,394 0.7
------------ ------------ -----
1,270,901 1,328,324 0.9
-----------------------------------------------------------------------------------------------------
MERCHANDISING 448,800 Pick'n Pay Stores Limited... 511,498 673,101 0.5
15,593 Pick'n Pay Stores
Limited 'N'............... 21,701 21,667 0.0
------------ ------------ -----
533,199 694,768 0.5
-----------------------------------------------------------------------------------------------------
MINING 60,000 Beatrix Mines Ltd. ......... 517,129 271,945 0.2
23,300 De Beers Centenary AG....... 619,984 860,774 0.6
8,000 De Beers Consolidated Mines
Ltd.(ADR) (a)............. 282,000 295,000 0.2
5,290 Gold Fields of South Africa
Ltd. ..................... 135,224 124,841 0.1
------------ ------------ -----
1,554,337 1,552,560 1.1
-----------------------------------------------------------------------------------------------------
NEWSPAPER/ 85,400 Nasionale Pers Beperk 'N'... 839,684 984,153 0.7
PUBLISHING
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTH AFRICA 11,639,794 13,056,465 9.1
- ---------------------------------------------------------------------------------------------------------------------
ZIMBABWE BEVERAGE & TOBACCO 1,152,080 Delta Corporation Ltd. ..... 1,038,644 1,769,320 1.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ZIMBABWE 1,038,644 1,769,320 1.2
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA 12,678,438.. 14,825,785 10.3
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
EUROPE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CZECH REPUBLIC TELECOMMUNICATIONS 8,117 +SPT Telecom A.S. .......... 813,327.... 852,205 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
CZECH REPUBLIC 813,327 852,205 0.6
- ---------------------------------------------------------------------------------------------------------------------
FRANCE UTILITIES--WATER 14,018 Compagnie Generale des Eaux
S.A. (Warrants) (c)....... 0 8,399 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 0 8,399 0.0
- ---------------------------------------------------------------------------------------------------------------------
GREECE BANKING 18,923 Ergo Bank S.A. (Ordinary)... 686,353 1,137,200 0.8
-----------------------------------------------------------------------------------------------------
BEVERAGE 16,984 Hellenic Bottling Co.
S.A. ..................... 453,611 628,178 0.4
-----------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 29
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GREECE TELECOMMUNICATIONS 38,840 Hellenic Telecommunication
(CONCLUDED) Organization S.A. ........ $ 806,651 $ 912,434 0.6%
38,840 Hellenic Telecommunication
Organization S.A. (Rights)
(d)....................... 0 4,527 0.0
----------- ----------- -----------
806,651 916,961 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GREECE 1,946,615 2,682,339 1.8
- ---------------------------------------------------------------------------------------------------------------------
HUNGARY BANKING 78,860 OTP Bank (GDR) (b).......... 1,774,865 2,089,790 1.5
-----------------------------------------------------------------------------------------------------
HEALTH/PERSONAL 22,360 Gedeon Richter Ltd. (GDR)
CARE (b)....................... 555,970 2,057,120 1.4
1,000 Gedeon Richter Ltd. (GDR)
(b)(f).................... 40,875 92,000 0.1
----------- ----------- -----------
596,845 2,149,120 1.5
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 5,639 +Magyar TarKozlesi
Reszvenytarsasag, Ltd.
(MATAV) (Ordinary) (f).... 1,779,623 2,048,683 1.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY 4,151,333 6,287,593 4.4
- ---------------------------------------------------------------------------------------------------------------------
ITALY AUTOMOBILES 378,757 Fiat S.p.A. ................ 1,156,122 1,363,445 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 1,156,122 1,363,445 0.9
- ---------------------------------------------------------------------------------------------------------------------
NETHERLANDS ELECTRONICS 11,250 Philips Electronics N.V..... 457,905 806,522 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 457,905 806,522 0.6
- ---------------------------------------------------------------------------------------------------------------------
POLAND AUTOMOTIVE 31,477 T.C. Debica S.A. ........... 715,104 646,788 0.4
-----------------------------------------------------------------------------------------------------
BANKING 104,975 Wielkopolsky Bank Kredytowy
S.A. ..................... 694,747 600,770 0.4
-----------------------------------------------------------------------------------------------------
ELECTRICAL & 23,100 Elektrim Towarzystow
ELECTRONICS Handlowe S.A. ............ 190,302 201,114 0.1
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 11,090 NIF 3 Trinity............... 32,267 32,409 0.0
31,390 +NIF Piast S.A. ............ 126,860 88,867 0.1
13,770 +NIF Progress............... 56,169 43,175 0.0
2,280 +Polish National Investment
Fund...................... 113,845 97,169 0.1
----------- ----------- -----------
329,141 261,620 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND 1,929,294 1,710,292 1.1
- ---------------------------------------------------------------------------------------------------------------------
PORTUGAL BUILDING PRODUCTS 139,965 Cimpor-Cimentos de Portugal
S.A. ..................... 3,068,132 3,263,437 2.3
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 32,570 Portugal Telecom S.A. ...... 1,085,998 1,314,426 0.9
20,840 Portugal Telecom S.A. (ADR)
(a)....................... 683,759 836,205 0.6
----------- ----------- -----------
1,769,757 2,150,631 1.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGAL 4,837,889 5,414,068 3.8
- ---------------------------------------------------------------------------------------------------------------------
RUSSIA ELECTRICAL 1,625,380... Unified Energy Systems...... 523,267 586,437 0.4
COMPONENTS &
DISTRIBUTION
-----------------------------------------------------------------------------------------------------
ENERGY SOURCES 49,936 A.O. Mosenergo (ADR) (a).... 1,472,949 2,072,344 1.4
275,000 +Irkutskenergo (GDR) (b).... 34,733 93,225 0.1
----------- ----------- -----------
1,507,682 2,165,569 1.5
-----------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 30
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPE SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RUSSIA NATURAL GAS 13,480 RAO Gazprom (ADR) (a)(f).... $ 212,310 $ 231,856 0.2%
(CONCLUDED)
-----------------------------------------------------------------------------------------------------
OIL & RELATED 22,000 Lukoil Oil Company (ADR)
(a)....................... 1,051,800 1,716,000 1.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 333,000 +Rostelecom (Ordinary)...... 1,302,050 1,292,040 0.9
27,500 +Rostelecom (Preferred)..... 77,825 67,513 0.0
30,000 +Rostelecom RDC (f)......... 112,500 115,500 0.1
----------- ----------- -----------
1,492,375 1,475,053 1.0
-----------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 38,800 +Bashkirenergo.............. 21,047 18,857 0.0
& GAS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN RUSSIA 4,808,481 6,193,772 4.3
- ---------------------------------------------------------------------------------------------------------------------
TURKEY BANKING 6,246,300 Akbank T.A.S. .............. 450,545 536,660 0.4
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 4,060,005 Akcansa Cimento A.S......... 586,310 560,850 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TURKEY 1,036,855 1,097,510 0.8
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EUROPE 21,137,821 26,416,145 18.3
- ---------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
- ---------------------------------------------------------------------------------------------------------------------
ARGENTINA OIL & GAS PRODUCERS 45,267 Yacimientos Petroliferos
Fiscales S.A. (YPF) (ADR)
(a)....................... 1,216,712 1,391,960 0.9
-----------------------------------------------------------------------------------------------------
OIL & RELATED 175,072 Companhia Naviera Perez
Companc S.A.C.F.I.M.F.A.
(Class B)................. 822,001 1,404,302 1.0
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 38,200 +Nortel Inversora S.A.
(ADR)(a) ................. 1,102,879 1,036,175 0.7
15,809 Telecom Argentina Stet-
France Telecom S.A. (ADR)
(a)....................... 780,895 829,973 0.6
----------- ----------- -----------
1,883,774 1,866,148 1.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ARGENTINA 3,922,487 4,662,410 3.2
- ---------------------------------------------------------------------------------------------------------------------
BRAZIL BANKING 103,086,523 Banco Bradesco S.A.
(Preferred)............... 696,489 1,039,005 0.7
986,000 Banco Itau S.A.
(Preferred)............... 522,011 556,886 0.4
----------- ----------- -----------
1,218,500 1,595,891 1.1
-----------------------------------------------------------------------------------------------------
BEVERAGE 4,800 Companhia Cervejaria
Brahma S.A. PN
(ADR) (a)................. 70,224 73,500 0.1
4,182,525 Companhia Cervejaria Brahma
S.A. PN (Preferred)....... 2,249,358 3,185,946 2.2
----------- ----------- -----------
2,319,582 3,259,446 2.3
-----------------------------------------------------------------------------------------------------
OIL & RELATED 14,644,000 Petroleo Brasileiro
S.A.--Petrobras
(Preferred)............... 2,622,181 4,067,535 2.8
-----------------------------------------------------------------------------------------------------
STEEL 2,773,000 Companhia Siderurgica
Nacional S.A. ............ 84,704 91,446 0.1
118,740 Usinas Siderurgicas de Minas
Gerais--Usiminas S.A.
(Preferred)............... 1,224,217 1,322,520 0.9
----------- ----------- -----------
1,308,921 1,413,966 1.0
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 43,018 Telecomunicacoes Brasileiras
S.A.--Telebras PN (ADR)
(a)....................... 3,127,989 6,527,982 4.5
13,972,227 Telecomunicacoes Brasileiras
S.A.--Telebras PN
(Preferred)............... 737,840 2,119,521 1.5
----------- ----------- -----------
3,865,829 8,647,503 6.0
-----------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 31
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AMERICA SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BRAZIL UTILITIES--ELECTRICAL 1,244,000 Centrais Eletricas
(CONCLUDED) & GAS Brasileiras
S.A.--Eletrobras.......... $ 446,987 $ 695,669 0.5%
235,000 Centrais Eletricas
Brasileiras
S.A.--Eletrobras 'B'
(Preferred)............... 90,290 140,367 0.1
----------- ----------- -----------
537,277 836,036 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 11,872,290 19,820,377 13.8
- ---------------------------------------------------------------------------------------------------------------------
CHILE AUTOMOBILES 34,106 Chilgener Inc. (ADR)(a)..... 991,654 954,968 0.6
-----------------------------------------------------------------------------------------------------
HOLDING COMPANY 39,000 +Quinenco S.A. (ADR)(a)..... 736,523 721,500 0.5
-----------------------------------------------------------------------------------------------------
UTILITIES 46,978 CIA Telecomunicaciones de
Chile S.A. (ADR)(a)....... 1,364,666 1,550,274 1.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHILE 3,092,843 3,226,742 2.2
- ---------------------------------------------------------------------------------------------------------------------
MEXICO BANKING 355,000 +Grupo Financiero
Banamex--Accival, S.A.
de C.V. (BANACCI) (Class
B)........................ 660,134 911,517 0.7
10,650 +Grupo Financiero
Banamex--Accival, S.A.
de C.V. (BANACCI)
(Class L)................. 18,179 24,933 0.0
----------- ----------- -----------
678,313 936,450 0.7
-----------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 31,800 +Grupo Televisa, S.A. de
C.V. (GDR)(b)............. 920,075 965,925 0.7
-----------------------------------------------------------------------------------------------------
BUILDING & 126,000 Apasco, S.A. de C.V. ....... 458,715 900,793 0.6
CONSTRUCTION
-----------------------------------------------------------------------------------------------------
BUILDING MATERIALS 154,000 Cementos Mexicanos, S.A. de
C.V....................... 665,660 752,070 0.5
-----------------------------------------------------------------------------------------------------
HEALTH/PERSONAL 502,100 Kimberly-Clark de Mexico,
CARE S.A. de C.V............... 1,398,339 2,003,344 1.4
-----------------------------------------------------------------------------------------------------
LEISURE 232,905 Grupo Carso, S.A. de C.V.
'A1'...................... 1,108,152 1,621,101 1.1
-----------------------------------------------------------------------------------------------------
RETAIL 121,843 Cifra, S.A. de C.V. 'A'..... 154,789 225,130 0.2
996,200 Cifra, S.A. de C.V. 'C'..... 1,403,647 1,592,415 1.1
----------- ----------- -----------
1,558,436 1,817,545 1.3
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 72,633 Telefonos de Mexico, S.A.
de C.V. (ADR) (a)......... 2,701,257 3,468,226 2.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 9,488,947 12,465,454 8.7
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
LATIN AMERICA 28,376,567 40,174,983 27.9
- ---------------------------------------------------------------------------------------------------------------------
MIDDLE
EAST
- ---------------------------------------------------------------------------------------------------------------------
EGYPT BANKING 29,620 Commercial International
Bank (Egypt) S.A.E........ 350,674 619,862 0.4
-----------------------------------------------------------------------------------------------------
CEMENT 46,065 Torah Portland Cement Co.... 1,175,643 1,166,031 0.8
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EGYPT 1,526,317 1,785,893 1.2
- ---------------------------------------------------------------------------------------------------------------------
ISRAEL BANKING 631,829 Bank Hapoalim Ltd. ......... 1,431,067 1,314,224 0.9
788,600 Bank Leumi Israel........... 1,109,333 1,195,148 0.9
----------- ----------- -----------
2,540,400 2,509,372 1.8
-----------------------------------------------------------------------------------------------------
FOOD CHAINS 189,100 Supersol Ltd. .............. 509,906 606,302 0.4
-----------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 32
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MIDDLE EAST SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ISRAEL MERCHANDISING 15,004 +Blue Square Chain Stores
(CONCLUDED) Properties & Investments
Ltd....................... $ 108,081 $ 145,989 0.1%
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ISRAEL 3,158,387 3,261,663 2.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
MIDDLE EAST 4,684,704 5,047,556 3.5
- ---------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN/ASIA
- ---------------------------------------------------------------------------------------------------------------------
AUSTRALIA MERCHANDISING 28,840 Amway Asia Pacific Ltd.(GDR)
(b)....................... 1,113,181 1,258,145 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 1,113,181 1,258,145 0.9
- ---------------------------------------------------------------------------------------------------------------------
CHINA CHEMICALS 60,500 +Beijing Yanhua
Petrochemical (ADR) (a)... 695,629 695,750 0.5
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 911,000 Eastern Communications Co.,
Ltd. (Class B)............ 904,054 1,344,636 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CHINA 1,599,683 2,040,386 1.4
- ---------------------------------------------------------------------------------------------------------------------
HONG KONG CELLULAR TELEPHONES 251,000 +Smartone
Telecommunications........ 573,475 570,248 0.4
-----------------------------------------------------------------------------------------------------
FOOD 3,097,000 C.P. Pokphand Co. Ltd.
(Ordinary)................ 1,194,703 959,467 0.7
5,432,500 Tingyi (Cayman Islands)
Holdings Co............... 1,295,759 1,353,427 0.9
------------ ------------ -----
2,490,462 2,312,894 1.6
-----------------------------------------------------------------------------------------------------
INDUSTRIAL 3,352,000 Sinocan Holdings Ltd........ 1,178,227 1,655,058 1.1
-----------------------------------------------------------------------------------------------------
REAL ESTATE 521,000 China Overseas Land &
Investment................ 262,259 420,335 0.3
293,000 Hang Lung Development
Company................... 619,292 537,073 0.4
402,500 Henderson China Holding
Ltd....................... 722,233 678,038 0.5
------------ ------------ -----
1,603,784 1,635,446 1.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HONG KONG 5,845,948 6,173,646 4.3
- ---------------------------------------------------------------------------------------------------------------------
INDIA AUTOMOBILE 7,000 Bajaj Auto Ltd. (GDR)(b).... 241,500 240,450 0.2
-----------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 68,000 State Bank of India Ltd.
(GDR) (b)(f).............. 1,356,815 1,802,000 1.2
-----------------------------------------------------------------------------------------------------
BUILDING MATERIALS 16,800 Larsen & Toubro Ltd. (GDR)
(b)....................... 264,587 289,800 0.2
-----------------------------------------------------------------------------------------------------
ENERGY SOURCES 96,747 +Bombay Suburban Electric
Supply Co. Ltd. (GDR)
(b)....................... 1,936,026 2,563,795 1.8
-----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 116,200 +Industrial Credit &
Investment Corporation of
India Ltd. (GDR) (b)...... 1,141,976 1,670,375 1.1
-----------------------------------------------------------------------------------------------------
LEISURE 41,022 EIH Ltd. (GDR) (b)(f)....... 514,547 676,863 0.5
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 24,600 Videsh Sanchar Nigam Ltd.
(GDR)(b).................. 422,775 510,450 .04
16,000 +Videsh Sanchar Nigam Ltd.
(GDR)(b)(f)............... 264,000 332,000 0.2
------------ ------------ -----
686,775 842,450 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDIA 6,142,226 8,085,733 5.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES HELD/ VALUE PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDONESIA BROADCASTING & US$ 750,000 P.T. Surya Citra Television,
PUBLISHING 4% due 7/01/1997
(Convertible)............. $ 785,697 $ 897,225 0.6%
US$ 15,000 P.T. Surya Citra Television,
4% due 7/01/1997
(Convertible) (f)......... 15,000 17,944 0.0
----------- ----------- -----------
800,697 915,169 0.6
-----------------------------------------------------------------------------------------------------
FOREST PRODUCTS & 658,350 P.T. Indah Kiat Pulp & Paper
PAPER Corp. 'Foreign'........... 386,538 386,069 0.3
55,440 P.T. Indah Kiat Pulp & Paper
Corp. (Warrants) (c)...... 0 19,240 0.0
----------- ----------- -----------
386,538 405,309 0.3
-----------------------------------------------------------------------------------------------------
INSURANCE 547,000 P.T. Asuransi Lippo Life
(Foreign)................. 671,160 647,171 0.5
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 328,500 P.T. Astra International
(Foreign)................. 1,031,069 1,351,852 0.9
742,500 P.T. Bimantara Citra........ 1,006,405 1,298,611 0.9
----------- ----------- -----------
2,037,474 2,650,463 1.8
-----------------------------------------------------------------------------------------------------
REAL ESTATE 942,500 P.T. Ciputra Development.... 815,030 940,561 0.7
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 44,600 P.T. Indonesian Satellite
Corp. (ADR) (a)........... 1,310,148 1,335,212 0.9
483,000 P.T. Telekomunikasi
Indonesia................. 748,118 790,093 0.6
45,466 P.T. Telekomunikasi
Indonesia (ADR) (a)....... 1,341,382 1,477,645 1.0
----------- ----------- -----------
3,399,648 3,602,950 2.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDONESIA 8,110,547 9,161,623 6.4
- ---------------------------------------------------------------------------------------------------------------------
MALAYSIA AIRLINES 107,000 Malaysian Airline System
BHD....................... 293,668 267,108 0.2
-----------------------------------------------------------------------------------------------------
BANKING 505,800 Commerce Asset Holdings
BHD....................... 1,510,141 1,332,793 0.9
19,250 Commerce Asset Holdings BHD
(Warrants) (c)............ 0 2,975 0.0
137,000 Malayan Banking BHD......... 1,388,587 1,438,562 1.0
----------- ----------- -----------
2,898,728 2,774,330 1.9
-----------------------------------------------------------------------------------------------------
BROADCASTING & 329,000 New Straits Times Press
PUBLISHING BHD....................... 1,843,125 1,929,389 1.3
-----------------------------------------------------------------------------------------------------
BUILDING MATERIALS 90,000 Hume Industries (Malaysia)
BHD (Class A)............. 491,775 413,678 0.3
-----------------------------------------------------------------------------------------------------
CHEMICALS 80,000 Nylex (Malaysia) BHD........ 205,108 136,308 0.1
-----------------------------------------------------------------------------------------------------
CONSTRUCTION & 20,750 Ekran BHD (Rights) (e)...... 0 1,644 0.0
HOUSING
-----------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS & 500 Amway (Malaysia) Holdings
SERVICES BHD....................... 3,174 2,972 0.0
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 354,000 Hicom Holdings BHD.......... 834,382 670,492 0.5
HOLDINGS 48,300 OYL Industries BHD.......... 507,940 306,217 0.2
82,000 United Engineers BHD........ 749,717 591,354 0.4
----------- ----------- -----------
2,092,039 1,568,063 1.1
-----------------------------------------------------------------------------------------------------
ENGINEERING & 146,000 Malaysian Resources Corp.
CONSTRUCTION BHD....................... 520,160 402,068 0.3
-----------------------------------------------------------------------------------------------------
FOOD 84,000 Nestle (Malaysia) BHD....... 650,872 629,076 0.4
-----------------------------------------------------------------------------------------------------
METAL 411,000 Magnum Corporation BHD...... 759,016 618,853 0.4
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 771,000 Renong BHD.................. 1,221,142 1,008,163 0.7
492,800 Sungei Way Holdings BHD..... 1,044,153 929,480 0.6
----------- ----------- -----------
2,265,295 1,937,643 1.3
-----------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 34
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES HELD/ VALUE PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MALAYSIA NATURAL GAS 121,000 Petronas Gas BHD............ $ 499,346 $ 441,098 0.3%
(CONCLUDED)
-----------------------------------------------------------------------------------------------------
OIL & RELATED 211,700 Petronas Dagangan BHD....... 550,067 503,309 0.4
-----------------------------------------------------------------------------------------------------
TOBACCO 40,000 Rothmans of Pall Mall
(Malaysia) BHD............ 419,742 393,074 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIA 13,492,115 12,018,613 8.3
- ---------------------------------------------------------------------------------------------------------------------
PAKISTAN CHEMICALS--FERTILIZERS 15,000 Fauji Fertilizer Co.
Ltd. ..................... 31,246 29,503 0.0
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 280,000 Pakistan Telecommunications
Corp...................... 258,800 213,016 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PAKISTAN 290,046 242,519 0.1
- ---------------------------------------------------------------------------------------------------------------------
PHILIPPINES INTERNATIONAL TRADE 212,500 +International Container
Terminal Services, Inc.... 93,481 108,871 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PHILIPPINES 93,481 108,871 0.1
- ---------------------------------------------------------------------------------------------------------------------
SOUTH KOREA AUTOMOTIVE 8,678 +Dong Ah Tire Industries.... 691,547 516,174 0.4
-----------------------------------------------------------------------------------------------------
BANKING 200,330 Cho Hung Bank Co. Ltd. ..... 1,656,018 1,360,706 0.9
-----------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 27,753 +Kookmin Bank
(GDR) (b)(f).............. 459,931 603,628 0.4
-----------------------------------------------------------------------------------------------------
CHEMICAL 55,000 L.G. Chemical
Limited................... 777,667 763,544 0.5
-----------------------------------------------------------------------------------------------------
ELECTRONIC 740 Samsung Display............. 42,614 40,814 0.0
COMPONENT
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 130 SK Telecom Co. Ltd.......... 65,985 95,887 0.1
67,575 SK Telecom Co. Ltd.
(ADR) (a)(f).............. 1,048,786 679,973 0.5
----------- ----------- -----------
1,114,771 775,860 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTH KOREA 4,742,548 4,060,726 2.8
- ---------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 48,500 Bangkok Bank Public Company
Ltd. ..................... 348,064 333,707 0.2
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 7,000 Siam Cement Public Company
Limited................... 205,098 121,221 0.1
101,200 Siam City Cement Public
Company Limited........... 435,789 410,746 0.3
----------- ----------- -----------
640,887 531,967 0.4
-----------------------------------------------------------------------------------------------------
REAL ESTATE Chf 1,300,000 Bangkok Land Public Co.,
Ltd., 3.125% due 3/31/2001
(Convertible)............. 456,864 209,577 0.1
US$ 184,000 Bangkok Land Public Co.,
Ltd., 4.50% due 10/13/2003
(Convertible)............. 135,825 73,600 0.1
US$ 433,000 Hemaraj Land and Development
Public Co., Ltd., 3.50%
due 9/09/2003............. 425,104 428,670 0.3
US$ 385,000 Tanayong Public Co. Ltd.,
3.50% due 3/01/2004
(Convertible)............. 349,909 215,600 0.1
----------- ----------- -----------
1,367,702 927,447 0.6
-----------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 35
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THAILAND TELECOMMUNICATIONS 198,000 +TelecomAsia Corporation
(CONCLUDED) Public Company Ltd.
'Foreign'............... $ 375,784 $ 239,177 0.2%
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THAILAND 2,732,437 2,032,298 1.4
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN/ASIA 44,162,212 45,182,560 31.3
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM FACE
SECURITIES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* US$ 3,714,000 General Motors Acceptance
Corp., 6.25% due
7/01/1997............... 3,713,355 3,713,355 2.6
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT 10,000,000 Federal National Mortgage
AGENCY Association, 5.41% due
OBLIGATIONS* 7/02/1997............... 9,996,995 9,996,995 6.9
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 13,710,350 13,710,350 9.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS......... $124,750,092 145,357,379 100.8
============
LIABILITIES IN EXCESS
OF OTHER ASSETS........... (1,204,679) (0.8)
------------ -----
NET ASSETS................ $144,152,700 100.0%
============ =====
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase 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 7/08/1997.
(e) The rights may be exercised until 7/01/1997.
(f) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
See Notes to Financial Statements.
34
<PAGE> 36
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$124,750,092) (Note 1a).......................... $145,357,379
Cash..................................................................................... 43,443
Foreign cash (Note 1c)................................................................... 1,205,276
Receivables:
Securities sold........................................................................ $1,370,338
Dividends.............................................................................. 597,403
Interest............................................................................... 60,094
Capital shares sold.................................................................... 27,508 2,055,343
---------- ------------
Total assets............................................................................. 148,661,441
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased................................................................... 3,884,131
Capital shares redeemed................................................................ 231,007
Investment adviser (Note 2)............................................................ 81,541 4,196,679
----------
Accrued expenses and other liabilities................................................... 312,062
------------
Total liabilities........................................................................ 4,508,741
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................................................... $144,152,700
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized............................. $ 1,245,439
Paid-in capital in excess of par......................................................... 123,982,630
Undistributed investment income--net..................................................... 1,154,454
Accumulated realized capital losses on investments and foreign currency transactions--net
(Note 5)............................................................................... (2,832,696)
Unrealized appreciation on investments and foreign currency transactions--net............ 20,602,873
------------
NET ASSETS--Equivalent to $11.57 per share based on 12,454,391 shares outstanding........ $144,152,700
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
35
<PAGE> 37
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $91,540 withholding tax on foreign dividends)............................ $ 1,446,562
Interest and discount earned............................................................... 458,659
-----------
Total income............................................................................... 1,905,221
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2).......................................................... $ 587,517
Custodian fees............................................................................. 143,905
Accounting services (Note 2)............................................................... 13,340
Pricing services........................................................................... 7,187
Professional fees.......................................................................... 5,477
Registration fees (Note 1f)................................................................ 4,061
Transfer agent fees (Note 2)............................................................... 2,040
Directors' fees and expenses............................................................... 932
Printing and shareholder reports........................................................... 156
Other...................................................................................... 3,636
----------
Total expenses before reimbursement........................................................ 768,251
Reimbursement of expenses (Note 2)......................................................... (36,881)
----------
Expenses after reimbursement............................................................... 731,370
-----------
Investment income--net..................................................................... 1,173,851
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET
(NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net......................................................................... 1,281,291
Foreign currency transactions--net....................................................... (59,958) 1,221,333
----------
Change in unrealized appreciation/depreciation on:
Investments--net......................................................................... 16,312,419
Foreign currency transactions--net....................................................... 3,156 16,315,575
---------- -----------
Net realized and unrealized gain on investments and foreign currency transactions.......... 17,536,908
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $18,710,759
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
36
<PAGE> 38
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net............................................................ $ 1,173,851 $ 1,857,960
Realized gain (loss) on investments and foreign currency transactions--net........ 1,221,333 (156,983)
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net............................................................... 16,315,575 4,829,141
------------ -----------
Net increase in net assets resulting from operations.............................. 18,710,759 6,530,118
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1g):
Investment income--net............................................................ (1,771,805) (1,385,673)
------------ -----------
Net decrease in net assets resulting from dividends to shareholders............... (1,771,805) (1,385,673)
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions................ 31,614,844 35,245,827
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets...................................................... 48,553,798 40,390,272
Beginning of period............................................................... 95,598,902 55,208,630
------------ -----------
End of period*.................................................................... $144,152,700 $95,598,902
============ ===========
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net............................................ $ 1,154,454 $ 1,752,408
============ ===========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
37
<PAGE> 39
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN FOR THE SIX FOR THE YEAR ENDED FOR THE PERIOD
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL MONTHS ENDED DECEMBER 31, MAY 2, 1994+ TO
STATEMENTS. JUNE 30, -------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 10.05 $ 9.32 $ 9.51 $ 10.00
-------- ------- ------- -------
Investment income--net.................................... .10 .20 .20 .09
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net.................. 1.61 .76 (.30) (.58)
-------- ------- ------- -------
Total from investment operations.......................... 1.71 .96 (.10) (.49)
-------- ------- ------- -------
Less dividends from investment income--net................ (.19) (.23) (.09) --
-------- ------- ------- -------
Net asset value, end of period............................ $ 11.57 $ 10.05 $ 9.32 $ 9.51
======== ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................ 17.29%# 10.59% (1.08%) (4.90%)#
======== ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................ 1.24%* 1.25% 1.25% 1.29%*
======== ======= ======= =======
Expenses.................................................. 1.31%* 1.31% 1.36% 1.35%*
======== ======= ======= =======
Investment income--net.................................... 2.00%* 2.42% 2.73% 2.18%*
======== ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $144,153 $95,599 $55,209 $36,676
======== ======= ======= =======
Portfolio turnover........................................ 44.52% 87.33% 62.53% 29.79%
======== ======= ======= =======
Average commission rate paid++............................ $ .0011 $ .0003 -- --
======== ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ 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.
# Aggregate total investment return.
See Notes to Financial Statements.
38
<PAGE> 40
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Developing Capital Markets Focus Fund (the
"Fund") is classified as "non-diversified", as defined in the Investment Company
Act of 1940. These unaudited 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. The following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--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. Short-term securities are valued at amortized cost, which approximates
market value. 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--The Fund 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--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--The Fund may write and purchase call and put options. When the 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--The Fund may purchase or sell futures contracts
and options on such futures contracts for the purpose 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.
39
<PAGE> 41
- --------------------------------------------------------------------------------
- - Foreign currency options and futures--The Fund 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 Fund'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) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. MLAM is responsible for the management of the Company's
portfolios and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 1.00% of the average
daily value of the Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $35,382 in commissions on the execution
of portfolio security transactions.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $75,610,140 and $46,733,976, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
---------------------------------------------------------
<S> <C> <C>
Long-term investments................... $1,281,291 $20,607,287
Foreign currency transactions........... (59,958) (4,414)
--------- -----------
Total................................... $1,221,333 $20,602,873
========= ===========
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $20,607,287, of which $25,153,366 related to appreciated securities
and $4,546,079 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments for Federal income tax purposes was $124,750,092.
40
<PAGE> 42
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$31,614,844 and $35,245,827 for the six months ended June 30, 1997 and the year
ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
---------------------------------------------------------
<S> <C> <C>
Shares sold........................... 3,751,947 $ 40,376,632
Shares issued to shareholders in
reinvestment of dividends............ 176,082 1,736,172
--------- ----------
Total issued.......................... 3,928,029 42,112,804
Shares redeemed....................... (981,701) (10,497,960)
--------- ----------
Net increase.......................... 2,946,328 $ 31,614,844
========= ==========
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
<S> <C> <C>
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
========= ==========
---------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1996, the Fund had net capital loss carryforwards of
approximately $3,909,000, of which $91,000 expires in 2002 and $3,728,000
expires in 2003; and $90,000 in 2004. These amounts will be available to offset
like amounts of any future taxable gains.
6. COMMITMENTS:
At June 30, 1997, the Fund had entered into foreign exchange contracts under
which it agreed to purchase and sell various foreign currencies with values of
approximately $861,000 and $317,000, respectively.
41
<PAGE> 43
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 1997, Domestic Money Market Fund's net
annualized yield was 5.06%.* The Fund's 7-day yield as of June 30, 1997 was
5.15%. The average portfolio maturity was 68 days at June 30, 1997, compared to
73 days at December 31, 1996.
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the period's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although gross domestic product growth for the first quarter of
the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors are uncertain regarding the viability of economic and monetary union,
while scandals continue to depress investor confidence in Japan. At present, it
appears that the US economy is perceived most favorably by investors for its
ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
should remain positive.
During the first three months of 1997, we maintained a relatively cautious
investment bias given the strength of the economy. During the second half of the
six-month period ended June 30, 1997, we grew more optimistic in response to
moderating economic growth.
The Fund's composition at the end of June and as of our last report is
detailed below:
<TABLE>
<CAPTION>
- -------------------------------------------------------
Issue 6/30/97 12/31/96
- -------------------------------------------------------
<S> <C> <C>
Bank Notes...................... 6.1% 1.3%
Certificates of Deposit......... 3.2 1.8
Commercial Paper................ 56.5 46.9
Corporate Notes................. 7.8 7.6
Funding Agreements.............. 1.6 1.8
Master Notes.................... 0.9 1.1
Repurchase Agreements........... -- 2.1
US Government Agency &
Instrumentality
Obligations--Discount......... 0.1 0.2
US Government Agency &
Instrumentality
Obligations--Non-Discount..... 23.1 38.7
Other Assets Less Liabilities... 0.7 (1.5)
----- -----
Total........................... 100.0% 100.0%
===== =====
</TABLE>
IN CONCLUSION
We appreciate your investment in Domestic Money Market Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Jacqueline Rogers
Jacqueline Rogers
Vice President and Portfolio Manager
August 13, 1997
- ---------------
* Based on a constant investment throughout the period, with dividends
compounded daily, and reflecting a net return to the investor after all
expenses.
42
<PAGE> 44
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--6.1% $ 3,500,000 Bank of America N.T. & S.A. .......... 5.63% 12/30/97 $ 3,494,224
1,250,000 Bank of America N.T. & S.A. .......... 5.93 6/24/98 1,248,628
2,500,000 First Bank N.A. ...................... 5.647 11/19/97 2,499,907
4,000,000 First National Bank, Chicago.......... 6.02 6/11/98 3,998,543
1,000,000 Keybank National Association.......... 5.57 5/06/98 999,589
2,000,000 Morgan Guaranty Trust Co. of New
York ............................... 5.615 2/19/98 1,999,321
3,500,000 Northern Trust Co. of Chicago......... 5.96 6/17/98 3,496,971
1,500,000 Northern Trust Co. of Chicago......... 5.95 6/24/98 1,498,635
500,000 US National Bank...................... 5.665 4/14/98 499,789
- ---------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$19,744,067) 19,735,607
- ---------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT--3.2% 6,500,000 Chase Manhattan Bank USA (Delaware)... 5.53 7/22/97 6,499,094
4,000,000 Morgan Guaranty Trust Co. of New
York ............................... 5.71 1/06/98 3,994,029
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$10,499,206) 10,493,123
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--56.5% 9,765,000 American Home Products Corporation.... 5.64 7/24/97 9,729,751
1,571,000 Associates First Capital Corp. ....... 5.60 8/04/97 1,562,691
965,000 Atlantic Asset Securitization
Corp. .............................. 5.60 7/17/97 962,598
4,000,000 Atlantic Asset Securitization
Corp. .............................. 5.65 7/17/97 3,989,956
10,622,000 Atlantic Asset Securitization
Corp. .............................. 5.58 7/18/97 10,594,011
7,109,000 Bear Stearns Companies, Inc. ......... 5.65 7/08/97 7,101,149
4,000,000 Bear Stearns Companies, Inc. ......... 5.65 7/14/97 3,991,839
3,602,000 Bear Stearns Companies, Inc. ......... 5.65 7/22/97 3,590,128
2,548,000 CSW Credit, Inc. ..................... 5.56 7/17/97 2,541,704
7,000,000 CSW Credit, Inc. ..................... 5.58 7/23/97 6,976,130
5,000,000 CSW Credit, Inc. ..................... 5.58 8/04/97 4,973,650
7,971,000 Clipper Receivables Corp. ............ 5.63 8/04/97 7,928,315
790,000 Corporate Receivables Corp. .......... 5.65 7/14/97 788,388
2,591,000 Countrywide Home Loans, Inc........... 5.60 7/21/97 2,582,939
2,000,000 Countrywide Home Loans, Inc........... 5.67 7/21/97 1,993,722
4,430,000 Countrywide Home Loans, Inc........... 5.61 8/14/97 4,399,625
7,402,000 Eureka Securitization Inc. ........... 5.58 7/15/97 7,385,938
3,628,000 Finova Capital Corp. ................. 5.62 7/07/97 3,624,602
8,000,000 Finova Capital Corp. ................. 5.65 7/23/97 7,972,378
4,000,000 Finova Capital Corp. ................. 5.60 8/12/97 3,973,867
2,147,000 Ford Motor Credit Co. ................ 5.60 7/02/97 2,146,666
5,000,000 Ford Motor Credit Co. ................ 5.66 12/01/97 4,879,938
3,048,000 General Electric Capital Corp. ....... 5.63 8/06/97 3,030,718
6,041,000 General Electric Capital Corp. ....... 5.68 11/26/97 5,900,930
4,000,000 General Motors Acceptance Corp. ...... 5.48 7/09/97 3,994,951
2,543,000 General Motors Acceptance Corp. ...... 5.65 7/14/97 2,537,812
5,650,000 General Motors Acceptance Corp. ...... 5.40 7/23/97 5,630,492
2,500,000 General Motors Acceptance Corp. ...... 5.72 11/10/97 2,448,300
5,000,000 International Lease Finance Corp. .... 5.61 7/16/97 4,988,229
3,000,000 International Lease Finance Corp. .... 5.66 8/13/97 2,979,897
7,500,000 Lehman Brothers Holdings Inc. ........ 5.76 7/08/97 7,491,600
7,500,000 Lehman Brothers Holdings Inc. ........ 5.68 8/04/97 7,459,837
3,478,000 Lexington Parker Capital Corp......... 5.58 8/11/97 3,455,897
5,000,000 Lexington Parker Capital Corp......... 5.60 8/18/97 4,962,600
7,000,000 Lexington Parker Capital Corp......... 5.60 8/25/97 6,940,111
14,230,000 National Fleet Funding Corp. ......... 5.59 7/18/97 14,192,437
3,955,000 Preferred Receivables Funding
Corp. .............................. 5.60 8/11/97 3,929,461
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$183,633,077) 183,633,257
- ---------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--7.8% 7,000,000 Asset-Backed Securities Investment
Trust 1996-M........................ 5.687 10/15/97 7,000,000
5,000,000 CIT Group Holdings, Inc. (The)........ 5.61 10/27/97 4,998,875
2,000,000 International Business Machines
Corp. .............................. 5.67 1/28/98 1,996,200
2,600,000 International Business Machines
Corp. .............................. 5.93 3/18/98 2,596,568
744,775 Premier Auto Trust 1997-1............. 5.476 12/08/97 744,030
8,000,000 SMM Trust 1997-Q...................... 5.687 1/15/98 7,999,952
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$25,340,433) 25,335,625
- ---------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--1.6% 5,000,000 Jackson National Life Insurance
Co. ................................ 5.72 5/01/98 5,000,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$5,000,000) 5,000,000
- ---------------------------------------------------------------------------------------------------------------------
MASTER NOTES--0.9% 3,000,000 Goldman Sachs Group L.P.+............. 5.60 8/01/97 3,000,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (COST--$3,000,000) 3,000,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 45
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US GOVERNMENT, AGENCY & $ 160,000 Federal Home Loan Bank................ 5.52% 10/10/97 $ 157,545
INSTRUMENTALITY OBLIGATIONS-- 70,000 Federal National Mortgage
DISCOUNT--0.1% Association......................... 5.52 9/29/97 69,044
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--DISCOUNT (COST--$226,556) 226,589
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY & 1,500,000 Federal Farm Credit Bank.............. 5.85 10/01/97 1,500,750
INSTRUMENTALITY OBLIGATIONS-- 5,000,000 Federal Farm Credit Bank+............. 5.63 11/25/97 4,999,578
NON-DISCOUNT--23.1% 4,000,000 Federal Home Loan Bank+............... 5.26 12/10/97 3,999,143
1,040,000 Federal Home Loan Bank+............... 5.85 1/26/98 1,040,161
1,000,000 Federal Home Loan Bank................ 6.17 11/06/98 997,200
1,900,000 Federal Home Loan Bank................ 5.95 12/29/98 1,896,139
1,000,000 Federal Home Loan Mortgage Corp.+..... 5.58 4/15/98 999,619
1,000,000 Federal Home Loan Mortgage Corp.+..... 5.57 4/20/98 999,530
700,000 Federal Home Loan Mortgage Corp. ..... 6.36 5/20/99 698,915
5,000,000 Federal National Mortgage
Association+........................ 5.25 7/16/97 4,999,861
2,000,000 Federal National Mortgage
Association+........................ 5.27 8/01/97 1,999,926
2,000,000 Federal National Mortgage
Association+........................ 5.255 9/03/97 1,999,744
1,000,000 Federal National Mortgage
Association+........................ 5.26 9/09/97 999,869
1,000,000 Federal National Mortgage
Association+........................ 5.26 9/29/97 999,853
3,200,000 Federal National Mortgage
Association......................... 5.47 12/30/97 3,194,880
2,000,000 Federal National Mortgage
Association......................... 5.19 1/08/98 1,992,200
2,000,000 Federal National Mortgage
Association+........................ 5.57 3/26/98 1,999,139
2,500,000 Federal National Mortgage
Association+........................ 5.27 3/27/98 2,498,751
5,500,000 Federal National Mortgage
Association+........................ 5.31 4/24/98 5,498,288
1,000,000 Federal National Mortgage
Association......................... 6.50 4/30/99 998,400
800,000 Federal National Mortgage
Association......................... 6.375 5/21/99 800,320
6,500,000 Student Loan Marketing Association+... 5.42 10/30/97 6,500,457
1,000,000 Student Loan Marketing Association.... 5.80 12/18/98 990,500
1,800,000 US Treasury Notes..................... 6.00 8/31/97 1,801,406
4,800,000 US Treasury Notes..................... 5.75 9/30/97 4,803,749
3,500,000 US Treasury Notes..................... 5.625 10/31/97 3,501,638
3,800,000 US Treasury Notes..................... 5.375 11/30/97 3,797,028
2,200,000 US Treasury Notes..................... 5.25 12/31/97 2,197,250
1,170,000 US Treasury Notes..................... 5.00 1/31/98 1,165,612
4,000,000 US Treasury Notes..................... 7.875 4/15/98 4,064,372
1,200,000 US Treasury Notes..................... 5.625 11/30/98 1,194,187
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$75,155,365) 75,128,465
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$322,598,704)--99.3%........... 322,552,666
OTHER ASSETS LESS LIABILITIES--0.7%... 2,386,610
------------
NET ASSETS--100.0%.................... $324,939,276
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the time
of purchase by the Fund. Other securities bear interest at the rates shown,
payable at fixed dates or upon maturity. The interest rates on variable rate
securities are adjusted periodically based upon appropriate indexes; the
interest rates shown are the rates in effect at June 30, 1997.
+ Variable Rate Notes.
See Notes to Financial Statements.
44
<PAGE> 46
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $322,598,704*) (Note 1a)......................... $ 322,552,666
Receivables:
Capital shares sold...................................................................... $ 1,427,974
Interest................................................................................. 1,342,536 2,770,510
----------
Prepaid expenses and other assets.......................................................... 2,566
------------
Total assets............................................................................... 325,325,742
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed.................................................................. 185,384
Investment adviser (Note 2).............................................................. 127,109 312,493
----------
Accrued expenses and other liabilities..................................................... 73,973
------------
Total liabilities.......................................................................... 386,466
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................. $ 324,939,276
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 1,300,000,000 shares authorized............................. $ 32,498,531
Paid-in capital in excess of par........................................................... 292,486,783
Unrealized depreciation on investments--net................................................ (46,038)
------------
NET ASSETS--Equivalent to $1.00 per share based on 324,985,314 capital shares
outstanding.............................................................................. $ 324,939,276
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. As of June 30, 1997, net unrealized
depreciation for Federal income tax purposes amounted to $46,038, of which
$11,506 related to appreciated securities and $57,544 related to depreciated
securities.
See Notes to Financial Statements.
45
<PAGE> 47
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and discount earned................................................................... $ 8,209,910
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2).............................................................. $ 732,992
Accounting services (Note 2)................................................................... 30,704
Professional fees.............................................................................. 12,976
Custodian fees................................................................................. 7,356
Directors' fees and expenses................................................................... 2,733
Transfer agent fees (Note 2)................................................................... 2,368
Other.......................................................................................... 644
--------
Total expenses................................................................................. 789,773
----------
Investment income--net......................................................................... 7,420,137
----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES 1c & 3):
Realized gain on investments--net.............................................................. 8,175
Change in unrealized appreciation/depreciation on investments--net............................. (26,574)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................... $ 7,401,738
==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
46
<PAGE> 48
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net............................................................... $ 7,420,137 $ 13,810,153
Realized gain on investments--net.................................................... 8,175 12,359
Change in unrealized appreciation/depreciation on investments--net................... (26,574) (157,747)
------------ ------------
Net increase in net assets resulting from operations................................. 7,401,738 13,664,765
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1d):
Investment income--net............................................................... (7,420,137) (13,810,153)
Realized gain on investments--net.................................................... (8,175) (12,359)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders....................................................................... (7,428,312) (13,822,512)
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares..................................................... 123,826,573 103,681,145
Net asset value of shares issued to shareholders in reinvestment of dividends and
distributions (Note 1d)............................................................ 7,429,513 13,824,990
------------ ------------
131,256,086 117,506,135
Cost of shares redeemed.............................................................. (81,046,250) (146,504,203)
------------ ------------
Net increase (decrease) in net assets derived from capital share transactions........ 50,209,836 (28,998,068)
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets.............................................. 50,183,262 (29,155,815)
Beginning of period.................................................................. 274,756,014 303,911,829
------------ ------------
End of period........................................................................ $324,939,276 $274,756,014
============ ============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
47
<PAGE> 49
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE YEAR ENDED
FINANCIAL STATEMENTS. MONTHS ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net.......................... .0250 .0504 .0547 .0386 .0302
Realized and unrealized gain (loss) on
investments-- net............................. (.0001) (.0005) .0012 (.0007) .0005
-------- -------- -------- -------- --------
Total from investment operations................ .0249 .0499 .0559 .0379 .0307
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................ (.0250) (.0504) (.0547) (.0386) (.0302)
Realized gain on investments--net............. --+ (.0001) (.0002) -- (.0005)
-------- -------- -------- -------- --------
Total dividends and distributions............... (.0250) (.0505) (.0549) (.0386) (.0307)
-------- -------- -------- -------- --------
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.............. 5.06%* 5.00% 5.65% 3.94% 3.10%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................. .54%* .54% .55% .50% .36%
======== ======== ======== ======== ========
Expenses........................................ .54%* .54% .55% .57% .63%
======== ======== ======== ======== ========
Investment income--net, and realized gain on
investments--net.............................. 5.07%* 4.97% 5.50% 4.02% 3.03%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $324,939 $ 274,756 $ 303,912 $ 363,199 $ 170,531
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.0001 per share.
See Notes to Financial Statements.
48
<PAGE> 50
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Domestic Money Market Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(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. 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) Income taxes--It is the Fund'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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
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.
(d) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends and distributions are declared from the total of net investment income
and net realized gain or loss on investments.
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 Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.50% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor,
and/or ML & Co.
3. CAPITAL SHARE TRANSACTIONS:
The number of shares sold and redeemed during the periods corresponds to the
amounts included in the Statements of Changes in Net Assets with respect to net
proceeds from sale of shares and cost of shares redeemed, respectively, since
shares are recorded at $1.00 per share.
49
<PAGE> 51
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Equity Growth Fund's total investment
return was +7.25%, based on a change in per share net asset value from $26.22 to
$26.64, and assuming reinvestment of $0.533 per share income dividends and
$0.832 per share capital gains.
For the one-year, five-year and ten-year periods ended June 30, 1997, the
Fund's average annual total returns were +9.93%, +16.48% and +6.57%,
respectively. (Total returns do not include the effect of insurance-related fees
and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the quarter's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although real gross domestic product growth for the first quarter
of the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
will remain positive.
PORTFOLIO MATTERS
Small-capitalization stocks underperformed large-capitalization stocks during
the first six months of 1997. The unmanaged Russell 2000 Small Stack Index
returned +10.20% for the first half of the year as compared to a total return of
+20.55% for the unmanaged Standard & Poor's 500 Index. Equity Growth Fund posted
a total return of +7.25% for the same period.
We are in a process of refining the focus of Equity Growth Fund to emphasize
the value-driven, bottom-up investment approach. The small and emerging growth
companies focus of the Fund is leading us to concentrate on domestic stocks
having under $750 million in market capitalizations selling in the bottom
quintiles of their absolute historical ranges for price/book value, price/sales
or enterprise value/earnings before interest, taxes, depreciation and
amortization ratios. Investments in emerging growth companies with larger market
capitalization (generally over $1.0 billion) are expected to become more
limited. A significant amount of direct contact with company management is also
an important component of our investment style. Additionally, a catalyst for
valuation improvement over the next 18 months should generally be visible to
justify purchasing a stock for the Fund.
Through this process, we expect the technology sector to increase to a
significantly overweighted position relative to the Russell 2000 Index by the
end of the third quarter of this year. Volatility in the technology sector
provides a constant flow of prospective investments. Other sectors that we
expect will be emphasized include materials and processing, consumer
discretionary and energy. The financial, utilities and consumer staples sectors
are expected to become significantly underweighted. The median market
capitalization of the Fund's holdings is expected to decline from the $700
million level in early 1997 to the current median market capitalization of
approximately $300 million. The unmanaged Russell 2000 Small Stock Index and the
Lipper Small Cap Funds category are two widely-known benchmarks for the new Fund
style.
Our investment approach has benefited the Fund over the past year, even in a
difficult environment for small-capitalization stocks. We seek to have the value
component of this style help limit volatility in down markets, while the direct
research approach is intended to identify stocks with strong upside potential.
When small-capitalization stocks overall begin to show
50
<PAGE> 52
- --------------------------------------------------------------------------------
improved relative performance, we expect Equity
Growth Fund to be well-positioned to provide superior returns to its investors.
Several indicators point toward just such an inflection point, including an
improved domestic economy, better-than-expected earnings growth for small-
capitalization companies compared to large-capitalization companies and the cut
to the capital gains tax rate.
IN CONCLUSION
We appreciate your investment in Equity Growth Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our
investment outlook and strategies with you in our upcoming annual report to
shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Daniel V. Szemis
Daniel V. Szemis
Vice President and Portfolio Manager
August 13, 1997
51
<PAGE> 53
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ADVERTISING 101,000 +HA-LO Industries, Inc. ...... $ 1,932,499 $ 2,348,250 0.5%
- ---------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION 113,000 Air Express International
Corporation................. 3,931,625 4,470,563 1.0
- ---------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 199,700 Walbro Corp. ................. 3,782,738 3,919,113 0.9
- ---------------------------------------------------------------------------------------------------------------------
BANKING 90,000 TCF Financial Corp. .......... 1,829,462 4,443,750 1.0
- ---------------------------------------------------------------------------------------------------------------------
BANKS & FINANCE 87,600 Charter One Financial, Inc. 4,136,475 4,719,450 1.0
- ---------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY 100,000 +CN Biosciences, Inc. ........ 1,283,125 1,825,000 0.4
110,700 +COR Therapeutics, Inc. ...... 983,177 1,176,188 0.2
47,000 +Gilead Sciences, Inc. ....... 1,175,477 1,298,375 0.3
290,000 +Neoprobe Corp. .............. 5,147,138 4,041,875 0.9
------------ ------------ ------
8,588,917 8,341,438 1.8
- ---------------------------------------------------------------------------------------------------------------------
BROADCAST 508,100 +Paxson Communications Corp... 5,342,017 6,478,275 1.4
- ---------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 190,000 Apogee Enterprises, Inc. ..... 1,327,091 4,061,250 0.9
- ---------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 192,500 +Accustaff, Inc. ............. 4,717,500 4,559,844 1.0
263,600 Reynolds & Reynolds Co. (The)
(Class A)................... 3,860,355 4,151,700 0.9
------------ ------------ ------
8,577,855 8,711,544 1.9
- ---------------------------------------------------------------------------------------------------------------------
CABLE 156,400 +General Cable Corp. ......... 3,284,400 4,007,750 0.9
- ---------------------------------------------------------------------------------------------------------------------
CEMENT 14,300 +Giant Cement Holding,
Inc. ....................... 262,763 262,763 0.1
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS 120,000 Crompton & Knowles Corp. ..... 1,804,886 2,670,000 0.6
- ---------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 318,000 +Network Equipment
Technologies, Inc. ......... 4,839,000 5,724,000 1.3
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 198,000 +Boole & Babbage, Inc. ....... 4,158,375 4,133,250 0.9
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 438,300 +Metromail Corporation........ 9,332,575 10,847,925 2.4
169,500 +Phoenix Technologies Ltd. ... 2,232,903 2,203,500 0.5
138,200 +Premenos Technology Corp. ... 1,190,398 1,174,700 0.3
198,000 +Structural Dynamics Research
Corp. ...................... 4,966,756 5,197,500 1.1
115,200 +Vanstar Corporation.......... 1,029,727 1,627,200 0.3
------------ ------------ ------
18,752,359 21,050,825 4.6
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER TECHNOLOGY 440,000 +Platinum Technology, Inc. ... 6,135,879 5,830,000 1.3
- ---------------------------------------------------------------------------------------------------------------------
COMPUTERS 150,500 +Physician Computer Network,
Inc. ....................... 863,202 1,006,469 0.2
316,000 +Sybase, Inc. ................ 5,067,291 4,661,000 1.0
50,000 Telxon Corporation............ 841,125 893,750 0.2
------------ ------------ ------
6,771,618 6,561,219 1.4
- ---------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS 230,000 +MicroAge, Inc. .............. 2,489,383 4,226,250 0.9
398,000 +Planar Systems, Inc. ........ 4,727,044 4,029,750 0.9
------------ ------------ ------
7,216,427 8,256,000 1.8
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTION/WHOLESALE 38,000 +VWR Scientific Products
Corporation................. 612,755 598,500 0.1
- ---------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 123,100 +ACX Technologies, Inc. ...... 2,569,313 2,769,750 0.6
126,800 Harsco Corp. ................. 3,274,336 5,135,400 1.1
------------ ------------ ------
5,843,649 7,905,150 1.7
- ---------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 115,000 Belden, Inc. ................. 3,504,929 3,917,188 0.9
192,500 Methode Electronics Inc.
(Class A)................... 2,345,917 3,777,813 0.8
145,787 +Vishay Intertechnology,
Inc. ....................... 3,733,305 4,218,711 0.9
------------ ------------ ------
9,584,151 11,913,712 2.6
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONIC/INSTRUMENTS 140,000 BMC Industries, Inc. ......... 566,421 4,795,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 54
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ELECTRONICS 55,400 +Dynatech Corporation......... $ 1,864,799 $ 1,980,550 0.4%
120,000 +Kemet Corp. ................. 2,510,253 2,985,000 0.6
36,000 +Marshall Industries.......... 1,258,362 1,341,000 0.3
155,000 +Semitool, Inc. .............. 2,640,625 1,821,250 0.4
87,500 Wyle Electronics.............. 3,183,865 3,456,250 0.8
------------ ------------ ------
11,457,904 11,584,050 2.5
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONICS DISTRIBUTION 115,500 +DII Group, Inc. ............. 3,545,881 5,082,000 1.1
- ---------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL 211,718 +TETRA Technologies, Inc. .... 2,449,375 5,107,697 1.1
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 340,000 +AMRESCO, Inc. ............... 5,889,373 7,310,000 1.6
45,000 FINOVA Group, Inc. ........... 1,798,646 3,442,500 0.8
45,800 +FirstFed Financial Corp. .... 1,144,048 1,422,662 0.3
------------ ------------ ------
8,832,067 12,175,162 2.7
- ---------------------------------------------------------------------------------------------------------------------
FOOD 20,000 Flowers Industries, Inc. ..... 314,133 336,250 0.1
- ---------------------------------------------------------------------------------------------------------------------
GAMING 130,000 +WMS Industries, Inc. ........ 2,615,024 3,258,125 0.7
- ---------------------------------------------------------------------------------------------------------------------
HEALTH CARE COST CONTAINMENT 230,000 +FPA Medical Management,
Inc. ....................... 4,439,687 5,433,750 1.2
- ---------------------------------------------------------------------------------------------------------------------
HEALTH INSURANCE 27,000 +ARM Financial Group, Inc.
(Class A)................... 405,000 540,000 0.1
- ---------------------------------------------------------------------------------------------------------------------
HEALTHCARE-- PRODUCTS & 225,000 +Thermedics, Inc. ............ 3,792,678 3,529,688 0.8
SERVICES
- ---------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 50,000 +American Oncology Resources,
Inc. ....................... 375,000 837,500 0.2
150,000 +Emcare Holdings, Inc. ....... 4,146,991 5,493,750 1.2
------------ ------------ ------
4,521,991 6,331,250 1.4
- ---------------------------------------------------------------------------------------------------------------------
HOTELS 200,000 La Quinta Inns, Inc. ......... 3,919,340 4,375,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
IDENTIFICATION 11,900 +Identix, Inc. ............... 98,770 131,644 0.0
- ---------------------------------------------------------------------------------------------------------------------
INSTRUMENTS/PHOTO-OPTICAL 135,400 +Elsag Bailey Process
Automation N.V. ............ 2,008,924 2,487,975 0.5
- ---------------------------------------------------------------------------------------------------------------------
INSURANCE 19,000 AGCO Corp. ................... 491,515 682,812 0.2
8,500 American National Insurance
Co. ........................ 746,914 741,625 0.2
183,000 PXRE Corp. ................... 4,712,250 5,627,250 1.2
58,400 Security-Connecticut Corp. ... 2,905,400 3,215,650 0.7
------------ ------------ ------
8,856,079 10,267,337 2.3
- ---------------------------------------------------------------------------------------------------------------------
MACHINERY 191,500 Stewart & Stevenson Services,
Inc. ....................... 4,730,996 4,979,000 1.1
- ---------------------------------------------------------------------------------------------------------------------
MANUFACTURED HOUSING 337,812 Clayton Homes, Inc. .......... 3,951,027 4,813,821 1.1
160,000 Oakwood Homes Corporation..... 3,379,734 3,840,000 0.8
------------ ------------ ------
7,330,761 8,653,821 1.9
- ---------------------------------------------------------------------------------------------------------------------
MARKETING 40,000 +Catalina Marketing
Corporation................. 1,352,400 1,925,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
MEDICAL 160,300 +Sofamor Danek Group, Inc. ... 6,713,000 7,333,725 1.6
- ---------------------------------------------------------------------------------------------------------------------
MEDICAL EQUIPMENT 200,000 +Physio-Control International
Corp. ...................... 4,203,750 2,950,000 0.6
- ---------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 250,000 +Medpartners Inc. ............ 4,971,078 5,406,250 1.2
250,000 +NABI, Inc. .................. 1,900,000 1,625,000 0.4
150,000 +Physician Reliance Network,
Inc. ....................... 1,243,750 1,387,500 0.3
------------ ------------ ------
8,114,828 8,418,750 1.9
- ---------------------------------------------------------------------------------------------------------------------
MEDICAL SPECIALTIES 289,500 +VISX, Inc. .................. 6,665,064 6,875,625 1.5
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 55
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MEDICAL SUPPLIES 285,000 +ATS Medical, Inc. ........... $ 1,845,625 $ 1,407,187 0.3%
42,700 +Biomatrix, Inc. ............. 548,238 789,950 0.2
105,000 Dentsply International,
Inc. ....................... 3,690,000 5,131,875 1.1
100,000 +Urologix, Inc. .............. 1,485,000 1,700,000 0.4
346,800 +Vivus, Inc................... 8,032,028 8,236,500 1.8
------------ ------------ ------
15,600,891 17,265,512 3.8
- ---------------------------------------------------------------------------------------------------------------------
METAL FABRICATING 400,000 +Miller Industries, Inc. ..... 5,050,927 6,400,000 1.4
97,300 Quanex Corp. ................. 2,632,303 2,985,894 0.7
42,000 +Ryerson Tull, Inc. .......... 664,545 693,000 0.1
215,000 Valmont Industries, Inc. ..... 2,298,124 4,085,000 0.9
------------ ------------ ------
10,645,899 14,163,894 3.1
- ---------------------------------------------------------------------------------------------------------------------
METALS 22,900 Castle (A.M.) & Company....... 449,607 505,231 0.1
83,000 Commonwealth Industries
Inc. ....................... 1,604,000 1,680,750 0.4
27,500 +Shiloh Industries, Inc. ..... 452,031 536,250 0.1
------------ ------------ ------
2,505,638 2,722,231 0.6
- ---------------------------------------------------------------------------------------------------------------------
NATURAL GAS UTILITIES 201,000 +TransTexas Gas Corp. ........ 2,871,094 3,065,250 0.7
- ---------------------------------------------------------------------------------------------------------------------
OFFICE--RELATED 208,000 +Wang Laboratories, Inc. ..... 4,027,003 4,433,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 90,000 Danka Business Systems PLC
(ADR)**..................... 2,506,668 3,656,250 0.8
- ---------------------------------------------------------------------------------------------------------------------
OIL 218,600 +Benton Oil & Gas Co. ........ 3,038,383 3,279,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
OIL & GAS 100,000 Vintage Petroleum, Inc. ...... 2,179,256 3,075,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 60,000 +American Exploration Co. .... 686,100 877,500 0.2
90,000 +Barrett Resources Corp. ..... 2,104,146 2,694,375 0.6
156,500 +Brown (Tom), Inc. ........... 3,080,063 3,306,062 0.7
180,000 +Pride International
Inc.(a)..................... 1,229,736 4,308,750 1.0
------------ ------------ ------
7,100,045 11,186,687 2.5
- ---------------------------------------------------------------------------------------------------------------------
OIL/GAS-- EQUIPMENT & SERVICES 125,000 +Weatherford Enterra, Inc. ... 3,683,463 4,812,500 1.1
- ---------------------------------------------------------------------------------------------------------------------
PETROLEUM 50,000 +Plains Resources, Inc. ...... 748,212 737,500 0.2
- ---------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 105,000 +Flamel Technologies
S.A.(ADR)**................. 1,200,000 420,000 0.1
160,000 Mylan Laboratories Inc. ...... 2,525,462 2,360,000 0.5
220,000 +NeXstar Pharmaceuticals,
Inc. ....................... 4,478,688 3,080,000 0.7
150,000 +Sano Corporation............. 1,917,187 2,193,750 0.5
------------ ------------ ------
10,121,337 8,053,750 1.8
- ---------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING 122,000 Banta Corp. .................. 2,822,042 3,309,250 0.7
- ---------------------------------------------------------------------------------------------------------------------
RESTAURANTS 200,000 Applebee's International,
Inc. ....................... 3,954,375 5,350,000 1.2
150,000 +Boston Chicken, Inc. ........ 4,654,875 2,090,625 0.4
------------ ------------ ------
8,609,250 7,440,625 1.6
- ---------------------------------------------------------------------------------------------------------------------
RETAIL 100,900 +Department 56, Inc. ......... 2,024,054 2,238,719 0.5
- ---------------------------------------------------------------------------------------------------------------------
RETAIL--MAIL ORDER 135,000 +Viking Office Products,
Inc. ....................... 2,720,485 2,548,125 0.6
- ---------------------------------------------------------------------------------------------------------------------
RETAIL APPAREL 125,000 +Tommy Hilfiger Corp. ........ 6,439,261 5,023,438 1.1
- ---------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 8,400 Fingerhut Companies, Inc. .... 142,170 146,475 0.0
- ---------------------------------------------------------------------------------------------------------------------
RETAIL STORES 256,000 Baker (J.) Inc. .............. 1,987,375 2,016,000 0.4
134,800 +Barnes & Noble, Inc. ........ 4,482,550 5,796,400 1.3
------------ ------------ ------
6,469,925 7,812,400 1.7
- ---------------------------------------------------------------------------------------------------------------------
SAVINGS & LOAN 74,100 Haven Bancorp, Inc. .......... 2,521,800 2,741,700 0.6
- ---------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 55,000 +Asyst Technologies, Inc. .... 1,572,501 2,392,500 0.5
- ---------------------------------------------------------------------------------------------------------------------
STEEL 176,800 +Citation Corp. .............. 2,662,445 3,027,700 0.7
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 56
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TECHNOLOGY 195,000 +Storage Technology Corp. .... $ 7,552,527 $ 8,677,500 1.9%
- ---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 95,700 +Brite Voice Systems, Inc. ... 804,306 753,637 0.2
306,200 +Metromedia International
Group, Inc. ................ 3,865,339 3,884,912 0.8
------------ ------------ ------
4,669,645 4,638,549 1.0
- ---------------------------------------------------------------------------------------------------------------------
TEXTILES 138,800 +Galey & Lord, Inc. .......... 1,688,953 2,602,500 0.5
130,000 Unifi, Inc. .................. 2,963,853 4,858,750 1.1
------------ ------------ ------
4,652,806 7,461,250 1.6
- ---------------------------------------------------------------------------------------------------------------------
TOOLS 93,300 +Brown & Sharpe Manufacturing
Company (Class A)........... 1,297,742 1,411,162 0.3
- ---------------------------------------------------------------------------------------------------------------------
TOYS 140,000 +Galoob Toys, Inc. ........... 3,752,652 2,642,500 0.6
- ---------------------------------------------------------------------------------------------------------------------
TRANSPORT--TRUCK 83,500 +Landair Services, Inc. ...... 1,150,119 1,189,875 0.3
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 8,300 +Primark Corp. ............... 211,999 220,987 0.1
- ---------------------------------------------------------------------------------------------------------------------
WHOLESALE & INTERNATIONAL 305,100 +CHS Electronics, Inc. ....... 7,100,812 8,047,012 1.8
TRADE
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 337,049,138 390,397,992 85.8
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $19,735,000 Associates Corp. of North
America, 6.15% due
7/01/1997................... 19,731,629 19,731,629 4.3
15,000,000 CXC Inc., 5.55% due
7/30/1997................... 14,930,625 14,930,625 3.3
8,000,000 Corporate Asset Funding Co.
Inc., 5.55% due 7/21/1997... 7,974,100 7,974,100 1.7
15,000,000 Countrywide Home Loans, 5.57%
due 7/21/1997............... 14,951,262 14,951,262 3.3
10,000,000 GTE Corp., 5.50% due
7/18/1997................... 9,972,250 9,972,250 2.2
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 67,559,866 67,559,866 14.8
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............. $404,609,004 457,957,858 100.6
============
LIABILITIES IN EXCESS OF
OTHER ASSETS.................. (2,759,059) (0.6)
------------ ------
NET ASSETS.................... $455,198,799 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
** American Depositary Receipts (ADR).
+ Non-income producing security.
(a) Formerly known as Pride Petroleum Services, Inc.
See Notes to Financial Statements.
55
<PAGE> 57
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$404,609,004) (Note 1a)............................ $457,957,858
Cash....................................................................................... 2,367,175
Receivables:
Securities sold.......................................................................... $2,222,023
Capital shares sold...................................................................... 343,625
Dividends................................................................................ 141,319 2,706,967
----------
Prepaid expenses and other assets.......................................................... 2,555
------------
Total assets............................................................................... 463,034,555
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased..................................................................... 7,201,803
Capital shares redeemed.................................................................. 319,091
Investment adviser (Note 2).............................................................. 281,631 7,802,525
----------
Accrued expenses and other liabilities..................................................... 33,231
------------
Total liabilities.......................................................................... 7,835,756
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................. $455,198,799
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized............................... $ 1,708,863
Paid-in capital in excess of par........................................................... 367,693,457
Undistributed investment income--net....................................................... 1,066,070
Undistributed realized capital gains on investments--net................................... 31,381,555
Unrealized appreciation on investments--net................................................ 53,348,854
------------
NET ASSETS--Equivalent to $26.64 per share based on 17,088,632 shares outstanding.......... $455,198,799
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
56
<PAGE> 58
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and discount earned................................................................ $ 1,390,861
Dividends (net of $1,237 foreign withholding tax)........................................... 1,334,416
Other income................................................................................ 11,636
------------
Total income................................................................................ 2,736,913
------------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................................................... $1,575,200
Accounting services (Note 2)................................................................ 48,140
Professional fees........................................................................... 20,994
Custodian fees.............................................................................. 18,896
Directors' fees and expenses................................................................ 3,940
Transfer agent fees (Note 2)................................................................ 2,250
Other....................................................................................... 1,406
----------
Total expenses.............................................................................. 1,670,826
------------
Investment income--net...................................................................... 1,066,087
------------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES 1c & 3):
Realized gain on investments--net........................................................... 31,493,371
Change in unrealized appreciation on investments--net....................................... (207,789)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ $32,351,669
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
57
<PAGE> 59
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Investment income--net...................................................... $ 1,066,087 $ 2,025,368
Realized gain on investments--net........................................... 31,493,371 22,199,518
Change in unrealized appreciation/depreciation on investments--net.......... (207,789) 5,970,999
------------ ------------
Net increase in net assets resulting from operations........................ 32,351,669 30,195,885
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1d):
Investment income--net...................................................... (1,422,649) (1,882,603)
Realized gain on investments--net........................................... (22,153,543) (43,561,906)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders.............................................................. (23,576,192) (45,444,509)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions.............................................................. (6,605,943) 128,356,735
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................................ 2,169,534 113,108,111
Beginning of period......................................................... 453,029,265 339,921,154
------------ ------------
End of period*.............................................................. $455,198,799 $453,029,265
============ ============
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net....................................... $ 1,066,070 $ 1,422,632
============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
58
<PAGE> 60
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN FOR THE SIX
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
STATEMENTS. JUNE 30, --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 26.22 $ 27.98 $ 19.26 $ 20.96 $ 17.80
-------- -------- -------- -------- --------
Investment income (loss)--net........................ .06 .13 .17 .05 (.01)
Realized and unrealized gain (loss) on
investments--net..................................... 1.72 1.84 8.64 (1.56) 3.17
-------- -------- -------- -------- --------
Total from investment operations..................... 1.78 1.97 8.81 (1.51) 3.16
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................. (.08) (.14) (.09) -- --+
Realized gain on investments--net.................. (1.28) (3.59) -- (.19) --
-------- -------- -------- -------- --------
Total dividends and distributions.................... (1.36) (3.73) (.09) (.19) --
-------- -------- -------- -------- --------
Net asset value, end of period....................... $ 26.64 $ 26.22 $ 27.98 $ 19.26 $ 20.96
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 7.25%+++ 8.11% 45.90% (7.27%) 17.78%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .80%* .81% .81% .83% .96%
======== ======== ======== ======== ========
Investment income (loss)--net........................ .51%* .50% .72% .27% (.05%)
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $455,199 $453,029 $339,921 $170,044 $98,976
======== ======== ======== ======== ========
Portfolio turnover................................... 71.38% 80.84% 96.79% 88.48% 131.75%
======== ======== ======== ======== ========
Average commission rate paid++....................... $ .0559 $ .0598 -- -- --
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
**Total investment returns exclude insurance-related fees and expenses.
+++Aggregate total investment return.
+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. 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.
59
<PAGE> 61
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Equity Growth Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued at amortized cost, which approximates
market value. 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) Income taxes--It is the Fund'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.
(c) 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. 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.
(d) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.75% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $8,470 in commissions on the
execution of portfolio security transactions
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
60
<PAGE> 62
- --------------------------------------------------------------------------------
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $267,187,574 and $301,861,212, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Realized
Gains Unrealized
(Losses) Gains
---------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $31,493,726 $53,348,854
Short-term investments................. (355) --
---------- ----------
Total.................................. $31,493,371 $53,348,854
========== ==========
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $53,348,854, of which $66,828,676 related to appreciated securities
and $13,479,822 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments for Federal income tax purposes was $404,609,004.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $(6,605,943) and $128,356,735 for the six months ended June 30, 1997 and
the year ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
---------------------------------------------------------
<S> <C> <C>
Shares sold........................... 1,409,166 $ 34,049,904
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 960,725 23,576,192
--------- ----------
Total issued.......................... 2,369,891 57,626,096
Shares redeemed....................... (2,556,054) (64,232,039)
--------- ----------
Net decrease.......................... (186,163) $ (6,605,943)
========= ==========
---------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
<S> <C> <C>
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
========= ==========
---------------------------------------------------------
</TABLE>
61
<PAGE> 63
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Global Bond Focus Fund's net
annualized yield was 6.86%. The Fund's total investment return for the six-month
period ended June 30, 1997 was -2.88%, based on a change in per share net asset
value from $9.76 to $9.15, and assuming reinvestment of $0.326 per share income
dividends.
For the one-year period ended June 30, 1997, the Fund's annual total return
was +2.30%. For the period since inception (July 1, 1993) through June 30, 1997,
the Fund's average annual total return was +5.57%. The Fund's standardized
30-day yield as of June 30, 1997 was 5.68%. (Total returns do not include the
effect of insurance-related fees and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the quarter's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although real gross domestic product (GDP) growth for the first
quarter of the year was revised slightly upward to 5.9%, there are indications
that the second quarter's rate of growth will be lower. At the same time,
inflationary pressures remain contained, supported by the June employment report
showing moderate growth in wages along with a slight increase in unemployment.
It remains to be seen whether economic activity moderates enough to rule out
future FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
will remain positive.
PORTFOLIO MATTERS
The Fund closed the six-month period ended June 30, 1997 with its largest
percentage of net assets invested in US assets over the past 24 months. With GDP
growth in the third quarter of 1997 not expected to meet the pace of second
quarter's 6.2% level, and with what we believe to be no inflationary pressures
in sight within the economy, US investments appear very attractive. Interest
rates dropped across the yield curve as the FRB put on hold any additional
interest rate hikes during this six-month period. Our growing comfort with the
possibility of no FRB action between now and year-end is reflected in the Fund's
duration extension in June. At June 30, 1997, the Fund had an average life of
6.6 years, which is 28% longer than the unmanaged JP Morgan Global Government
Bond Index. Our strategy is to take advantage of the very steep yield curve in
the US market and invest in A-rated bank, insurance and finance securities which
trade at attractive yield spreads over the Treasury curve.
The US Government's surprise move to pay down additional debt as a result of
record revenue streams (higher taxes collected) twice in the past three months,
coupled with the unusually high amount of maturity in corporate and Government
securities, should propel existing bonds to even higher price levels. Yield
spreads of high-yield bonds relative to Government securities have narrowed to
historical levels. With spreads this tight, even high-yielding assets in the
market are being placed into Government securities as a temporary position.
By June 30, 1997, the Fund's three largest regional positions were: United
States, 30% of net assets; Australia, 12%; and Sweden, 9%. These compare to the
unmanaged JP Morgan Global Government Bond Index weightings of 40%, 1% and 2%,
respectively.
The overweighting of Sweden represents our greater emphasis on high-yield
Europe. The other two markets of Italy and Spain are at index weighting because
of the significant narrowing each of these markets achieved in their convergence
to German interest rates prior to the European Monetary Union. We believe that
Sweden at 100 basis points (1.00%) over Germany still has enough room to narrow
because of its very attractive fundamental eco-
62
<PAGE> 64
- --------------------------------------------------------------------------------
nomic composition. Core Europe is essentially
not represented in the Fund because we believe the outlook for German recovery
is still difficult to discern.
CURRENCY OUTLOOK
We continue to expect the US dollar to trade higher against its major trading
partners. With our investments concentrated more in the dollar and dollar bloc
economies, hedging becomes less of a concern. As of June 30, 1997, our sterling
positions are unhedged as that currency strengthens against the Deutschemark,
which pulls sterling higher against the US dollar as well. The Swedish krona is
in a similar position.
IN CONCLUSION
We appreciate your investment in Global Bond Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Sean J. Casey
Sean J. Casey
Vice President and Portfolio Manager
August 13, 1997
63
<PAGE> 65
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH FACE VALUE PERCENT OF
AMERICA INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CANADA FOREIGN Canadian Government
GOVERNMENT Bonds:
OBLIGATIONS C$ 350,000... 7% due 12/01/2006...... $ 248,559 $ 265,843 0.3%
2,000,000 8% due 6/01/2023....... 1,632,355 1,643,349 2.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN CANADA 1,880,914 1,909,192 2.4
- ---------------------------------------------------------------------------------------------------------------------
UNITED STATES BANKING US$ 1,600,000 JP Morgan Trust II, 7.95%
due 2/01/2027.......... 1,585,648 1,601,632 2.0
3,750,000 Mellon Capital II, 7.995%
due 1/15/2027.......... 3,666,602 3,745,500 4.7
----------- ----------- -----
5,252,250 5,347,132 6.7
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 3,750,000 American Express Company,
6.75% due 6/23/2004.... 3,743,400 3,719,175 4.7
3,000,000 BT Institutional Capital
Trust, 8.09% due
12/01/2026 (c)......... 3,022,730 2,909,010 3.7
----------- ----------- -----
6,766,130 6,628,185 8.4
------------------------------------------------------------------------------------------------------
GAMING 500,000 ++Harrah's Jazz
Company, 4.25% due
11/15/2001............. 482,500 190,000 0.2
------------------------------------------------------------------------------------------------------
INDUSTRIALS 1,000,000 Philip Morris Cos., Inc.,
8.25% due 10/15/2003... 1,074,600 1,055,430 1.3
------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS 1,000,000 AON Capital Trust, Series
A, 8.205% due
1/01/2027(c)........... 1,016,960 1,025,380 1.3
6,150,000 PNC Institution Capital
Bank, 8.315% due
5/15/2027(c)........... 6,273,000 6,222,816 7.8
----------- ----------- -----
7,289,960 7,248,196 9.1
------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Notes:
OBLIGATIONS 250,000 5.875% due 11/15/1999.. 248,398 248,398 0.3
1,250,000 6.625% due 3/31/2002... 1,244,726 1,261,325 1.6
1,500,000 6.625% due 5/15/2007... 1,507,500 1,512,420 1.9
----------- ----------- -----
3,000,624 3,022,143 3.8
------------------------------------------------------------------------------------------------------
UTILITIES 233,382 +Tucson Electric Power
Co., 10.732%
due 1/01/2013.......... 223,464 232,542 0.3
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE UNITED
STATES 24,089,528 23,723,628 29.8
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
HELD STOCKS & WARRANTS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES BROADCASTING & 1 K-III Communications
PUBLISHING Corp. (Non-Convertible
Preferred), Series B... 82 89 0.0
------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 4,700 American Telecasting Inc.
(Warrants)(a).......... 11,222 1,880 0.0
------------------------------------------------------------------------------------------------------
TOTAL STOCKS & WARRANTS
IN THE UNITED STATES 11,304 1,969 0.0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA 25,981,746 25,634,789 32.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 66
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC FACE VALUE PERCENT OF
BASIN INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA FOREIGN A$ 8,400,000 Australian Government
GOVERNMENT Bonds, 7.50% due
OBLIGATIONS 9/15/2009.............. $ 6,491,356 $ 6,492,921 8.2%
4,650,000 New South Wales Treasury
Bond, 6.50% due
5/01/2006.............. 3,284,797 3,330,607 4.2
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN AUSTRALIA 9,776,153 9,823,528 12.4
- ---------------------------------------------------------------------------------------------------------------------
JAPAN BANKING Y 65,000,000 Asian Development Bank,
5.625% due 2/18/2002... 750,697 668,999 0.8
20,000,000 IBRD World Bank, 4.50%
due 6/20/2000.......... 173,986 191,790 0.2
190,000,000 World Bank, 4.50% due
3/20/2003.............. 1,848,733 1,883,402 2.4
----------- ----------- -----
2,773,416 2,744,191 3.4
------------------------------------------------------------------------------------------------------
FOREIGN 60,000,000 Republic of Finland,
GOVERNMENT 6% due 1/29/2002....... 654,914 619,027 0.8
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN JAPAN 3,428,330 3,363,218 4.2
- ---------------------------------------------------------------------------------------------------------------------
NEW ZEALAND FOREIGN NZ$ 1,000,000 New Zealand Government
GOVERNMENT Bond, 8% due
OBLIGATIONS 11/15/2006............. 724,611 723,649 0.9
5,300,000 New Zealand Treasury
Bond, 8% due
4/15/2004.............. 3,796,117 3,793,340 4.8
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN NEW
ZEALAND 4,520,728 4,516,989 5.7
- ---------------------------------------------------------------------------------------------------------------------
SOUTH KOREA FOREIGN Krw 3,500,000 Export-Import Bank Korea,
GOVERNMENT 7.125% due 9/20/2001... 3,521,000 3,515,750 4.4
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN SOUTH
KOREA 3,521,000 3,515,750 4.4
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 21,246,211 21,219,485 26.7
- ---------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
---------------------------------------------------------------------------------------------------------------------
DENMARK FOREIGN Dkr 2,800,000 Denmark Government Bonds,
GOVERNMENT 8% due 5/15/2003....... 516,582 477,289 0.6
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN DENMARK 516,582 477,289 0.6
- ---------------------------------------------------------------------------------------------------------------------
FRANCE BANKING Frf 1,500,000 Banque Nationale de Paris
(New York), 7.20% due
1/15/2007.............. 1,478,385 1,491,150 1.9
------------------------------------------------------------------------------------------------------
FOREIGN 2,000,000 French Government B-Tan,
GOVERNMENT 7% due 10/12/2000...... 420,453 373,919 0.5
OBLIGATIONS
2,300,000 French OAT, 7.25% due
4/25/2006.............. 483,739 440,550 0.5
----------- ----------- -----
904,192 814,469 1.0
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN FRANCE 2,382,577 2,305,619 2.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE> 67
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE FACE VALUE PERCENT OF
(CONCLUDED) INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GERMANY BANKING DM 3,700,000 Rheinische Hypothebank,
6.875% due
6/18/2007(c)........... $ 3,674,618 $ 3,699,630 4.7%
------------------------------------------------------------------------------------------------------
FOREIGN Bundesrepublic
GOVERNMENT Deutschland:
OBLIGATIONS 625,000 7.50% due 11/11/2004... 452,947 404,604 0.5
500,000 6.25% due 4/26/2006.... 337,334 299,524 0.4
450,000 Deutschland Republic,
6.75% due 4/22/2003.... 311,821 280,985 0.3
1,900,000 German Unity Fund, 8% due
1/21/2002.............. 1,416,586 1,239,917 1.6
----------- ----------- -----
2,518,688 2,225,030 2.8
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN GERMANY 6,193,306 5,924,660 7.5
- ---------------------------------------------------------------------------------------------------------------------
ITALY FOREIGN Buoni Poliennali del
GOVERNMENT Tesoro
OBLIGATIONS (Italian Government
Bonds):
Lit 500,000,000 9.50% due 5/01/2001.... 358,425 325,569 0.4
1,700,000,000 8.50% due 8/01/2004.... 1,100,515 1,094,436 1.4
750,000,000 Government of Italy,
8.50% due 4/01/2004.... 515,391 483,369 0.6
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN ITALY 1,974,331 1,903,374 2.4
- ---------------------------------------------------------------------------------------------------------------------
SPAIN FOREIGN Government of Spain:
GOVERNMENT Pta 75,000,000 10.10% due 2/28/2001... 650,217 588,693 0.7
OBLIGATIONS 325,000,000 8% due 5/30/2004....... 2,512,109 2,456,095 3.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN SPAIN 3,162,326 3,044,788 3.8
- ---------------------------------------------------------------------------------------------------------------------
SWEDEN FOREIGN Government of Sweden:
GOVERNMENT Skr 8,500,000 10.25% due 5/05/2000... 1,411,881 1,243,689 1.6
OBLIGATIONS 44,200,000 5.50% due 4/12/2002.... 5,604,220 5,652,917 7.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN SWEDEN 7,016,101 6,896,606 8.7
- ---------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM BANKING L 1,100,000 Royal Bank of Scotland,
7.875% due 12/07/2006.. 1,820,776 1,854,544 2.3
------------------------------------------------------------------------------------------------------
FOREIGN United Kingdom Treasury
GOVERNMENT Gilt:
OBLIGATIONS 800,000 7% due 11/06/2001...... 1,299,561 1,325,203 1.7
300,000 8% due 6/10/2003....... 490,794 520,103 0.7
530,000 8.50% due 12/07/2005... 945,081 958,071 1.2
150,000 9% due 7/12/2011....... 252,238 289,611 0.4
450,000 8% due 6/07/2021....... 795,378 823,653 1.0
----------- ----------- -----
3,783,052 3,916,641 5.0
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE UNITED
KINGDOM 5,603,828 5,771,185 7.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPE 26,849,051 26,323,521 33.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE> 68
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US GOVERNMENT United States Treasury
OBLIGATIONS* Bills(b):
US$ 400,000 5.02% due 8/21/1997.... $ 397,155 $ 397,128 0.5%
100,000 5.09% due 8/21/1997.... 99,286 99,282 0.1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 496,441 496,410 0.6
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............................ $74,573,449 73,674,205 92.7
===========
VARIATION MARGIN ON FINANCIAL FUTURES
CONTRACTS**.................................. 0 0.0
UNREALIZED DEPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS--NET***................... (107,886) (0.1)
OTHER ASSETS LESS LIABILITIES................ 5,888,779 7.4
----------- -----
NET ASSETS................................... $79,455,098 100.0%
=========== =====
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustments under certain conditions until the expiration date.
(b) All or a portion of security held as collateral in connection with open
financial futures contracts.
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933. 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.
++ Non-income producing security.
* US Government Obligations are traded on a discount basis; the interest rates
shown are the rates paid at the time of purchase by the Fund.
67
<PAGE> 69
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
**Financial futures contracts sold as of June 30, 1997 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTES 1a & 1b)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
30 US Treasury Bonds NYSE September 1997 $ 3,331,875
- -------------------------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT
PRICE--$3,331,875) $ 3,331,875
==========
- -------------------------------------------------------------------------------------------------
</TABLE>
***Forward foreign exchange contracts as of June 30, 1997 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION (DEPRECIATION)
FOREIGN CURRENCY PURCHASED EXPIRATION DATE (NOTE 1b)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A$ 3,750,000................................................. July 1997 $ 2,228
DM 27,261,680................................................ July 1997 (174,974)
L 2,000,000................................................. July 1997 (7,516)
Skr 24,872,890................................................ July 1997 (13,663)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$25,200,740) $(193,925)
-----------
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOREIGN CURRENCY SOLD
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A$ 7,750,000................................................. July 1997 $ 30,446
DM 14,730,800................................................ July 1997 45,958
L 3,000,000................................................. July 1997 (50,610)
Lit 3,050,000,000............................................. July 1997 12,909
NZ$ 6,642,228................................................. July 1997 39,029
Skr 24,872,890................................................ July 1997 8,307
- ---------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$28,851,513) $ 86,039
---------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION--NET ON FORWARD FOREIGN EXCHANGE CONTRACTS $(107,886)
=========
</TABLE>
- --------------------------------------------------------------------------------
+Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $233,000, representing 0.3% of net
assets.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tucson Electric Power Co., 10.732% due 1/01/2013.............................. 8/19/1993 $ 223,464 $232,542
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 223,464 $232,542
======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
68
<PAGE> 70
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $74,573,449) (Note 1a).......................... $73,674,205
Cash...................................................................................... 2,284,765
Foreign cash (Note 1c).................................................................... 2,650,738
Receivables:
Securities sold......................................................................... $3,617,044
Interest................................................................................ 1,324,008
Capital shares sold..................................................................... 10,848
Dividends............................................................................... 1,961 4,953,861
----------
Deferred organization expenses (Note 1f).................................................. 2,367
Prepaid registration fees and other assets (Note 1f)...................................... 641
-----------
Total assets.............................................................................. 83,566,577
-----------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange contracts (Note 1b)................... 107,886
Payables:
Securities purchased.................................................................... 3,927,159
Investment adviser (Note 2)............................................................. 40,715
Forward foreign exchange contracts (Note 1b)............................................ 29,893
Capital shares redeemed................................................................. 105 3,997,872
----------
Accrued expenses and other liabilities.................................................... 5,721
-----------
Total liabilities......................................................................... 4,111,479
-----------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................ $79,455,098
===========
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized.............................. $ 868,822
Paid-in capital in excess of par.......................................................... 86,699,987
Accumulated investment loss--net.......................................................... (315,589)
Accumulated realized capital loss on investments and foreign currency transactions--net
(Note 5)................................................................................ (6,769,431)
Unrealized depreciation on investments and foreign currency transactions--net............. (1,028,691)
-----------
NET ASSETS--Equivalent to $9.15 per share based on 8,688,221 shares outstanding........... $79,455,098
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
69
<PAGE> 71
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned (net of $23,026 foreign withholding tax).................... $ 2,847,220
Dividends................................................................................ 114
-----------
Total income............................................................................. 2,847,334
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................................................ $ 248,060
Custodian fees........................................................................... 22,620
Professional fees........................................................................ 11,146
Accounting services (Note 2)............................................................. 7,851
Pricing services......................................................................... 2,615
Transfer agent fees (Note 2)............................................................. 2,491
Directors' fees and expenses............................................................. 829
Amortization of organization expenses (Note 1f).......................................... 654
Other.................................................................................... 694
-----------
Total expenses........................................................................... 296,960
-----------
Investment income--net................................................................... 2,550,374
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET
(NOTES 1b, 1c, 1e & 3):
Realized loss from:
Investments--net....................................................................... (2,862,026)
Foreign currency transactions--net..................................................... (2,676,715) (5,538,741)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net....................................................................... (23,084)
Foreign currency transactions--net..................................................... 30,535 7,451
----------- -----------
Net realized and unrealized loss on investments and foreign currency transactions........ (5,531,290)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS..................................... $(2,980,916)
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
70
<PAGE> 72
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................................... $ 2,550,374 $ 6,880,110
Realized gain (loss) on investments and foreign currency
transactions--net......................................................... (5,538,741) 830,715
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net................................................ 7,451 (706,098)
------------ ------------
Net increase (decrease) in net assets resulting from operations............. (2,980,916) 7,004,727
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1g):
Investment income--net...................................................... (2,984,814) (6,810,949)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders......... (2,984,814) (6,810,949)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net proceeds from issuance of capital shares................................ (8,369,082) (6,069,072)
Net proceeds from issuance of capital shares resulting from
reorganization............................................................ -- 17,820,572
------------ ------------
Net increase (decrease) in net assets derived from capital share
transactions.............................................................. (8,369,082) 11,751,500
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................................... (14,334,812) 11,945,278
Beginning of period......................................................... 93,789,910 81,844,632
------------ ------------
End of period*.............................................................. $79,455,098 $93,789,910
============ ============
- ------------------------------------------------------------------------------------------------------------------
* Undistributed (accumulated) investment income (loss)--net................. $ (315,589) $ 118,851
============ ============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
71
<PAGE> 73
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31, FOR THE PERIOD
MONTHS ENDED JULY 1, 1993+ TO
JUNE 30, ----------------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997++ 1996++ 1995++ 1994 1993
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 9.76 $ 9.79 $ 9.17 $ 10.38 $ 10.00
------- ------- ------- ------- -------
Investment income--net........................... .28 .78 .85 .76 .25
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net.............................. (.56) (.03) .61 (1.19) .33
------- ------- ------- ------- -------
Total from investment operations................. (.28) .75 1.46 (.43) .58
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net......................... (.33) (.78) (.84) (.76) (.20)
In excess of realized gain on
investments--net............................. -- -- -- (.02) --
------- ------- ------- ------- -------
Total dividends and distributions................ (.33) (.78) (.84) (.78) (.20)
------- ------- ------- ------- -------
Net asset value, end of period................... $ 9.15 $ 9.76 $ 9.79 $ 9.17 $ 10.38
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... (2.88%)+++ 8.02% 16.69% (4.21%) 5.90%+++
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................... .72%* .69% .68% .75% .94%*
======= ======= ======= ======= =======
Investment income--net........................... 6.17%* 7.95% 8.99% 8.01% 6.20%*
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $ 79,455 $93,790 $81,845 $75,150 $ 50,737
======= ======= ======= ======= =======
Portfolio turnover............................... 366.09% 267.13% 132.57% 117.58% 54.80%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ Aggregate total investment return.
See Notes to Financial Statements.
72
<PAGE> 74
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Global Bond Focus Fund (the "Fund") is
classified as "non-diversified", as defined in the Investment Company Act of
1940. These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued at amortized cost, which approximates
market value. 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--The Fund 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--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--The Fund may write and purchase call and put options. When the 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--The Fund may purchase or sell futures contracts
and options on such futures contracts for the purpose 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.
73
<PAGE> 75
- --------------------------------------------------------------------------------
- - Foreign currency options and futures--The Fund 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 Fund'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 from net investment income are
declared and paid monthly. Distributions from capital gains are recorded on the
ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.60% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Inc., earned
$1,832 for providing security price quotations to compute the Fund's net asset
value.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $284,595,848 and $292,599,137, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Realized
Gains Unrealized
(Losses) Losses
---------------------------------------------------------
<S> <C> <C>
Long-term investments............................. $(2,569,656) $ (899,213)
Short-term investments............................ 6 (31)
Stock index futures contracts..................... (292,376) --
Foreign currency transactions..................... (3,058,883) (21,561)
Forward foreign exchange contracts................ 382,168 (107,886)
----------- -----------
Total............................................. $(5,538,741) $(1,028,691)
=========== ===========
- ---------------------------------------------------------
</TABLE>
74
<PAGE> 76
- --------------------------------------------------------------------------------
At June 30, 1997, net unrealized depreciation for Federal income tax purposes
aggregated $899,244, of which $515,865 related to appreciated securities and
$1,415,109 related to depreciated securities. At June 30, 1997, the aggregate
cost of investments for Federal income tax purposes was $74,573,449.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $(8,369,082) and $11,751,500 for the six months ended June 30, 1997 and for
the year ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
---------------------------------------------------------
<S> <C> <C>
Shares sold....................................... 104,613 $ 1,092,633
Shares issued to shareholders in reinvestment of
dividends........................................ 324,048 2,984,814
---------- ------------
Total issued...................................... 428,661 4,077,447
Shares redeemed................................... (1,349,591) (12,446,529)
---------- ------------
Net decrease...................................... (920,930) $ (8,369,082)
========== ============
---------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- ---------------------------------------------------------
<S> <C> <C>
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
========== ============
- ---------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1996, the Fund had net capital loss carryforward of
approximately $514,000, all of which expires in 2002. This amount will be
available to offset like amounts of any future taxable gains.
6. COMMITMENTS:
At June 30, 1997, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
agreed to purchase and sell various foreign currencies with values of
approximately $742,000 and $409,000, respectively.
7. SUBSEQUENT EVENT:
On July 1, 1997, the Board of Directors declared a net investment income
dividend of $.046265 per share payable on July 1, 1997 to shareholders of record
as of June 30, 1997.
75
<PAGE> 77
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Global Strategy Focus Fund provided a
total investment return of +14.60%, based on a change in per share net asset
value from $13.87 to $15.06, and assuming reinvestment of $0.433 per share
income dividends and $0.290 per share capital gains.
For the one-year and five-year periods ended June 30, 1997, the Fund's average
annual total returns were +24.67% and +11.32%, respectively. For the period
since inception (February 28, 1992) through June 30, 1997, the Fund's average
annual total return was +11.12%. (Total returns do not include the effects of
insurance-related fees and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the period's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although gross domestic product growth for the first quarter of
the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
should remain positive.
PORTFOLIO MATTERS
As of June 30, 1997, the asset allocation for Global Strategy Focus Fund was:
foreign equities, 56% of net assets; US equities, 24%; foreign bonds, 14%; US
bonds, 5%; and cash reserves, 1%.
The major change in the portfolio during the six months ended June 30, 1997
was the reallocation of assets away from US stocks and bonds in favor of foreign
equities and fixed-income securities. The proportion of funds allocated to
securities outside the United States increased from 59% of net assets as of
December 31, 1996 to 70% as of June 30, 1997. In increasing the foreign equity
representation, we concentrated on laggard groups such as basic materials. New
commitments in this sector included: Broken Hill Proprietary Co. Ltd. in
Australia; Rio Tinto PLC in the United Kingdom; and Sasol Ltd. and De Beers
Consolidated Mines Ltd. in South Africa. We also enlarged the Fund's commitment
to Japan, where new positions included Amway Japan Ltd., Autobacs Seven Co.,
Ltd., Matsushita Electric Industries, Ltd. and Sony Corporation.
Our increasingly cautious view of the US equity market reflected our concern
that a slower US economy in coming months could lead to earnings
disappointments. The largest concentration of assets was in the financial
services, technology, energy and healthcare sectors. New positions in these
sectors included Intel Corporation and Microsoft Corp. in technology; Nationwide
Financial Services Inc. in insurance; MGIC Investment Corp. in financial
services; Smith International, Inc. in oil services; and Tenet Healthcare Corp.
in hospital management.
As of June 30, 1997, our foreign bond exposure remained concentrated in
Europe. Positions included obligations in the core markets of Germany and
Denmark and the peripheral markets of Finland, Spain, Italy and Sweden.
Positions are also maintained in the bond markets of the United Kingdom, Canada
and Australia. As of June 30, 1997, we hedged our European bond and stock
positions, the Japanese equity
76
<PAGE> 78
- --------------------------------------------------------------------------------
holdings and the positions in Australian stocks
and bonds back into US dollars, given our expectation of further US dollar
strength. As for the US bond commitment, the average duration was 6 years as of
June 30, 1997. The duration was extended from 4 years as of late March,
reflecting our belief that evidence of a slowdown in the US economy improves the
reward/risk relationship for US fixed-income securities.
IN CONCLUSION
We appreciate your investment in Global Strategy Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Thomas R. Robinson
Thomas R. Robinson
Vice President and Portfolio Manager
August 13, 1997
77
<PAGE> 79
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 40,000 United Technologies
Corp. ................... $ 1,654,646 $ 3,320,000 0.4%
- ---------------------------------------------------------------------------------------------------------------------
AIRLINES 33,000 +USAir Group, Inc. ........ 1,161,240 1,155,000 0.1
- ---------------------------------------------------------------------------------------------------------------------
AUTO--RELATED 69,900 +Hertz Corp. (Class A) .... 2,074,409 2,516,400 0.3
- ---------------------------------------------------------------------------------------------------------------------
BANKING 99,102 Banc One Corp. ............ 4,328,829 4,800,229 0.5
68,000 Bank of New York Co.,
Inc. .................... 1,780,938 2,958,000 0.3
28,000 Bank of New York Co., Inc.
(Warrants)(a)............ 210,563 3,157,000 0.3
42,000 BankAmerica Corp. ......... 2,153,156 2,711,625 0.3
26,000 The Chase Manhattan
Corp. ................... 2,669,234 2,523,625 0.3
------------ ------------ ------
11,142,720 16,150,479 1.7
- ---------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 54,375 +Oracle Corp. ............. 1,766,520 2,735,742 0.3
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS 64,000 duPont (E.I.) de Nemours &
Co. ..................... 3,487,086 4,024,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT 118,000 +WorldCom, Inc. ........... 2,949,906 3,768,625 0.4
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 135,200 First Data Corp. .......... 4,788,088 5,940,350 0.6
11,500 +Microsoft Corp. .......... 1,184,334 1,454,031 0.2
------------ ------------ ------
5,972,422 7,394,381 0.8
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 98,500 +BMC Software, Inc. ....... 3,693,343 5,454,437 0.6
75,100 Computer Associates
International, Inc. ..... 3,058,837 4,182,131 0.4
------------ ------------ ------
6,752,180 9,636,568 1.0
- ---------------------------------------------------------------------------------------------------------------------
COMPUTERS 74,500 +Cabletron Systems,
Inc. .................... 2,570,053 2,109,281 0.2
52,000 +Compaq Computer Corp. .... 3,863,668 5,161,000 0.6
23,000 International Business
Machines Corp. .......... 1,263,803 2,074,313 0.2
------------ ------------ ------
7,697,524 9,344,594 1.0
- ---------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 48,800 AlliedSignal Inc. ......... 3,564,585 4,099,200 0.4
- ---------------------------------------------------------------------------------------------------------------------
CONTAINERS 133,100 +Owens-Illinois, Inc. ..... 3,855,558 4,126,100 0.4
- ---------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 112,000 Sunbeam Corp. Inc. ........ 4,261,918 4,228,000 0.5
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 34,000 Intel Corporation.......... 4,701,353 4,813,125 0.5
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 75,500 American Express Company... 3,645,482 5,624,750 0.6
116,000 MGIC Investment Corp. ..... 4,424,013 5,560,750 0.6
------------ ------------ ------
8,069,495 11,185,500 1.2
- ---------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 67,400 The Black & Decker
Corporation.............. 2,259,513 2,506,438 0.3
- ---------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 70,000 +Oxford Health Plans
Inc. .................... 4,358,087 5,022,500 0.6
165,000 +Tenet Healthcare Corp. ... 4,311,798 4,877,813 0.5
------------ ------------ ------
8,669,885 9,900,313 1.1
- ---------------------------------------------------------------------------------------------------------------------
INSURANCE 47,000 Aetna Inc. ................ 3,553,757 4,811,625 0.5
67,200 Allstate Corp. ............ 2,914,196 4,905,600 0.5
30,900 +Hartford Life (Class A)... 1,002,795 1,158,750 0.1
37,300 Nationwide Financial
Services Inc. ........... 886,997 990,781 0.1
85,000 Travelers Group, Inc. ..... 4,514,064 5,360,313 0.6
12,900 Travelers Property Casualty
Corp., Class A........... 499,238 514,388 0.1
120,000 UNUM Corporation........... 3,807,756 5,040,000 0.5
------------ ------------ ------
17,178,803 22,781,457 2.4
- ---------------------------------------------------------------------------------------------------------------------
LEISURE 177,000 Brunswick Corporation...... 4,422,151 5,531,250 0.6
- ---------------------------------------------------------------------------------------------------------------------
LEISURE & TOURISM 51,177 TCI Pacific Communications
(Convertible
Preferred)............... 4,633,648 5,245,643 0.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 80
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MACHINERY 93,000 +American Standard
Companies, Inc. ......... $ 3,045,606 $ 4,161,750 0.5%
95,100 Ingersoll-Rand Co. ........ 4,280,462 5,872,425 0.6
------------ ------------ ------
7,326,068 10,034,175 1.1
- ---------------------------------------------------------------------------------------------------------------------
NATURAL GAS 106,000 Enron Corp. ............... 3,985,927 4,326,125 0.5
- ---------------------------------------------------------------------------------------------------------------------
NATURAL GAS PIPELINES 53,600 IMC Global, Inc. .......... 2,032,587 1,876,000 0.2
- ---------------------------------------------------------------------------------------------------------------------
OIL SERVICES 144,000 Dresser Industries,
Inc. .................... 3,182,337 5,364,000 0.6
17,000 Schlumberger Ltd. ......... 1,433,923 2,125,000 0.2
56,800 +Smith International,
Inc. .................... 2,600,351 3,450,600 0.4
------------ ------------ ------
7,216,611 10,939,600 1.2
- ---------------------------------------------------------------------------------------------------------------------
PAPER 95,000 Kimberly-Clark Corp. ...... 3,646,050 4,726,250 0.5
- ---------------------------------------------------------------------------------------------------------------------
PETROLEUM 32,900 Pennzoil Co. .............. 1,430,640 2,525,075 0.3
80,000 Unocal Corp. .............. 2,671,702 3,105,000 0.3
------------ ------------ ------
4,102,342 5,630,075 0.6
- ---------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 44,400 Abbott Laboratories........ 1,825,798 2,963,700 0.3
72,000 American Home Products
Corporation.............. 4,236,405 5,508,000 0.6
43,000 Merck & Co., Inc. ......... 2,595,765 4,450,500 0.5
------------ ------------ ------
8,657,968 12,922,200 1.4
- ---------------------------------------------------------------------------------------------------------------------
RAILROADS 39,000 Burlington Northern Santa
Fe Inc. ................. 3,386,514 3,505,125 0.4
- ---------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT 115,000 Prentiss Properties
Trusts................... 2,348,760 2,946,875 0.3
TRUSTS 92,550 Starwood Lodging Trust..... 2,448,662 3,950,728 0.4
------------ ------------ ------
4,797,422 6,897,603 0.7
- ---------------------------------------------------------------------------------------------------------------------
RETAIL 93,000 Sears, Roebuck & Co. ...... 4,162,622 4,998,750 0.5
- ---------------------------------------------------------------------------------------------------------------------
RETAIL--DRUG STORES 116,105 Rite Aid Corp. ............ 3,762,904 5,790,737 0.6
- ---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 84,000 +Airtouch Communications,
Inc. .................... 2,358,626 2,299,500 0.3
- ---------------------------------------------------------------------------------------------------------------------
TOBACCO 51,000 Philip Morris Companies,
Inc. .................... 1,648,777 2,263,125 0.2
- ---------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 136,100 Carnival Corp. (Class A)... 3,924,225 5,614,125 0.6
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 191,300 Edison International....... 3,659,395 4,758,587 0.5
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 77,000 El Paso Natural Gas Co. ... 3,924,651 4,235,000 0.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS & WARRANTS 174,868,251 225,279,792 24.2
- ---------------------------------------------------------------------------------------------------------------------
COUNTRY FOREIGN STOCKS++
---------------------------------------------------------------------------------------------------------------------
ARGENTINA 355,900 Yacimientos Petroliferos
Fiscales S.A. (YPF)
(ADR)* (21).............. 8,033,094 10,943,925 1.2
- ---------------------------------------------------------------------------------------------------------------------
AUSTRALIA 713,000 Broken Hill Proprietary Co.
Ltd. (40)................ 9,381,161 10,411,589 1.1
- ---------------------------------------------------------------------------------------------------------------------
BRAZIL 13,950,000 Companhia Cervejaria Brahma
S.A. PN (Preferred)
(34)..................... 7,955,613 10,626,103 1.1
75,700 Telecomunicacoes
Brasileiras S.A.--
Telebras (ADR)* (27)..... 4,691,014 11,487,475 1.2
138,300 +Unibanco Holdings
(ADR)* (3)............... 4,668,104 5,134,388 0.6
------------ ------------ ------
17,314,731 27,247,966 2.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
79
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CANADA 401,600 Canadian Pacific, Ltd. (48)... $ 8,048,765 $ 11,420,500 1.2%
273,200 +Imax Corporation (13)..... 4,335,930 6,659,250 0.7
185,800 Magna International Inc.
(Class A) (1)............ 8,723,375 11,182,837 1.2
122,100 Potash Corp. of
Saskatchewan, Inc.
(35)..................... 9,074,783 9,165,131 1.0
------------ ------------ ------
30,182,853 38,427,718 4.1
- ---------------------------------------------------------------------------------------------------------------------
FINLAND 250,000 +Amer Group Ltd. (10)...... 4,544,192 4,580,167 0.5
132,000 Finnlines OY (36).......... 2,486,828 4,047,518 0.4
115,000 Orion-Yhtymae OY (22)...... 4,516,917 4,335,731 0.5
409,900 UPM-Kymmene OY (38)........ 8,516,525 9,485,864 1.0
------------ ------------ ------
20,064,462 22,449,280 2.4
- ---------------------------------------------------------------------------------------------------------------------
FRANCE 236,000 Scor S.A. (16)............. 8,948,438 9,504,434 1.0
126,500 +SGS-Thomson
Microelectronics N.V. (NY
Registered Shares) (51).. 4,655,571 10,120,000 1.1
545,000 Usinor-Sacilor S.A. (40)... 8,643,115 9,833,359 1.1
------------ ------------ ------
22,247,124 29,457,793 3.2
- ---------------------------------------------------------------------------------------------------------------------
GERMANY 13,500 Henkel KGaA (9)............ 600,048 716,602 0.1
121,500 Henkel KGaA
(Preferred) (9).......... 5,163,053 6,902,617 0.7
24,900 Mannesmann AG (17)......... 7,578,765 11,102,548 1.2
176,500 Siemens AG (12)............ 8,419,829 10,488,107 1.1
------------ ------------ ------
21,761,695 29,209,874 3.1
- ---------------------------------------------------------------------------------------------------------------------
HONG KONG 404,600 HSBC Holdings PLC (3)...... 6,668,545 12,169,128 1.3
- ---------------------------------------------------------------------------------------------------------------------
INDONESIA 313,380 P.T. Indonesian Satellite
Corp. (ADR)* (27)........ 9,998,585 9,381,814 1.0
- ---------------------------------------------------------------------------------------------------------------------
ITALY 750,000 Arnoldo Mondadori Editore
S.p.A. (23).............. 6,327,223 4,332,098 0.5
1,161,800 Danieli & Company (17)..... 4,276,177 4,066,061 0.4
143,000 Gucci Group N.V. (ADR)*
(29)..................... 10,378,120 9,205,625 1.0
------------ ------------ ------
20,981,520 17,603,784 1.9
- ---------------------------------------------------------------------------------------------------------------------
JAPAN 131,000 Amway Japan Ltd. (46)...... 5,024,087 4,440,290 0.5
62,000 Autobacs Seven Co.,
Ltd. (46)................ 4,284,932 4,917,970 0.5
424,000 Bridgestone Corporation
(47)..................... 7,463,165 9,852,712 1.1
314,000 Canon, Inc. (12)........... 5,242,497 8,558,400 0.9
803,000 Maeda Corp. (4)............ 7,177,535 4,510,605 0.5
570,000 Matsushita Electric
Industries, Ltd. (12).... 8,772,630 11,502,577 1.2
440,000 Matsushita Electric Works,
Ltd. (12)................ 5,008,320 4,996,942 0.5
1,395,000 Mitsubishi Electric
Corp. (11)............... 9,130,689 7,811,610 0.8
1,451,000 Mitsubishi Heavy Industry,
Ltd. (8)................. 10,315,664 11,142,037 1.2
809,000 Mitsui-Soko Co., Ltd.
(42)..................... 6,794,019 5,646,816 0.6
906,000 Okumura Corp. (4).......... 6,730,420 4,804,246 0.5
124,000 Rohm Company, Ltd. (12).... 7,059,616 12,782,388 1.4
120,000 Sony Corporation (12)...... 8,809,983 10,472,613 1.1
808,000 Tokio Marine and Fire
Insurance Co., Ltd.
(16)..................... 9,454,210 10,587,927 1.1
1,311,000 Toray Industries Ltd.
(28)..................... 8,509,966 9,356,923 1.0
------------ ------------ ------
109,777,733 121,384,056 12.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE> 82
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MEXICO 555,400 Grupo Carso, S.A. de C.V.
(ADR)* (18).............. $ 7,690,826 $ 7,497,900 0.8%
342,000 Panamerican Beverages, Inc.
(Class A) (34)........... 7,114,640 11,243,250 1.2
225,000 Telefonos de Mexico, S.A.
de C.V. (Telmex) (ADR)*
(27)..................... 8,575,626 10,743,750 1.2
------------ ------------ ------
23,381,092 29,484,900 3.2
- ---------------------------------------------------------------------------------------------------------------------
NETHERLANDS 544,000 ABN-AMRO Holdings (3)...... 7,835,801 10,152,152 1.1
466 ABN-AMRO Holdings
N.V. (Convertible
Preferred) (3)........... 15,383 33,265 0.0
------------ ------------ ------
7,851,184 10,185,417 1.1
- ---------------------------------------------------------------------------------------------------------------------
NORWAY 641,000 Color Line ASA (36)........ 2,499,223 2,888,452 0.3
- ---------------------------------------------------------------------------------------------------------------------
PHILIPPINES 3,245,000 San Miguel Corp.
(Class B) (34)........... 9,433,294 8,558,918 0.9
- ---------------------------------------------------------------------------------------------------------------------
SOUTH AFRICA 248,000 De Beers Consolidated
Mines Ltd. (ADR)*(35).... 8,396,127 9,145,000 1.0
810,000 Sasol Ltd. (10)............ 9,525,964 10,629,687 1.1
------------ ------------ ------
17,922,091 19,774,687 2.1
- ---------------------------------------------------------------------------------------------------------------------
SOUTH KOREA 183,363 +Hyundai Engineering &
Construction Co., Ltd.
(GDR)** (b) (44)......... 2,353,218 756,372 0.1
- ---------------------------------------------------------------------------------------------------------------------
SPAIN 238,000 Repsol S.A. (ADR)* (21).... 7,749,030 10,100,125 1.1
- ---------------------------------------------------------------------------------------------------------------------
SWEDEN 454,100 Bure Investment
Aktiebolaget (45)........ 3,955,365 5,726,615 0.6
214,600 +Castellum AB (24)......... 1,439,624 1,609,902 0.2
4,300 Perstorp, AB (Class B)
(9)...................... 76,145 76,196 0.0
278,000 Sparbanken Sverige AB
(Class A) (3)............ 3,575,154 6,184,650 0.7
------------ ------------ ------
9,046,288 13,597,363 1.5
- ---------------------------------------------------------------------------------------------------------------------
SWITZERLAND 7,700 BBC Brown Boveri & Cie AG
(11)..................... 7,543,607 11,673,870 1.3
7,000 Novartis AG (22)........... 6,960,585 11,208,067 1.2
1,000 Roche Holding AG (22)...... 8,400,244 9,058,791 1.0
------------ ------------ ------
22,904,436 31,940,728 3.5
- ---------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 801,000 Boots Company PLC (49)..... 7,746,777 9,384,384 1.0
2,248,100 British Steel PLC (50)..... 6,083,975 5,589,192 0.6
1,012,400 +Grand Metropolitan PLC
(34)..................... 7,201,806 9,731,331 1.1
783,900 Imperial Chemical
Industries PLC (43)...... 10,154,513 10,872,238 1.2
1,498,900 LucasVarity PLC (1)........ 5,164,432 5,184,755 0.6
560,000 Rio Tinto PLC (40)......... 8,358,161 9,745,845 1.1
2,085,000 Vodafone Group PLC (27).... 7,541,528 10,159,350 1.1
------------ ------------ ------
52,251,192 60,667,095 6.7
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 431,802,551 516,640,984 55.6
- ---------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT FOREIGN BONDS++
---------------------------------------------------------------------------------------------------------------------
AUSTRALIA A$ 7,500,000 Government of
Australia, 7.50% due
7/15/2005 (15)........... 5,794,948 5,809,000 0.6
- ---------------------------------------------------------------------------------------------------------------------
CANADA C$ 7,350,000 Canadian Government Bonds,
7% due 12/01/2006 (15)... 5,583,958 5,582,697 0.6
- ---------------------------------------------------------------------------------------------------------------------
DENMARK Dkr 72,500,000 Government of Denmark,
7% due 11/15/2007 (15)... 11,582,614 11,478,046 1.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE> 83
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
COUNTRY AMOUNT FOREIGN BONDS++ COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINLAND Fim 55,000,000 Finnish Government Bonds,
7.25% due 4/18/2006
(15)..................... $ 12,170,983 $ 11,507,531 1.2%
- ---------------------------------------------------------------------------------------------------------------------
GERMANY
Bundesrepublik Deutschland
(15):
DM 6,500,000 7.125% due 12/20/2002.... 4,514,124 4,124,699 0.5
7,900,000 6.50% due 10/14/2005..... 5,092,717 4,812,263 0.5
50,930,000 6% due 1/04/2007......... 30,216,011 29,974,640 3.2
7,550,000 Treuhandanstalt, 6.875% due
6/11/2003 (15)........... 5,020,900 4,744,204 0.5
------------ ------------ ------
44,843,752 43,655,806 4.7
- ---------------------------------------------------------------------------------------------------------------------
ITALY Lit 19,265,000,000 Buoni Poliennali del Tesoro
(Italian Government
Bonds), 8.50% due
1/01/2004 (15)........... 11,853,145 12,403,664 1.3
- ---------------------------------------------------------------------------------------------------------------------
SPAIN Pta 1,670,000,000 Spanish Government Bonds,
7.90% due 2/28/2002
(15)..................... 13,081,909 12,420,944 1.3
- ---------------------------------------------------------------------------------------------------------------------
SWEDEN
Government of Sweden (15):
Skr 41,300,000 10.25% due 5/05/2000..... 7,052,190 6,042,864 0.7
48,800,000 8% due 8/15/2007......... 6,934,396 6,935,667 0.8
------------ ------------ ------
13,986,586 12,978,531 1.5
- ---------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM L 11,000,000 United Kingdom Treasury
Gilt, 7.25% due
12/07/2007 (15).......... 18,207,288 18,504,513 2.0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS 137,105,183 134,340,732 14.4
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------
US Treasury Notes:
US$ 10,000,000 6.50% due 5/31/2002...... 10,073,125 10,040,600 1.1
12,000,000 6.625% due 5/15/2007..... 12,063,750 12,099,360 1.3
20,000,000 6.625% due 2/15/2027..... 19,090,625 19,568,800 2.1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT
OBLIGATIONS 41,227,500 41,708,760 4.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.................................. $ 785,003,485 917,970,268 98.7
============
UNREALIZED APPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS+++.............................. 1,907,449 0.2
OTHER ASSETS LESS LIABILITIES...................... 10,145,950 1.1
------------ ------
NET ASSETS......................................... $ 930,023,667 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to adjustment
under certain conditions until the expiration date.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
+ Non-Income producing securities.
82
<PAGE> 84
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
++ Corresponding industry groups for foreign stocks and bonds:
<TABLE>
<S> <C> <C>
(1) Auto--Parts (24) Real Estate (47) Tire & Rubber
(2) Automotive Equipment (25) Retail Stores (48) Natural Resources
(3) Banking (26) Shipping (49) Merchandising
(4) Building & Construction (27) Telecommunications (50) Steel
(5) Building Materials (28) Textiles (51) Semiconductor Capital Equipment
(6) Business & Public Service (29) Textiles & Apparel
(7) Business Publishing (30) Trading
(8) Capital Goods (31) Utilities
(9) Chemicals (32) Utilities--Electric
(10) Diversified (33) Financial Services
(11) Electrical Equipment (34) Beverages
(12) Electronics (35) Mining
(13) Entertainment & Leisure (36) Transportation
(14) Glass (37) Communications Equipment
(15) Government (Bonds) (38) Paper & Forest Products
(16) Insurance (39) Industrial Components
(17) Machinery & Equipment (40) Metals
(18) Multi-Industry (41) Photography
(19) Natural Gas (42) Warehouse & Storage
(20) Packaging (43) Oil--Integrated
(21) Petroleum (44) Engineering & Construction
(22) Pharmaceutical (45) Investment Management
(23) Printing & Publishing (46) Retailers
</TABLE>
+++ Forward foreign exchange contracts sold as of June 30, 1997 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
UNREALIZED
APPRECIATION
FOREIGN EXPIRATION (DEPRECIATION)
CURRENCY SOLD DATE (NOTE 1b)
- ------------------------------------------------------
<S> <C> <C> <C>
A$ 19,500,000 July 1997 $ 40,092
Chf 45,700,000 July 1997 566,771
DM 138,700,000 July 1997 909,836
Dkr 77,300,000 July 1997 77,950
Fim 173,000,000 July 1997 143,949
Frf 162,400,000 July 1997 267,449
L 49,000,000 August 1997 211,481
Lit 53,400,000,000 July 1997 230,806
Pta 3,270,000,000 July 1997 309,203
Skr 190,000,000 July 1997 88,968
Y 13,370,000,000 July 1997 (939,056)
- ------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON
FORWARD FOREIGN
EXCHANGE CONTRACTS--NET (US$
COMMITMENT--$476,852,759) $1,907,449
===============
- ------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
83
<PAGE> 85
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $785,003,485) (Note 1a).......................... $ 917,970,268
Cash....................................................................................... 2,565,986
Unrealized appreciation on forward foreign exchange contracts
(Note 1b)................................................................................ 1,907,449
Foreign cash (Note 1c)..................................................................... 379,875
Receivables:
Securities sold.......................................................................... $ 5,370,630
Interest................................................................................. 4,142,889
Dividends................................................................................ 2,276,531
Capital shares sold...................................................................... 15,359 11,805,409
----------
Prepaid expenses and other assets.......................................................... 3,600
------------
Total assets............................................................................... 934,632,587
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased..................................................................... 3,535,195
Investment adviser (Note 2).............................................................. 507,637
Forward foreign exchange contracts (Note 1b)............................................. 252,698
Capital shares redeemed.................................................................. 203,352 4,498,882
----------
Accrued expenses and other liabilities..................................................... 110,038
------------
Total liabilities.......................................................................... 4,608,920
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................. $ 930,023,667
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 200,000,000 shares authorized............................... $ 6,177,367
Paid-in capital in excess of par........................................................... 730,994,892
Undistributed investment income--net....................................................... 13,590,158
Undistributed realized capital gains on investments and foreign currency
transactions--net........................................................................ 44,469,010
Unrealized appreciation on investments and foreign currency transactions--net.............. 134,792,240
------------
NET ASSETS--Equivalent to $15.06 per share based on 61,773,674 shares outstanding.......... $ 930,023,667
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
84
<PAGE> 86
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned (net of $26,469 foreign withholding tax)................... $ 5,325,610
Dividends (net of $905,309 foreign withholding tax)..................................... 9,789,601
------------
Total income............................................................................ 15,115,211
------------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)....................................................... $ 2,839,816
Custodian fees.......................................................................... 152,541
Accounting services (Note 2)............................................................ 86,099
Professional fees....................................................................... 54,342
Directors' fees and expenses............................................................ 7,389
Pricing services........................................................................ 6,258
Transfer agent fees (Note 2)............................................................ 2,330
Other................................................................................... 29,132
-----------
Total expenses.......................................................................... 3,177,907
------------
Investment income--net.................................................................. 11,937,304
------------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET
(NOTES 1b, 1c, 1e & 3):
Realized gain from:
Investments--net...................................................................... 37,880,171
Foreign currency transactions--net.................................................... 6,784,603 44,664,774
-----------
Change in unrealized appreciation/depreciation on:
Investments--net...................................................................... 59,108,273
Foreign currency transactions--net.................................................... 4,600,961 63,709,234
----------- ------------
Net realized and unrealized gain on investments and foreign currency transactions....... 108,374,008
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 120,311,312
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
85
<PAGE> 87
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net.............................................................. $11,937,304 $15,340,737
Realized gain on investments and foreign currency transactions--net................. 44,664,774 60,957,413
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net................................................................. 63,709,234 24,598,652
------------ ------------
Net increase in net assets resulting from operations................................ 120,311,312 100,896,802
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net.............................................................. (18,926,819) (12,699,527)
Realized gain on investments--net................................................... (26,410,839) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders...................................................................... (45,337,658) (12,699,527)
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share transactions....... (15,152,805) 241,763,930
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets........................................................ 59,820,849 329,961,205
Beginning of period................................................................. 870,202,818 540,241,613
------------ ------------
End of period*...................................................................... $930,023,667 $870,202,818
============ ============
- -------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.............................................. $13,590,158 $20,579,673
============ ============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
86
<PAGE> 88
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. JUNE 30, --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 13.87 $ 12.55 $ 11.73 $ 12.17 $ 10.22
-------- -------- -------- -------- --------
Investment income--net.................................... .19 .28 .39 .30 .16
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net...................... 1.72 1.33 .82 (.48) 1.96
-------- -------- -------- -------- --------
Total from investment operations.......................... 1.91 1.61 1.21 (.18) 2.12
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.................................. (.30) (.29) (.39) (.21) (.17)
Realized gain on investments--net....................... (.42) -- --+ (.04) --
In excess of realized gain on investments--net.......... -- -- -- (.01) --
-------- -------- -------- -------- --------
Total dividends and distributions......................... (.72) (.29) (.39) (.26) (.17)
-------- -------- -------- -------- --------
Net asset value, end of period............................ $ 15.06 $ 13.87 $ 12.55 $ 11.73 $ 12.17
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................ 14.60%+++ 13.17% 10.60% (1.46%) 21.03%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................. .73%* .71% .72% .77% .88%
======== ======== ======== ======== ========
Investment income--net.................................... 2.73%* 2.68% 3.33% 2.85% 2.41%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $930,024 $870,203 $540,242 $515,407 $269,627
======== ======== ======== ======== ========
Portfolio turnover........................................ 64.70% 173.44% 27.23% 21.03% 17.07%
======== ======== ======== ======== ========
Average commission rate paid++............................ $ .0109 $ .0143 -- -- --
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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. 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.
87
<PAGE> 89
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Global Strategy Focus Fund (the "Fund") is
classified as "non-diversified", as defined in the Investment Company Act of
1940. These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term
securities are valued at amortized cost, which approximates market value.
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--The Fund 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--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--The Fund may write and purchase call and put options. When the 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--The Fund may purchase or sell futures contracts
and options on such futures contracts for the purpose 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.
88
<PAGE> 90
- --------------------------------------------------------------------------------
- - Foreign currency options and futures--The Fund 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--Trans-actions 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 Fund'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) Dividends and distributions to shareholders--Dividends and distributions
paid by the Fund are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.65% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $20,824 in commissions on the execution
of portfolio security transactions.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $515,026,775 and $539,273,813, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS GAINS
(LOSSES) (LOSSES)
---------------------------------------------------------
<S> <C> <C>
Long-term investments......... $ 37,879,716 $ 132,966,783
Short-term investments........ 455 --
Foreign currency
transactions................ (7,019,197) (81,992)
Forward foreign exchange
contracts................... 13,803,800 1,907,449
----------- ------------
Total......................... $ 44,664,774 $ 134,792,240
=========== ============
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $132,966,783, of which $152,478,261 related to appreciated securities
and $19,511,478 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments for Federal income tax purposes was $785,003,485.
89
<PAGE> 91
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $(15,152,805) and $241,763,930 for the six months ended June 30, 1997 and
the year ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FOR THE SIX MONTHS ENDED DOLLAR
JUNE 30, 1997 SHARES AMOUNT
- ---------------------------------------------------------
<S> <C> <C>
Shares sold..................................... 537,967 $7,723,579
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 3,479,482 45,337,658
---------- ------------
Total issued.................................... 4,017,449 53,061,237
Shares redeemed................................. (4,967,078) (68,214,042)
---------- ------------
Net decrease.................................... (949,629) $(15,152,805)
========== ============
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FOR THE YEAR ENDED DOLLAR
DECEMBER 31, 1996 SHARES AMOUNT
- ---------------------------------------------------------
<S> <C> <C>
Shares sold..................................... 1,190,964 $14,964,723
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 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
=========== ============
- ---------------------------------------------------------
</TABLE>
5. COMMITMENTS:
At June 30, 1997, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
agreed to purchase and sell various foreign currencies with values of
approximately $76,000 and $2,056,000, respectively.
90
<PAGE> 92
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Global Utility Focus Fund's total
investment return was +10.70%, based on a change in per share net asset value
from $12.19 to $13.28, and assuming reinvestment of $0.194 per share income
dividends.
For the one-year period ended June 30, 1997, the Fund's annual total return
was +17.59%. For the period since inception (July 1, 1993) through June 30,
1997, the Fund's average annual total return was +11.04%. (Total returns do not
include the effect of insurance-related fees and expenses).
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the quarter's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although real gross domestic product growth for the first quarter
of the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
will remain positive.
PORTFOLIO MATTERS
The performance of various countries and regions continued to diverge during
the six-month period ended June 30, 1997. For most of the six-month period,
Europe was the best-performing region for utility investments with countries
such as Italy and Spain performing strongly. In May, investor sentiment briefly
shifted from Europe to Japan. The major political changes which occurred as a
result of elections in both the United Kingdom and France appeared to be a key
reason for the European region's stock market's declining from previous highs.
Moreover, after the Japanese stock market's prolonged underperformance,
investors began to view this market as an attractive investment area. This shift
in sentiment in the month of May did not carry over into June, as once again
Europe became the best-performing region for utility investments. The US-based
utility market remained volatile during the six-month period as long-term
interest rates fluctuated around the 7% level.
As of June 30, 1997, 97.6% of the Fund's net assets was invested in equities,
with 48.7% invested in US-based utility equities and 48.9% invested in foreign
utility equities. We held positions in 23 countries, including the United
States. The top five non-US countries in order of market values were Spain,
Italy, the United Kingdom, Chile and Brazil. In total, these five markets
accounted for 27.3% of net assets. On a regional basis, North America had the
largest weighting because of our significant position in the United States.
Europe was the second-largest region accounting for 27.9% of net assets.
During the six-month period ended June 30, 1997, the most notable shifts in
the composition of the Fund's portfolio were the elimination of a very modest
holding in bonds (1.4% of net assets as of December 31, 1996) and the continued
reduction of US-based utility stocks in favor of foreign utility stocks.
Finally, the Fund remained nearly fully invested throughout the period, as we
maintained our cash position in the range of 2%-3% of net assets.
During the first half of 1997 we made several transactions. For the most part,
these transactions were partial sales to capture stock price appreciation and to
raise capital for new purchases such as Electricidad de Portugal, S.A. and KN
Energy, Inc. We eliminated our position in NCR Corp., which we received as a
spin-off from AT&T Corp., since the company
91
<PAGE> 93
- --------------------------------------------------------------------------------
did not fit the investment strategy of the Fund.
We eliminated two positions, Tata Electric Companies and The Hong Kong & China
Gas Co., Ltd., as the fundamental outlooks for these companies deteriorated.
Looking ahead, there continues to be greater utility investment opportunities
abroad than in the United States. However, several of the US-based utility
companies are attractive on a total return basis. Therefore, we will continue to
weigh the investment positions and opportunities between the potential higher
capital appreciation from non-US utility stocks with those of the mainly
higher-yielding US-based utility stocks.
IN CONCLUSION
We appreciate your investment in Global Utility Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Walter D. Rogers
Walter D. Rogers
Vice President and Portfolio Manager
August 13, 1997
92
<PAGE> 94
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COMMON STOCKS VALUE PERCENT OF
COUNTRY INDUSTRY HELD & WARRANTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARGENTINA TELECOMMUNICATIONS 7,900 Central Costanera S.A.
(ADR)*(c)............... $ 261,847 $ 276,533 0.2%
25,600 Telecom Argentina STET
S.A. (ADR)*(c).......... 1,160,819 1,344,000 1.0
44,800 Telefonica de Argentina
S.A. (ADR)*............. 1,173,168 1,551,200 1.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
ARGENTINA 2,595,834 3,171,733 2.3
- ---------------------------------------------------------------------------------------------------------------------
AUSTRALIA UTILITIES--GAS 434,496 Australian Gas Light Co.,
Ltd. ................... 1,238,060 2,540,107 1.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRALIA 1,238,060 2,540,107 1.9
- ---------------------------------------------------------------------------------------------------------------------
AUSTRIA UTILITIES--GAS 13,560 Energie-Versorgung
Niederoesterreich AG
(EVN)................... 1,388,213 1,747,679 1.3
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRIA 1,388,213 1,747,679 1.3
- ---------------------------------------------------------------------------------------------------------------------
BRAZIL TELECOMMUNICATIONS 26,000 Telecomunicacoes
Brasileiras
S.A.-Telebras (ADR)*.... 1,330,477 3,945,500 2.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
BRAZIL 1,330,477 3,945,500 2.9
- ---------------------------------------------------------------------------------------------------------------------
CANADA TELECOMMUNICATIONS 56,000 BC Telecom, Inc. ......... 1,052,989 1,315,259 1.0
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 70,100 Transcanada Pipeline Co.,
Ltd. (ADR)*............. 1,045,275 1,410,763 1.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
CANADA 2,098,264 2,726,022 2.0
- ---------------------------------------------------------------------------------------------------------------------
CHILE TELECOMMUNICATIONS 61,200 Compania de Telefonos de
Chile S.A. (ADR)*....... 1,254,995 2,019,600 1.5
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 20,000 Chilgener S.A.(ADR)*...... 460,000 560,000 0.4
6,598 Chilgener S.A.
(Rights)(b)............. 0 14,780 0.0
87,750 Distribuidora Chilectra
Metropolitana, S.A.
(ADR)*(c)............... 1,098,337 2,610,563 1.9
48,300 Enersis S.A. (ADR)*....... 1,026,061 1,717,669 1.3
------------ ------------ ------
2,584,398 4,903,012 3.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
CHILE 3,839,393 6,922,612 5.1
- ---------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 77,000 Tele Danmark A/S (ADR)*... 1,826,433 2,011,625 1.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
DENMARK 1,826,433 2,011,625 1.5
- ---------------------------------------------------------------------------------------------------------------------
FRANCE UTILITIES--WATER 16,731 Generale des Eaux S.A. ... 1,907,473 2,144,452 1.6
16,731 Generale des Eaux S.A.
(Warrants)(a)........... 0 10,025 0.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS &
WARRANTS IN FRANCE 1,907,473 2,154,477 1.6
- ---------------------------------------------------------------------------------------------------------------------
GERMANY TELECOMMUNICATIONS 8,100 Deutsche Telekom AG....... 154,054 195,226 0.1
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 40,000 Veba AG................... 1,305,397 2,249,512 1.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
GERMANY 1,459,451 2,444,738 1.8
- ---------------------------------------------------------------------------------------------------------------------
INDONESIA TELECOMMUNICATIONS 1,110 P.T. Indonesian Satellite
Corp. (ADR)*............ 35,575 33,231 0.0
8,000 P.T. Telekomunikasi
Indonesia (PERSERO)
(ADR)*.................. 144,000 260,000 0.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
INDONESIA 179,575 293,231 0.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE> 95
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ITALY TELECOMMUNICATIONS 761,900 +Seat S.p.A............... $ 212,037 $ 159,093 0.1%
761,900 Societa Finanziara
Telefonica S.p.A.
(STET).................. 1,629,934 2,644,086 2.0
729,600 TIM S.p.A................. 684,328 2,360,332 1.7
729,600 Telecom Italia S.p.A. .... 950,865 2,184,380 1.6
------------ ------------ ------
3,477,164 7,347,891 5.4
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 513,400 Italgas Torino S.p.A...... 1,581,576 1,660,902 1.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
ITALY 5,058,740 9,008,793 6.6
- ---------------------------------------------------------------------------------------------------------------------
MALAYSIA TELECOMMUNICATIONS 208,500 Telekom Malaysia BHD...... 962,438 974,878 0.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
MALAYSIA 962,438 974,878 0.7
- ---------------------------------------------------------------------------------------------------------------------
MEXICO TELECOMMUNICATIONS 29,000 Telefonos de Mexico, S.A.
de C.V. (Telemex)
(ADR)*.................. 1,706,306 1,384,750 1.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
MEXICO 1,706,306 1,384,750 1.0
- ---------------------------------------------------------------------------------------------------------------------
NEW ZEALAND TELECOMMUNICATIONS 51,600 Telecom Corporation of New
Zealand Ltd. (ADR)*..... 1,206,873 2,102,700 1.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN NEW
ZEALAND 1,206,873 2,102,700 1.5
- ---------------------------------------------------------------------------------------------------------------------
PERU TELECOMMUNICATIONS 73,000 Telefonica del Peru, S.A.
(ADR)*.................. 1,496,500 1,911,688 1.4
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
PERU 1,496,500 1,911,688 1.4
- ---------------------------------------------------------------------------------------------------------------------
PHILIPPINES TELECOMMUNICATIONS 21,800 Philippine Long Distance
Telephone Co. (ADR)*.... 1,270,791 1,400,650 1.0
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 96,330 Manila Electric Co.
(MERALCO) 'B'........... 518,117 475,252 0.3
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
PHILIPPINES 1,788,908 1,875,902 1.3
- ---------------------------------------------------------------------------------------------------------------------
PORTUGAL TELECOMMUNICATIONS 65,720 Portugal Telecom, S.A.
(ADR)*.................. 1,417,539 2,637,015 1.9
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 2,940 EDP-Electricidad de
Portugal, S.A. (ADR)*... 75,970 105,840 0.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
PORTUGAL 1,493,509 2,742,855 2.0
- ---------------------------------------------------------------------------------------------------------------------
SOUTH KOREA UTILITIES--ELECTRIC 40,800 Korea Electric Power Corp.
(ADR)*.................. 821,100 762,450 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
SOUTH KOREA 821,100 762,450 0.6
- ---------------------------------------------------------------------------------------------------------------------
SPAIN TELECOMMUNICATIONS 50,700 Telefonica de Espana S.A.
(ADR)*.................. 1,942,165... 4,372,875 3.2
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 36,400 Empresa Nacional de
Electricidad, S.A.
(Endesa) (ADR)*......... 1,634,684 3,096,275 2.3
7,500 HidroCantabrico, S.A. .... 251,742 304,584 0.2
131,000 Iberdrola I S.A. ......... 879,896 1,654,737 1.2
------------ ------------ ------
2,766,322 5,055,596 3.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
SPAIN 4,708,487 9,428,471 6.9
- ---------------------------------------------------------------------------------------------------------------------
SWITZERLAND UTILITIES--ELECTRIC 1,500 Elektrowatt AG............ 588,618 556,699 0.4
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
SWITZERLAND 588,618 556,699 0.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
94
<PAGE> 96
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THAILAND TELECOMMUNICATIONS 2,000 +TelecomAsia Corporation
Public Co., Ltd.
(ADR)*.................. $ 43,740 $ 24,000 0.0%
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 68,000 Electricity Generating
Company of Thailand
(EGCOMP)................ 60,715 166,911 0.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
THAILAND 104,455 190,911 0.1
- ---------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM TELECOMMUNICATIONS 57,000 British Telecommuni-
cations PLC............. 406,712 422,768 0.3
10,000 British Telecommuni-
cations PLC (ADR)*...... 741,450 742,500 0.5
87,000 Vodafone Group PLC
(ADR)*.................. 2,549,289 4,214,063 3.1
------------ ------------ ------
3,697,451 5,379,331 3.9
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 167,500 National Power PLC........ 1,238,839 1,454,044 1.1
95,139 PowerGen PLC.............. 705,721 1,129,663 0.8
------------ ------------ ------
1,944,560 2,583,707 1.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED KINGDOM 5,642,011 7,963,038 5.8
- ---------------------------------------------------------------------------------------------------------------------
UNITED STATES TELECOMMUNICATIONS 36,400 +AirTouch Communications,
Inc. ................... 879,157 996,450 0.7
25,800 Ameritech Corp. .......... 1,030,404 1,752,788 1.3
37,400 BellSouth Corp. .......... 1,138,507 1,734,425 1.3
42,000 Frontier Corp. ........... 969,520 837,375 0.6
33,500 GTE Corp. ................ 1,124,815 1,469,813 1.1
3,240 Lucent Technologies
Inc. ................... 159,185 233,482 0.2
20,000 MCI Communications
Corp. .................. 602,500 765,000 0.5
31,000 NYNEX Corp. .............. 1,184,107 1,786,375 1.3
23,300 SBC Communications,
Inc. ................... 982,372 1,441,688 1.0
30,000 Sprint Corp. ............. 864,273 1,578,750 1.2
24,900 U S West Communications
Group................... 606,619 938,419 0.7
------------ ------------ ------
9,541,459 13,534,565 9.9
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 65,600 Allegheny Power System,
Inc. ................... 1,689,846 1,750,700 1.3
25,000 American Electric Power
Company, Inc. .......... 1,092,125 1,050,000 0.8
72,500 Boston Edison Co. ........ 2,012,799 1,912,187 1.4
59,192 CINergy Corp. ............ 1,425,176 2,060,621 1.5
49,300 Consolidated Edison Co. of
New York................ 1,597,050 1,451,269 1.0
31,500 DTE Energy Co............. 989,953 870,187 0.6
26,400 Dominion Resources,
Inc. ................... 1,242,516 966,900 0.7
31,000 Duke Energy Corp. ........ 1,172,492 1,486,062 1.1
97,000 Edison International...... 1,800,212 2,412,875 1.8
50,000 Enova Corporation Holding
Co. .................... 1,184,750 1,203,125 0.9
54,300 Entergy Corp. ............ 1,905,240 1,486,462 1.1
30,000 FPL Group, Inc. .......... 1,374,501 1,381,875 1.0
71,200 GPU, Inc. ................ 2,090,069 2,554,300 1.9
116,200 Houston Industries,
Inc. ................... 2,511,431 2,491,037 1.8
56,000 NIPSCO Industries,
Inc. ................... 1,787,890 2,313,500 1.7
50,700 New York State Electric &
Gas Corp. .............. 1,537,761 1,058,362 0.8
93,800 PECO Energy Co. .......... 2,719,313 1,969,800 1.4
72,800 PacifiCorp. .............. 1,401,416 1,601,600 1.2
44,000 Public Service Co. of
Colorado................ 1,312,146 1,826,000 1.3
50,200 Southern Co. ............. 1,041,077 1,098,125 0.8
40,000 Texas Utilities Co. ...... 1,627,400 1,377,500 1.0
------------ ------------ ------
33,515,163 34,322,487 25.1
------------------------------------------------------------------------------------------------------
</TABLE>
95
<PAGE> 97
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED UTILITIES--GAS 33,100 AGL Resources Inc. ....... $ 619,896 $ 682,687 0.5%
STATES 33,000 The Brooklyn Union Gas
(CONCLUDED) Co. .................... 855,855 944,625 0.7
40,000 The Coastal Corp. ........ 1,187,912 2,127,500 1.6
24,800 El Paso Natural Gas
Co. .................... 895,148 1,364,000 1.0
11,000 KN Energy, Inc. .......... 445,212 463,375 0.3
55,000 MDU Resources Group,
Inc. ................... 1,171,945 1,320,000 1.0
26,100 National Fuel Gas
Company................. 788,314 1,094,569 0.8
25,000 New Jersey Resources
Corp. .................. 656,623 784,375 0.6
53,500 Questar Corp. ............ 1,908,628 2,160,062 1.6
57,200 Sonat, Inc. .............. 1,840,734 2,931,500 2.1
49,800 Washington Gas Light
Co. .................... 1,046,197 1,251,225 0.9
62,900 Williams Co., Inc. ....... 1,243,846 2,751,875 2.0
------------ ------------ ------
12,660,310 17,875,793 13.1
------------------------------------------------------------------------------------------------------
UTILITIES--WATER 38,000 American Water Works Co.,
Inc. ................... 714,875 812,250 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED STATES 56,431,807 66,545,095 48.7
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMON STOCKS & WARRANTS 99,872,925 133,405,954 97.6
- ---------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** US$3,164,000 General Motors Acceptance
Corp., 6.25% due
7/01/1997............... 3,163,451 3,163,451 2.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 3,163,451 3,163,451 2.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS......... $103,036,376 136,569,405 99.9
============
OTHER ASSETS LESS
LIABILITIES............... 187,014 0.1
------------ ------
NET ASSETS................ $136,756,419 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** 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.
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
(b) The rights may be exercised until 7/02/1997.
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
+ Non-income producing security.
See Notes to Financial Statements.
96
<PAGE> 98
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$103,036,376) (Note 1a)............................. $136,569,405
Cash........................................................................................ 688
Foreign cash (Note 1c)...................................................................... 2,040
Receivables:
Dividends................................................................................. $374,906
Capital shares sold....................................................................... 1,012 375,918
--------
Deferred organization expenses (Note 1f).................................................... 2,414
Prepaid registration fees and other assets (Note 1f)........................................ 918
------------
Total assets................................................................................ 136,951,383
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................................................... 104,892
Investment adviser (Note 2)............................................................... 69,804 174,696
--------
Accrued expenses and other liabilities...................................................... 20,268
------------
Total liabilities........................................................................... 194,964
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................................................. $136,756,419
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized................................ $ 1,029,564
Paid-in capital in excess of par............................................................ 100,492,934
Undistributed investment income--net........................................................ 1,401,194
Undistributed realized capital gains on investments and foreign currency transactions--net
(Note 5).................................................................................. 299,581
Unrealized appreciation on investments and foreign currency transactions--net............... 33,533,146
------------
NET ASSETS--Equivalent to $13.28 per share based on 10,295,638 shares outstanding........... $136,756,419
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
97
<PAGE> 99
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $165,195 foreign withholding tax)......................................... $ 2,814,181
Interest and discount earned................................................................ 94,912
-----------
Total income................................................................................ 2,909,093
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................................................... $ 412,023
Custodian fees.............................................................................. 15,214
Accounting services (Note 2)................................................................ 14,533
Professional fees........................................................................... 8,065
Transfer agent fees (Note 2)................................................................ 2,524
Directors' fees and expenses................................................................ 1,440
Pricing services............................................................................ 1,339
Amortization of organization expenses (Note 1f)............................................. 416
Other....................................................................................... 1,250
----------
Total expenses.............................................................................. 456,804
-----------
Investment income--net...................................................................... 2,452,289
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET (NOTES
1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net.......................................................................... 2,932,310
Foreign currency transactions--net........................................................ (4,353) 2,927,957
----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................................................... 8,695,637
Foreign currency transactions--net........................................................ (619) 8,695,018
---------- -----------
Net realized and unrealized gain on investments and foreign currency transactions........... 11,622,975
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ $14,075,264
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
98
<PAGE> 100
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net................................................... $ 2,452,289 $ 5,748,285
Realized gain on investments and foreign currency transactions--net...... 2,927,957 1,196,792
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net............................................... 8,695,018 10,430,510
------------ ------------
Net increase in net assets resulting from operations..................... 14,075,264 17,375,587
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1g):
Investment income--net................................................... (2,183,116) (6,739,387)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders...... (2,183,116) (6,739,387)
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital shares transactions...... (17,573,530) (16,423,676)
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets............................................. (5,681,382) (5,787,476)
Beginning of period...................................................... 142,437,801 148,225,277
------------ ------------
End of period*........................................................... $136,756,419 $142,437,801
============ ============
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net................................... $ 1,401,194 $ 1,132,021
============ ============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
99
<PAGE> 101
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN FOR THE FOR THE YEAR ENDED
DERIVED FROM INFORMATION PROVIDED IN THE SIX MONTHS DECEMBER 31, FOR THE PERIOD
FINANCIAL STATEMENTS. ENDED --------------------------------- JULY 1, 1993+ TO
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 12.19 $ 11.30 $ 9.45 $ 10.66 $ 10.00
-------- -------- -------- -------- --------
Investment income--net........................... .23 .46 .45 .35 .04
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net.............................. 1.05 .95 1.79 (1.25) .64
-------- -------- -------- -------- --------
Total from investment operations................. 1.28 1.41 2.24 (.90) .68
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net......................... (.19) (.52) (.39) (.29) (.02)
In excess of realized gain on
investments--net............................. -- -- -- (.02) --
-------- -------- -------- -------- --------
Total dividends and distributions................ (.19) (.52) (.39) (.31) (.02)
-------- -------- -------- -------- --------
Net asset value, end of period................... $ 13.28 $ 12.19 $ 11.30 $ 9.45 $ 10.66
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 10.70%+++ 12.96% 24.33% (8.51%) 6.85%+++
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................... .67%* .66% .66% .73% .89%*
======== ======== ======== ======== ========
Investment income--net........................... 3.57%* 3.90% 4.44% 3.68% 2.84%*
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $136,756 $142,438 $148,225 $126,243 $104,517
======== ======== ======== ======== ========
Portfolio turnover............................... .56% 11.39% 11.05% 9.52% 1.72%
======== ======== ======== ======== ========
Average commission rate paid++................... $ .0261 $ .0522 $ -- $ -- $ --
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ 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.
+++ Aggregate total investment return.
See Notes to Financial Statements.
100
<PAGE> 102
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Global Utility Focus Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued at amortized cost, which approximates
market value. 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--The Fund 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--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--The Fund may write and purchase call and put options. When the 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--The Fund may purchase or sell futures contracts
and options on such futures contracts for the purpose 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--The Fund may also purchase or sell
listed or over-
101
<PAGE> 103
- --------------------------------------------------------------------------------
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 Fund'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 from net investment income are
declared and paid quarterly. Distributions of capital gains are recorded on the
ex-dividend date.
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 Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.60% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith,
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $1,860 in commissions on the
execution of portfolio security transactions for the Fund.
For the six months ended June 30, 1997, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $533 for providing security price
quotations to compute the Fund's net asset value.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $760,306 and $16,112,420, respectively.
102
<PAGE> 104
- --------------------------------------------------------------------------------
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Gains
- -------------------------------------------------------------------------
<S> <C> <C>
Long-term investments.......................... $2,932,310 $33,533,030
Foreign currency transactions.................. (4,353) 116
---------- -----------
Total.......................................... $2,927,957 $33,533,146
========== ===========
- -------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $33,533,030, of which $36,797,075 related to appreciated securities
and $3,264,045 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments for Federal income tax purposes was $103,036,376.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$17,573,530 and $16,423,676 for the six months ended June 30, 1997 and for the
year ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- -------------------------------------------------------------------------
<S> <C> <C>
Shares sold................................... 329,885 $ 4,106,175
Shares issued to shareholders in reinvestment
of dividends................................. 181,145 2,183,116
---------- ------------
Total issued.................................. 511,030 6,289,291
Shares redeemed............................... (1,902,322) (23,862,821)
---------- ------------
Net decrease.................................. (1,391,292) $(17,573,530)
========== ============
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- -------------------------------------------------------------------------
<S> <C> <C>
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)
========== ============
- -------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1996, the Fund had net capital loss carryforwards of
approximately $2,331,000, of which $121,000 expires in 2002 and $2,210,000
expires in 2003. This amount will be available to offset like amounts of any
future taxable gains.
6. SUBSEQUENT EVENT:
On July 3, 1997, the Board of Directors declared net investment income dividends
of $.136310 per share payable on July 11, 1997 to shareholders of record as of
July 2, 1997.
103
<PAGE> 105
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Government Bond Fund's net annualized
yield was 6.23%. Total investment return for the Fund for the six-month period
ended June 30, 1997 was +2.29%, based on a change in per share net asset value
from $10.40 to $10.31, and assuming reinvestment of $0.321 per share income
dividends.
For the one-year period ended June 30, 1997, the Fund's average annual total
return was +6.96%. For the period since inception (May 2, 1994) through June 30,
1997, the Fund's average annual total return was +6.76%. The Fund's standardized
30-day yield as of June 30, 1997 was 5.94%. (Total returns do not include the
effect of insurance-related fees and expenses).
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. At the beginning of the year, Federal
Reserve Board (FRB) Chairman Alan Greenspan cautioned investors about a possible
preemptive strike against inflation. While there were few signs of accelerating
inflation in the then-current data, he warned that monetary policy acts with a
lag and that it would be easier to tighten policy at that time, as a precaution,
rather than tighten later and more sharply once inflation was evident. A
mid-January market rally was halted and interest rates began to back up at the
beginning of February in anticipation of a central bank move. As Chairman
Greenspan warned, the FRB tightened monetary policy on March 25, 1997.
Since the March tightening, economic data have been more benign. Retail sales
fell, and inflation remained tame. The yield on the long-term bellwether
Treasury bond peaked at 7.17% in mid-April and then began to drop to its current
level of 6.57%. This market rally was fueled by a significant change in investor
expectations regarding the economy and in the outlook for interest rates. In
early May there was widespread agreement that the FRB was ready for another
tightening of monetary policy, and it was generally assumed that a further
tightening would be needed by July. However, the Consumer Price Index rose only
1.4% for the first five months of 1997, compared with a 3.8% increase over the
same period in 1996. At the same time, retail sales figures continued to
decline. As a result, a May increase in interest rates did not occur, and the
bond rally continued to gain momentum. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was confirmed further shortly
after the period's close when, as widely expected, the FRB chose to leave
monetary policy unchanged. This confluence of positive indicators helped produce
a significant rally in the US stock market. A slight decline in interest rates
resulted in a modest positive total return for US fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although gross domestic product growth for the first quarter of
the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived most favorably by investors
for its ongoing growth and limited inflationary pressures. If economic data
releases continue to support this point of view, the outlook for the US capital
markets should remain positive.
PORTFOLIO MATTERS
We began to take a more defensive position in the Fund toward the end of
January. We reduced the Fund's duration from 5.1 years to 4.2 years. In the
weeks following the FRB's March 25, 1997 tightening, the bond market's yield
rose to its peak of 7.17%. We continued to be defensive and brought the Fund's
duration to 4.2 years to seek to protect the Fund against the erosion of net
asset value. We took a more optimistic view of market conditions at the
beginning of May, when we began to invest more aggressively, and by the end of
June had extended the Fund's duration to 4.5 years. Currently, the average
portfolio maturity is 7.4 years. More than 18% of the Fund's assets are
currently invested in issues with maturities of longer than 20 years.
104
<PAGE> 106
- --------------------------------------------------------------------------------
Because we expect a resumption of strength in the third and fourth quarters of
1997, we believe that the FRB may resume a tightening mode in the second half of
the year. With the yield curve remaining relatively flat, we expect further
duration extensions to be moderate. We do not anticipate any significant changes
in the asset allocation mix during the summer.
IN CONCLUSION
We appreciate your investment in Government Bond Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Jay C. Harbeck
Jay C. Harbeck
Vice President and Portfolio Manager
August 13, 1997
105
<PAGE> 107
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT & AGENCY OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Federal Home Loan Mortgage Corp.:
MORTGAGE $3,000,000 7.14% due 9/13/2006......................... $ 3,064,440 $ 3,052,980
CORPORATION--5.1% 4,000,000 7.935% due 9/13/2006........................ 4,018,750 4,056,880
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION 7,083,190 7,109,860
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Federal National Mortgage Association:
MORTGAGE 2,000,000 8.90% due 6/12/2000......................... 2,171,480 2,134,060
ASSOCIATION--10.9% 1,045,000 7.50% due 2/11/2002......................... 1,088,232 1,085,170
4,000,000 7.40% due 7/01/2004......................... 4,157,540 4,169,360
500,000 7.85% due 9/10/2004......................... 499,297 511,095
2,000,000 7.65% due 3/10/2005......................... 2,091,140 2,109,680
3,000,000 7.375% due 3/28/2005........................ 3,158,430 3,107,820
2,000,000 6.96% due 4/02/2007......................... 1,980,560 2,030,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 15,146,679 15,147,185
- ---------------------------------------------------------------------------------------------------------------------
US TREASURY BONDS & US Treasury Bonds:
NOTES--71.6% 1,500,000 9.25% due 2/15/2016......................... 1,862,344 1,876,635
7,500,000 8.875% due 8/15/2017.......................... 9,044,297 9,134,775
1,000,000 8.75% due 5/15/2020......................... 1,216,406 1,216,406
5,500,000 8.125% due 8/15/2021........................ 6,375,703 6,298,380
6,000,000 7.50% due 11/15/2024........................ 6,390,937 6,473,460
3,000,000 6.50% due 11/15/2026........................ 2,861,641 2,877,180
US Treasury Notes:
5,000,000 7.375% due 11/15/1997....................... 5,055,469 5,031,250
9,500,000 7.875% due 4/15/1998........................ 9,704,668 9,654,375
11,000,000 6.375% due 4/30/1999........................ 11,025,781 11,058,410
4,000,000 7.75% due 12/31/1999........................ 4,181,562 4,143,120
7,000,000 7.75% due 1/31/2000......................... 7,276,172 7,254,870
2,000,000 7.125% due 2/29/2000........................ 2,004,375 2,043,740
1,000,000 6.875% due 3/31/2000........................ 1,019,375 1,016,250
3,000,000 6.375% due 5/15/2000........................ 3,012,422 3,010,770
6,000,000 7.875% due 8/15/2001........................ 6,334,688 6,323,460
5,000,000 7.50% due 11/15/2001........................ 5,140,469 5,210,150
6,000,000 6.625% due 3/31/2002........................ 5,954,063 6,054,360
1,500,000 6.375% due 8/15/2002........................ 1,497,422 1,499,535
2,000,000 6.25% due 2/15/2003......................... 1,992,656 1,984,380
2,500,000 6.50% due 5/15/2005......................... 2,416,400 2,495,300
3,000,000 6.50% due 8/15/2005......................... 2,914,687 2,991,570
500,000 6.625% due 5/15/2007........................ 498,015 504,140
1,000,000 10.625% due 8/15/2015....................... 1,392,813 1,392,813
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US TREASURY BONDS & NOTES 99,172,365 99,545,329
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--87.6% 121,402,234 121,802,374
- ---------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER*--4.3% 6,000,000 HSBC Holdings PLC, 5.43% due 7/30/1997 5,972,850 5,972,850
- ---------------------------------------------------------------------------------------------------------------------
REPURCHASE 6,108,000 Morgan (J.P.) & Company, Inc., purchased on
AGREEMENTS**--4.4% 6/30/1997 to yield 6% to 7/01/1997.......... 6,108,000 6,108,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
106
<PAGE> 108
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT AGENCY $6,000,000 Federal Farm Credit Bank, 5.42% due
OBLIGATIONS*--7.2% 7/17/1997................................... $ 5,984,643 $ 5,984,643
2,000,000 Federal Home Loan Bank, 5.40% due 7/03/1997... 1,999,100 1,999,100
2,000,000 Federal National Mortgage Association, 5.41%
due 7/10/1997............................... 1,996,994 1,996,994
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES--15.9% 22,061,587 22,061,587
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--103.5%..................... $143,463,821 143,863,961
============
LIABILITIES IN EXCESS OF OTHER
ASSETS--(3.5%)................................ (4,851,751)
------------
NET ASSETS--100.0%............................ $139,012,210
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
** Repurchase Agreements are fully collateralized by US Government Obligations.
See Notes to Financial Statements.
107
<PAGE> 109
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$143,463,821) (Note 1a).......................... $143,863,961
Cash..................................................................................... 377
Receivables:
Interest............................................................................... $2,223,922
Capital shares sold.................................................................... 137,545
Loaned securities (Note 6)............................................................. 269 2,361,736
----------
Prepaid registration fees and other assets (Note 1d)..................................... 717
------------
Total assets............................................................................. 146,226,791
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased................................................................... 7,151,252
Investment adviser (Note 2)............................................................ 51,993
Capital shares redeemed................................................................ 681 7,203,926
----------
Accrued expenses and other liabilities................................................... 10,655
------------
Total liabilities........................................................................ 7,214,581
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................................................... $139,012,210
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized............................. $ 1,348,508
Paid-in capital in excess of par......................................................... 136,674,350
Undistributed investment income--net..................................................... 725,350
Accumulated realized capital losses on investments--net (Note 5)......................... (136,138)
Unrealized appreciation on investments--net.............................................. 400,140
------------
NET ASSETS--Equivalent to $10.31 per share based on 13,485,079 shares outstanding........ $139,012,210
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
108
<PAGE> 110
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1b & 1c):
Interest and discount earned............................................................... $3,795,283
Other income............................................................................... 7,190
----------
Total income............................................................................... 3,802,473
----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2).......................................................... $274,250
Accounting services (Note 2)............................................................... 11,094
Registration fees (Note 1d)................................................................ 7,179
Custodian fees............................................................................. 6,301
Professional fees.......................................................................... 6,125
Transfer agent fees (Note 2)............................................................... 2,241
Directors' fees and expenses............................................................... 877
Pricing services........................................................................... 647
Other...................................................................................... 655
--------
Total expenses before reimbursement........................................................ 309,369
Reimbursement of expenses (Note 2)......................................................... (78,164)
--------
Expenses after reimbursement............................................................... 231,205
----------
Investment income--net..................................................................... 3,571,268
----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES 1c & 3):
Realized gain on investments--net.......................................................... 18,277
Change in unrealized appreciation on investments--net...................................... (551,426)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $3,038,119
==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
109
<PAGE> 111
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net................................................... $ 3,571,268 $ 3,815,911
Realized gain (loss) on investments--net................................. 18,277 (154,413)
Change in unrealized appreciation/depreciation on investments--net....... (551,426) (1,012,273)
------------ ------------
Net increase in net assets resulting from operations..................... 3,038,119 2,649,225
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net................................................... (3,330,521) (3,530,361)
Realized gain on investments--net........................................ -- (137,668)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders........................................................... (3,330,521) (3,668,029)
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions....... 49,723,820 49,603,169
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets............................................. 49,431,418 48,584,365
Beginning of period...................................................... 89,580,792 40,996,427
------------ ------------
End of period*........................................................... $139,012,210 $89,580,792
============ ============
- --------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net.................................... $ 725,350 $ 484,603
============ ============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
110
<PAGE> 112
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM SIX MONTHS FOR THE YEAR ENDED FOR THE PERIOD
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED DECEMBER 31, MAY 2, 1994+ TO
JUNE 30, -------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................... $ 10.40 $ 10.79 $ 9.97 $ 10.00
------- ------- ------- -------
Investment income--net........................................ .31 .65 .62 .25
Realized and unrealized gain (loss) on investments--net....... (.08) (.36) .81 (.07)
------- ------- ------- -------
Total from investment operations.............................. .23 .29 1.43 .18
------- ------- ------- -------
Less dividends and distributions:
Investment income--net...................................... (.32) (.64) (.61) (.21)
Realized gain on investments--net........................... -- (.04) -- --
------- ------- ------- -------
Total dividends and distributions............................. (.32) (.68) (.61) (.21)
------- ------- ------- -------
Net asset value, end of period................................ $ 10.31 $ 10.40 $ 10.79 $ 9.97
======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................ 2.29%++ 2.86% 14.83% 1.79%++
======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................ .42%* .15% .00% .00%*
======= ======= ======= =======
Expenses...................................................... .56%* .59% .66% .80%*
======= ======= ======= =======
Investment income--net........................................ 6.51%* 6.39% 6.28% 4.66%*
======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................... $139,012 $89,581 $40,996 $ 17,811
======= ======= ======= =======
Portfolio turnover............................................ 68.25% 21.23% 45.39% 103.03%
======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
111
<PAGE> 113
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Government Bond Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued at amortized cost, which approximates
market value. 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) Income taxes--It is the Fund'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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
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.
(d) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(e) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.50% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, MLAM earned fees of $274,250, of which
$78,164 was voluntarily waived.
For the six months ended June 30, 1997, Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Inc., earned $613
for providing security price quotations to compute the Fund's net asset value.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
112
<PAGE> 114
- --------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $107,072,071 and $65,969,688, respectively.
Net realized and unrealized gains as of June 30, 1997 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- -----------------------------------------------------------------------------
<S> <C> <C>
Long-term investments................................. $17,933 $400,140
Short-term investments................................ 344 --
------ -------
Total................................................. $18,277 $400,140
====== =======
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $400,140, of which $738,552 related to appreciated securities and
$338,412 related to depreciated securities. At June 30, 1997, the aggregate cost
of investments for Federal income tax purposes was $143,463,821.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$49,723,820 and $49,603,169 for the six months ended June 30, 1997 and the year
ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Dollar
For the Six Months Ended June 30, 1997 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
Shares sold......................................... 4,678,871 $47,792,542
Shares issued to shareholders in reinvestment of
dividends.......................................... 325,774 3,330,521
--------- -----------
Total issued........................................ 5,004,645 51,123,063
Shares redeemed..................................... (136,568) (1,399,243)
--------- -----------
Net increase........................................ 4,868,077 $49,723,820
========= ===========
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Dollar
For the Year Ended December 31, 1996 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
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
========= ===========
- ---------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1996, the Fund had net capital loss carryforward of
approximately $71,000, all of which expires in 2004. These amounts will be
available to offset like amounts of any future taxable gains.
6. LOANED SECURITIES:
At June 30, 1997, the Fund held US Treasury notes having an aggregate value of
approximately $520,000 as collateral for portfolio securities loaned having a
market value of approximately $504,000.
113
<PAGE> 115
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, High Current Income Fund's net
annualized yield was 8.97%. Total investment return for the Fund for the
six-month period ended June 30, 1997 was +6.13%, based on a change in per share
net asset value from $11.39 to $11.54, and assuming reinvestment of $0.525 per
share income dividends.
For the one-year period ended June 30, 1997, the Fund's annual total return
was +13.84%. For the five-year period ended June 30, 1997, the Fund's average
annual total return was +10.70%. For the ten-year period ended June 30, 1997,
the Fund's average annual total return was +11.43%. The Fund's standardized
30-day yield as of June 30, 1997 was 8.47%. (Total returns do not include the
effect of insurance-related fees and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the period's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although gross domestic product growth for the first quarter of
the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors are uncertain regarding the viability of economic and monetary union,
while scandals continue to depress investor confidence in Japan. At present, it
appears that the US economy is perceived favorably by investors for its ongoing
growth and limited inflationary pressures. If economic data releases continue to
support this point of view, the outlook for the US capital markets should remain
positive.
THE HIGH-YIELD MARKET
The high-yield market performed well during the six months ended June 30,
1997, despite a weak period in March that was precipitated by a FRB interest
hike. The unmanaged Credit Suisse First Boston High Yield Index returned +5.84%
for the six-month period ended June 30, 1997 compared to a return of +2.44% for
the ten-year Treasury note.
We believe the high-yield market remains fully valued. Yield spreads relative
to ten-year Treasury notes are near historically tight levels, despite having
widened somewhat following the March interest rate increase. Using the Credit
Suisse First Boston High Yield Index, the average yield spread between
high-yield issues and Treasury securities was 461 basis points (4.61%) for the
five-year period ended December 31, 1996. The index spread at June 30, 1997 was
339 basis points as compared to 312 basis points in early March.
Lofty high-yield valuation levels have been supported by both strong
technicals and healthy fundamentals. On the technical side, cash flows into
high-yield mutual funds have totaled over $8 billion year-to-date. Additional
assets have entered the high-yield market in the form of high-yield
collateralized bond obligations, high-grade corporate funds seeking to enhance
yield and new commitments to high-yield issues by insurance companies and
pension funds. Fundamentals also have favored the high-yield market. The economy
is healthy. The quality of new-issue supply has been excellent. Default rates
have been historically low. In our view, the credit cycle appears likely to
remain benign during 1997.
The spread between BB-rated issues and B-rated issues tightened to 151 basis
points compared to a year-to-date mean of 161 basis points. We expect the mean
to shift, perhaps to 175 basis points or 200 basis points. The dispersion of
spreads among B-rated issues also has been declining. A strong B-rated issue
tends to trade at a similar spread as a weak B-rated issue. In an investment
environment in which risk premiums are small, we believe it is appropriate to
reduce the Fund's exposure to credit risk and thus remain cautious. Therefore,
114
<PAGE> 116
- --------------------------------------------------------------------------------
our strategy has been to reduce risk through upgrading quality via stronger
B-rated issues, which we believe will be less sensitive to widening yield
spreads.
At June 30, 1997, our cash equivalent position was 16.5% of net assets. The
average maturity of the Fund was 6.4 years. Major industries in the Fund
included: cable/international, 6.7% of net assets; cable/domestic 4.6%; consumer
products, 4.1%; and energy, 7.1%.
IN CONCLUSION
We appreciate your investment in High Current Income Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Aldona A. Schwartz
Aldona A. Schwartz
Vice President and Portfolio Manager
August 13, 1997
115
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADVERTISING--0.6% B B1 $ 3,000,000 Outdoor Systems Inc., 8.875%
due 6/15/2007(e)............ $ 2,962,500 $ 2,913,750
- ---------------------------------------------------------------------------------------------------------------------
AEROSPACE & B- Ba 3,000,000 L-3 Communications Corp.,
DEFENSE--2.0% 10.375% due 5/01/2007(e).... 3,000,000 3,180,000
B+ B1 3,000,000 Newport News Shipbuilding
Inc., 9.25% due
12/01/2006.................. 3,000,000 3,135,000
B+ B1 3,500,000 Tracor Inc., 8.50% due
3/01/2007................... 3,486,070 3,526,250
------------ ------------
9,486,070 9,841,250
- ---------------------------------------------------------------------------------------------------------------------
AIRLINES--0.9% B+ B1 4,000,000 USAir, Inc., 10.375% due
3/01/2013................... 3,935,000 4,320,000
- ---------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE--0.5% B B3 2,000,000 Collins & Aikman Corp., 11.50%
due 4/15/2006............... 2,000,000 2,250,000
- ---------------------------------------------------------------------------------------------------------------------
BROADCASTING-- B- B2 1,500,000 Argyle Television Inc., 9.75%
RADIO & TV--1.7% due 11/01/2005.............. 1,447,500 1,560,000
B- B3 2,000,000 SFX Broadcasting Inc., 10.75%
due 5/15/2006............... 1,990,000 2,160,000
Sinclair Broadcasting Group
Inc.:
B B2 2,500,000 10% due 12/15/2003............ 2,436,250 2,575,000
B B2 2,000,000 10% due 9/30/2005............. 1,993,750 2,060,000
------------ ------------
7,867,500 8,355,000
- ---------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS--1.3% BB B1 2,500,000 Cemex S.A., 12.75% due
7/15/2006(e)................ 2,500,000 2,900,000
B+ B3 3,340,000 Pacific Lumber Co., 10.50% due
3/01/2003................... 3,252,088 3,440,200
------------ ------------
5,752,088 6,340,200
- ---------------------------------------------------------------------------------------------------------------------
CABLE-- CCC+ Caa 5,023,939 American Telecasting, Inc.,
DOMESTIC--4.6% 14.38% due
6/15/2004(d)(f)............. 3,763,086 1,500,902
BB- Ba3 3,000,000 Century Communications Corp.,
9.50% due 3/01/2005......... 2,953,750 3,075,000
B B2 4,000,000 Intermedia Capital Partners
L.P., 11.25% due
8/01/2006................... 3,997,500 4,360,000
BB+ Ba3 5,000,000 Lenfest Communications, Inc.,
8.375% due 11/01/2005....... 4,627,500 4,925,000
B B1 4,000,000 Olympus Communications L.P.,
10.625% due 11/15/2006...... 4,000,000 4,200,000
BB+ Ba3 2,000,000 TCI Communications Inc., 9.65%
due 3/31/2027............... 2,052,500 2,114,020
NR* NR* 2,000,000 TCI Satellite Entertainment,
Inc., 10.875% due
2/15/2007(e)................ 2,007,500 2,010,000
------------ ------------
23,401,836 22,184,922
- ---------------------------------------------------------------------------------------------------------------------
CABLE-- CCC+ Caa 8,000,000 Australis Media Ltd., 14.59%
INTERNATIONAL--6.7% due 5/15/2003(d)............ 5,332,042 5,760,000
BB- Baa3 9,000,000 Bell Cablemedia PLC, 11.74%
due 9/15/2005(d)............ 6,257,071 7,515,000
International Cabletel Inc.:
B B3 2,000,000 10% due 2/15/2007(e)........ 1,955,000 2,035,000
B B3 5,500,000 Series B, 10.98% due
2/01/2001(d)................ 3,816,882 3,808,750
BB- B2 3,000,000 Rogers Communications Inc.,
10.875% due 4/15/2004....... 3,042,500 3,142,500
BB B1 7,000,000 TeleWest Communications PLC,
11.45% due 10/01/2007(d).... 4,776,053 5,040,000
B+ B3 5,500,000 Videotron Holdings PLC, 11.77%
due 7/01/2004(d)............ 4,263,128 4,950,000
------------ ------------
29,442,676 32,251,250
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
116
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL GOODS--1.4% B+ B1 $ 1,660,000 Essex Group, Inc., 10% due
5/01/2003................... $ 1,668,925 $ 1,747,150
B- B3 4,500,000 International Wire Group,
Inc., 11.75% due
6/01/2005................... 4,490,625 4,893,750
------------ ------------
6,159,550 6,640,900
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS--1.7% BB- Ba3 4,100,000 Agricultural Minerals &
Chemicals Co., L.P., 10.75%
due 9/30/2003............... 4,123,188 4,438,250
BB- Ba3 3,500,000 ISP Holdings Inc., 9.75% due
2/15/2002................... 3,500,000 3,710,000
------------ ------------
7,623,188 8,148,250
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES-- B- B2 2,500,000 Amphenol Corporation, 9.875%
ELECTRONICS--1.1% due 5/15/2007............... 2,500,000 2,581,250
B- B3 3,000,000 Dictaphone Corp., 11.75% due
8/01/2005................... 2,943,750 2,760,000
------------ ------------
5,443,750 5,341,250
- ---------------------------------------------------------------------------------------------------------------------
CONGLOMERATES--0.8% NR* NR* 755,000 MacAndrews & Forbes Group,
Inc., 13% due 3/01/1999..... 752,837 756,888
Sequa Corp.:
BB B1 750,000 9.625% due 10/15/1999......... 740,625 766,875
B+ B3 2,500,000 9.375% due 12/15/2003......... 2,512,813 2,550,000
------------ ------------
4,006,275 4,073,763
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER NR* NR* 4,000,000 Coleman Escrow Corp., 11.57%
PRODUCTS--4.1% due 5/15/2001(d)(e)......... 2,590,761 2,530,000
B+ Ba3 1,250,000 Coty Inc., 10.25% due
5/01/2005................... 1,250,000 1,325,000
B+ Ba2 7,000,000 International Semi-Tech
Microelectronics, Inc.,
13.13% due 8/15/2003(d)..... 4,496,503 4,165,000
B B2 3,037,000 Polymer Group Inc., 12.25% due
7/15/2002................... 3,094,593 3,340,700
B- B1 3,183,000 Samsonite Corp., 11.125% due
7/15/2005................... 3,076,199 3,549,045
B+ B1 4,500,000 Sealy Corp., 10.25% due
5/01/2003................... 4,545,000 4,725,000
------------ ------------
19,053,056 19,634,745
- ---------------------------------------------------------------------------------------------------------------------
ENERGY--7.1% B- B3 2,000,000 Bellwether Exploration Co.,
10.875% due 4/01/2007....... 2,000,000 2,120,000
B B2 4,500,000 Benton Oil & Gas Co., 11.625%
due 5/01/2003............... 4,500,000 4,955,625
B+ B1 5,000,000 Clark Oil & Refining Corp.,
10.42% due 2/15/2000(d)..... 3,835,529 3,743,750
B B2 4,000,000 Energy Corp. of America, 9.50%
due 5/15/2007(e)............ 4,000,000 3,960,000
B+ B1 1,750,000 Parker Drilling Co., 9.75% due
11/15/2006.................. 1,758,750 1,839,688
BB- B1 3,000,000 Petroleo Brasileiro S.A.-
Petrobras, 10% due
10/17/2006(e)............... 3,000,312 3,172,500
BB- Ba3 1,000,000 Pride Pete Services Inc.,
9.375% due 5/01/2007........ 1,000,000 1,045,000
Transamerican Energy(e):
B+ B3 12,203,000 13.09% due 6/15/1999(d)....... 9,502,974 8,816,668
B+ B3 1,568,000 11.50% due 6/15/2002.......... 1,553,000 1,517,040
BBB- B1 3,000,000 Yacimientos Petroliferos
Fiscales S.A.(YPF), 8% due
2/15/2004................... 2,414,687 3,056,100
------------ ------------
33,565,252 34,226,371
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
117
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ENTERTAINMENT--1.1% B B2 $ 5,000,000 Six Flags Theme Parks Corp.,
12.25% due 6/15/2005(d)..... $ 4,482,763 $ 5,143,750
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.9% BB- B1 4,000,000 Reliance Group Holdings Inc.,
9.75% due 11/15/2003........ 3,898,750 4,240,000
- ---------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--1.9% B+ B1 4,500,000 Chiquita Brands International
Inc., 9.125% due
3/01/2004................... 4,448,750 4,590,000
CCC+ Caa 2,500,000 Del Monte Corp., 10% due
5/01/2003................... 2,310,000 2,581,250
B- B3 2,000,000 Envirodyne Industries, Inc.,
10.25% due 12/01/2001....... 2,018,750 2,007,500
------------ ------------
8,777,500 9,178,750
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BB B1 4,000,000 Republic of Argentina,
OBLIGATIONS--0.9% Global Bonds, 11% due
10/09/2006.................. 4,115,000 4,440,000
- ---------------------------------------------------------------------------------------------------------------------
GAMING--2.8% B+ B2 4,000,000 Greate Bay Properties, Inc.,
10.875% due 1/15/2004....... 3,590,000 3,560,000
D Caa 4,500,000 Harrah's Jazz Company, 14.25%
due 11/15/2001(c)........... 4,468,750 1,710,000
BB- B1 5,000,000 Trump Atlantic City
Association, 11.25% due
5/01/2006................... 4,961,250 4,887,500
NR* Caa 4,000,000 Trump's Castle Funding, Inc.,
11.75% due 11/15/2003....... 3,559,410 3,560,000
------------ ------------
16,579,410 13,717,500
- ---------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES--1.5% B+ B1 4,000,000 Beverly Enterprises, Inc., 9%
due 2/15/2006............... 3,740,000 4,115,000
B+ B2 3,000,000 Quest Diagnostic Inc., 10.75%
due 12/15/2006.............. 3,000,000 3,262,500
------------ ------------
6,740,000 7,377,500
- ---------------------------------------------------------------------------------------------------------------------
HOME BUILDERS--0.5% B- B2 2,500,000 Del E. Webb Corporation, 9%
due 2/15/2006............... 2,497,500 2,462,500
- ---------------------------------------------------------------------------------------------------------------------
HOTELS--1.0% BB- Ba3 4,500,000 HMC Acquisition Properties, 9%
due 12/15/2007.............. 4,202,500 4,573,125
- ---------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER BB- Ba3 2,750,000 AES China Generating Co., Ltd.
PRODUCERS--1.9% (Class A), 10.125% due
12/15/2006.................. 2,747,360 2,928,750
BB Ba2 2,500,000 California Energy Company,
Inc., 9.875% due
6/30/2003................... 2,518,750 2,660,425
NR* NR* 1,750,000 Consolidated Hydro, Inc.,
14.99% due
7/15/2003(c)(d)............. 1,369,242 962,500
Midland Cogeneration Venture
L.P.:
BB Ba3 2,208,205 10.33% due 7/23/2002(f)....... 2,245,929 2,362,780
B- B2 250,000 11.75% due 7/23/2005.......... 250,000 290,992
------------ ------------
9,131,281 9,205,447
- ---------------------------------------------------------------------------------------------------------------------
MEDIA & BB- B1 3,000,000 Comtel Brasileira Ltd., 10.75%
COMMUNICATIONS--3.2% due 9/26/2004(e)............ 3,000,000 3,210,000
BB- B2 3,000,000 Globo Communicacoes e
Participacoes, Ltd., 10.50%
due 12/20/2006(e)........... 3,011,250 3,187,500
BB Ba3 4,000,000 Grupo Televise, S.A. de C.V.,
11.375% due 5/15/2003....... 4,025,000 4,375,000
BBB- B1 4,000,000 Telefonica de Argentina S.A.,
11.875% due 11/01/2004...... 3,917,780 4,780,000
------------ ------------
13,954,030 15,552,500
- ---------------------------------------------------------------------------------------------------------------------
METALS & MINING--2.0% B- B2 4,500,000 Kaiser Aluminum Corp., 12.75%
due 2/01/2003............... 4,770,000 4,888,125
B- B3 3,000,000 Maxxam Group, Inc., 12.25% due
8/01/2003(d)................ 2,635,867 2,745,000
B B3 2,000,000 Westmin Resources Ltd., 11%
due 3/15/2007............... 2,000,000 2,090,000
------------ ------------
9,405,867 9,723,125
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
118
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PACKAGING--1.7% B B2 $ 4,000,000 Portola Packaging Inc., 10.75%
due 10/01/2005.............. $ 4,000,000 $ 4,295,000
Silgan Holdings, Inc.:
NR* NR* 2,751,000 13.25% due 7/15/2006(a)....... 3,076,057 3,064,137
B B1 1,000,000 9% due 6/01/2009(e)........... 1,000,000 1,003,750
------------ ------------
8,076,057 8,362,887
- ---------------------------------------------------------------------------------------------------------------------
PAPER--1.5% BB- B2 3,000,000 Repap Wisconsin Finance, Inc.,
9.25% due 2/01/2002......... 2,760,000 3,030,000
B B3 2,000,000 Riverwood International Corp.,
10.875% due 4/01/2008....... 1,966,250 1,805,000
B+ B1 2,000,000 S.D. Warren Co., 12% due
12/15/2004.................. 2,000,000 2,220,000
------------ ------------
6,726,250 7,055,000
- ---------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING--1.3% BB- B1 5,000,000 Hollinger International, Inc.,
9.25% due 2/01/2006......... 4,961,250 5,100,000
B B1 1,000,000 K-III Communications Corp.,
10.25% due 6/01/2004........ 995,000 1,072,500
------------ ------------
5,956,250 6,172,500
- ---------------------------------------------------------------------------------------------------------------------
REAL ESTATE--0.4% NR* NR* 3,000,000 Rockefeller Center Properties,
(Convertible), 11.09% due
12/31/2000(d)............... 2,067,142 2,047,500
- ---------------------------------------------------------------------------------------------------------------------
RESTAURANTS--1.3% Foodmaker, Inc.:
B- B1 4,000,000 9.25% due 3/01/1999........... 4,010,000 4,120,000
B+ Ba3 2,000,000 9.75% due 11/01/2003.......... 1,972,075 2,060,000
------------ ------------
5,982,075 6,180,000
- ---------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.4% D Caa 4,500,000 Bradlees, Inc., 11% due
8/01/2002(c)................ 4,466,562 315,000
NR* NR* 1,803,000 Cumberland Farms, Inc., 10.50%
due 10/01/2003(f)........... 1,764,686 1,775,955
------------ ------------
6,231,248 2,090,955
- ---------------------------------------------------------------------------------------------------------------------
STEEL--0.8% B B2 3,500,000 Weirton Steel Inc., 10.75% due
6/01/2005................... 3,346,250 3,675,000
- ---------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--1.8% CCC+ Caa 3,000,000 Grand Union Co., 12% due
9/01/2004................... 2,904,475 2,190,000
B B3 1,500,000 Penn Traffic American Corp.,
8.625% due 12/15/2003....... 1,237,500 1,215,000
B- B3 2,000,000 Pueblo Xtra Intl., 9.50% due
8/01/2003(e)................ 1,808,691 1,920,000
B B1 1,000,000 Ralph's Grocery Co., 10.45%
due 6/15/2004............... 962,500 1,070,000
B B1 2,000,000 Ralph's Grocery Co. (New),
10.45% due 6/15/2004........ 1,901,865 2,147,500
------------ ------------
8,815,031 8,542,500
- ---------------------------------------------------------------------------------------------------------------------
TELEPHONE--COMPETITIVE NR* NR* 6,000,000 Brooks Fiber Properties Inc.,
LOCAL EXCHANGE--1.2% 10.735% due 11/01/2001(d)... 3,975,168 3,900,000
B B1 2,000,000 Teleport Communications Group
Inc., 9.875% due
7/01/2006................... 2,104,000 2,130,000
------------ ------------
6,079,168 6,030,000
- ---------------------------------------------------------------------------------------------------------------------
TEXTILES--1.6% BB- Ba3 3,500,000 Tultex Corp., 10.625% due
3/15/2005................... 3,500,000 3,854,375
B+ B2 3,500,000 Westpoint Stevens Industries,
Inc., 9.375% due
12/15/2005.................. 3,291,250 3,657,500
------------ ------------
6,791,250 7,511,875
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
119
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TRANSPORTATION--2.8% NR* B3 $ 3,000,000 Central Transport Rental
Group, Notes, 9.50% due
4/30/2003................... $ 2,902,500 $ 2,880,000
BB- B1 4,000,000 Sea Containers Ltd., 12.50%
due 12/01/2004.............. 4,380,000 4,520,000
B- B3 3,700,000 Transtar Holdings Inc., 11.02%
due 12/15/2003(d)........... 2,859,635 3,108,000
BB Ba2 2,979,000 Viking Star Shipping Co.,
9.625% due 7/15/2003........ 2,884,937 3,038,580
------------- -------------
13,027,072 13,546,580
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AAA Aaa 1,000,000 United States Treasury Notes,
OBLIGATIONS--0.2% 6.625% due 2/15/2027........ 948,400 978,440
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES--3.2% B+ B1 3,137,000 Beaver Valley Funding Corp.,
9% due 6/01/2017............ 2,952,025 3,275,216
BB Ba2 1,000,000 Cleveland Electric
Illuminating Co., 9.50% due
5/15/2005................... 998,080 1,075,650
BB- B1 4,000,000 Metrogas S.A., 12% due
8/15/2000................... 3,935,000 4,460,000
BBB- NR* 3,000,000 Trans Gas de Occidente S.A.,
9.79% due
11/01/2010(e)(f)............ 3,000,000 3,166,782
Tucson Electric & Power
Co.(f):
NR* NR* 3,070,687 10.21% due 1/01/2009........ 2,948,074 3,050,236
NR* NR* 500,000 10.732% due 1/01/2013....... 461,050 498,200
------------- -------------
14,294,229 15,526,084
- ---------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT--0.4% D Ca 3,500,000 Mid-American Waste Systems,
Inc., 12.25% due
2/15/2003(c)................ 3,555,000 2,003,750
- ---------------------------------------------------------------------------------------------------------------------
WIRELESS BB+ B1 3,000,000 Comcast Cellular, 9.50% due
COMMUNICATION-- 5/01/2007(e)................ 2,995,110 3,007,500
DOMESTIC PAGING--4.5% B- B3 8,000,000 Millicom International
Cellular S.A., 13.31% due
6/01/2006(d)................ 4,850,760 5,840,000
B- B3 6,000,000 Nextel Communications, Inc.,
14.11% due 8/15/2004(d)..... 3,960,595 4,590,000
B B2 4,000,000 Paging Network, Inc., 10% due
10/15/2008.................. 4,000,000 3,885,000
B- B2 3,000,000 USA Mobile Communications
Holdings, Inc., 9.50% due
2/01/2004................... 2,710,000 2,820,000
B+ B1 1,500,000 Vanguard Cellular Systems,
9.375% due 4/15/2006........ 1,500,000 1,515,000
------------- -------------
20,016,465 21,657,500
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE
BONDS--75.3% 356,395,229 363,516,419
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
HELD PREFERRED STOCKS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BROADCASTING-- RADIO & TV--0.7% 3,214 Paxson Communications(a)(e)... 2,855,972 3,374,700
- ---------------------------------------------------------------------------------------------------------------------
CABLE--DOMESTIC--1.1% 52,819 Cablevision Systems Corp.
(Series M)(a)............... 4,427,500 5,308,309
- ---------------------------------------------------------------------------------------------------------------------
CABLE--INTERNATIONAL--0.7% 3,100 NTL, Inc.(a)(c)(e)............ 3,089,250 3,224,000
- ---------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--1.3% 5,653 Time Warner Inc. (Series
M)(a)....................... 5,680,205 6,246,565
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.6% 120,000 California Federal Bank
(Series A).................. 3,030,000 3,097,500
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
120
<PAGE> 122
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRY HELD PREFERRED STOCKS COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRINTING & PUBLISHING--0.4% 15,704 K-III Communications Corp.
(Series B)(a)............... $ 1,557,630 $ 1,696,036
- ---------------------------------------------------------------------------------------------------------------------
STEEL--0.6% 120,000 USX Capital Corp. ............ 3,000,000 3,015,000
- ---------------------------------------------------------------------------------------------------------------------
TELEPHONE--COMPETITIVE 3,000 Intermedia Community of
LOCAL EXCHANGE--0.6% Florida(a)(e)............... 2,932,500 3,097,500
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PREFERRED
STOCKS--6.0% 26,573,057 29,059,610
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
---------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.2% 93,747 On Command Corporation(c)..... 2,744,654 1,124,964
- ---------------------------------------------------------------------------------------------------------------------
GAMING--0.0% 2,500 Goldriver Hotel & Casino Corp.
(Class B)(c)................ 18,603 0
- ---------------------------------------------------------------------------------------------------------------------
INDUSTRIAL SERVICES--0.0% 311 Thermadyne Industries,
Inc.(c)..................... 4,495 9,369
- ---------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.0% 53,022 Grand Union Co.(c)............ 3,090,000 115,986
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON
STOCKS--0.2% 5,857,752 1,250,319
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
TRUSTS & WARRANTS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CABLE--DOMESTIC--0.0% 23,350 American Telecasting, Inc.
(Warrants) (b).............. 4,776 9,340
- ---------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.0% 29,830 On Command Corporation
(Warrants)(b)............... 238,640 156,607
- ---------------------------------------------------------------------------------------------------------------------
GAMING--0.0% 250 Goldriver Hotel & Casino
Finance Corp. (Liquidating
Trust) (c)+................. 6,000 0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TRUSTS &
WARRANTS--0.0% 249,416 165,947
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER**--9.9% $20,000,000 CXC Inc., 5.57% due
7/30/1997................... 19,907,167 19,907,167
15,355,000 General Motors Acceptance
Corp., 6.25% due 7/01/1997.. 15,352,334 15,352,334
12,300,000 Preferred Receivable Funding
Corp., 5.54% due 7/10/1997.. 12,281,072 12,281,072
------------- -------------
47,540,573 47,540,573
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 32,000,000 Federal Home Loan Mortgage
OBLIGATIONS**--6.6% Corp., 5.37% due 7/09/1997.. 31,957,040 31,957,040
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-
TERM SECURITIES--16.5% 79,497,613 79,497,613
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.0%...... $ 468,573,067 473,489,908
=============
OTHER ASSETS LESS
LIABILITIES--2.0%............. 9,521,588
-------------
NET ASSETS--100.0%............ $ 483,011,496
=============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Rated.
** Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
(a) Represents a pay-in-kind security which may pay interest/dividend in
additional face/shares.
(b) Warrants entitle the Fund 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.
121
<PAGE> 123
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase.
(e) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(f) Subject to principal paydowns.
+ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $3,548,000, representing 0.73% of net
assets.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
VALUE
ISSUE ACQUISITION DATES(S) COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goldriver Hotel & Casino Finance Corp. (Liquidating Trust)....... 8/31/1992 $ 6,000 0
Tucson Electric & Power Co., 10.21% due 1/01/2009................ 6/16/1993 - 4/01/1996 2,948,074 $ 3,050,236
Tucson Electric & Power Co., 10.732% due 1/01/2013............... 3/01/1993 461,050 498,200
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 3,415,124 $ 3,548,436
========== ==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
122
<PAGE> 124
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $468,573,067) (Note 1a)........................ $ 473,489,908
Receivables:
Interest............................................................................... $ 6,421,229
Securities sold........................................................................ 5,669,053
Capital shares sold.................................................................... 210,183 12,300,465
----------
Prepaid expenses and other assets........................................................ 5,893
------------
Total assets............................................................................. 485,796,266
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased................................................................... 2,188,146
Investment adviser (Note 2)............................................................ 193,125
Capital shares redeemed................................................................ 2,000 2,383,271
----------
Accrued expenses and other liabilities................................................... 401,499
------------
Total liabilities........................................................................ 2,784,770
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................................................... $ 483,011,496
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized............................. $ 4,186,249
Paid-in capital in excess of par......................................................... 473,271,850
Undistributed investment income--net..................................................... 3,685,112
Accumulated realized capital losses on investments--net.................................. (3,048,556)
Unrealized appreciation on investments--net.............................................. 4,916,841
------------
NET ASSETS--Equivalent to $11.54 per share based on 41,862,495 shares outstanding........ $ 483,011,496
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
123
<PAGE> 125
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1b & 1c):
Interest and discount earned.............................................................. $ 19,785,293
Dividends................................................................................. 895,252
Other income.............................................................................. 313,201
-----------
Total income.............................................................................. 20,993,746
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)......................................................... $ 1,038,361
Accounting services (Note 2).............................................................. 47,779
Professional fees......................................................................... 21,558
Custodian fees............................................................................ 17,928
Registration fees......................................................................... 6,988
Pricing services.......................................................................... 4,277
Directors' fees and expenses.............................................................. 3,963
Transfer agent fees (Note 2).............................................................. 2,300
Other..................................................................................... 1,054
----------
Total expenses............................................................................ 1,144,208
-----------
Investment income--net.................................................................... 19,849,538
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1c & 3):
Realized gain on investments--net......................................................... 2,429,686
Change in unrealized appreciation on investments--net..................................... 4,360,525
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................................... $ 26,639,749
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
124
<PAGE> 126
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net............................................................... $19,849,538 $36,909,359
Realized gain (loss) on investments--net............................................. 2,429,686 (3,777,610)
Change in unrealized appreciation on investments--net................................ 4,360,525 8,565,962
------------ ------------
Net increase in net assets resulting from operations................................. 26,639,749 41,697,711
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1d):
Investment income--net............................................................... (19,950,817) (36,130,450)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders.................. (19,950,817) (36,130,450)
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions................... 61,707,646 52,695,717
------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets......................................................... 68,396,578 58,262,978
Beginning of period.................................................................. 414,614,918 356,351,940
------------ ------------
End of period*....................................................................... $483,011,496 $414,614,918
============ ============
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net............................................... $ 3,685,112 $ 3,786,391
============ ============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
125
<PAGE> 127
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN FOR THE SIX
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
STATEMENTS. JUNE 30, ------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997+ 1996+ 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 11.39 $ 11.25 $ 10.61 $ 12.06 $ 11.13
-------- -------- -------- -------- -------
Investment income--net.............................. .51 1.08 1.09 1.05 .95
Realized and unrealized gain (loss) on
investments--net.................................. .16 .12 .65 (1.47) .95
-------- -------- -------- -------- -------
Total from investment operations.................... .67 1.20 1.74 (.42) 1.90
-------- -------- -------- -------- -------
Less dividends from investment income--net.......... (.52) (1.06) (1.10) (1.03) (.97)
-------- -------- -------- -------- -------
Net asset value, end of period...................... $ 11.54 $ 11.39 $ 11.25 $ 10.61 $ 12.06
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 6.13%++ 11.27% 17.21% (3.59%) 17.84%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .53%* .54% .55% .61% .72%
======== ======== ======== ======== =======
Investment income--net.............................. 9.13%* 9.50% 9.92% 9.73% 8.62%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $483,011 $ 414,615 $ 356,352 $ 255,719 $ 163,428
======== ======== ======== ======== =======
Portfolio turnover.................................. 27.17% 48.92% 41.60% 51.88% 35.67%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the period.
++ Aggregate total investment return.
See Notes to Financial Statements.
126
<PAGE> 128
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. High Current Income Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued at amortized cost, which approximates
market value. 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) Income taxes--It is the Fund'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.
(c) 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. 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.
(d) Dividends and distributions to shareholders--Dividends from net investment
income are declared and paid monthly. Distributions from capital gains are
recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee based upon the aggregate daily value of net assets of the
Fund and the Company's Prime Bond Fund at the following annual rates: 0.55% of
these Funds' aggregate average daily net assets not exceeding $250 million;
0.50% of such average daily net assets in excess of $250 million but not more
than $500 million; 0.45% of such average daily net assets in excess of $500
million but not more than $750 million; and 0.40% of such average daily net
assets in excess of $750 million. For the six months ended June 30, 1997, the
aggregate average daily net assets of the Fund and Prime Bond Fund was
approximately $964,046,000.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $1,250 in commissions on the
execution of portfolio security transactions.
For the six months ended June 30, 1997, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $4,024 for providing security price
quotations to compute the Fund's net asset value.
127
<PAGE> 129
- --------------------------------------------------------------------------------
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $111,574,132 and $100,185,681, respectively.
Net realized and unrealized gains as of June 30, 1997 were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
- ---------------------------------------------------------
<S> <C> <C>
Long-term investments............................... $ 2,429,686 $ 4,916,841
---------- ----------
Total............................................... $ 2,429,686 $ 4,916,841
========== ==========
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $4,916,841, of which $23,527,066 related to appreciated securities
and $18,610,225 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments for Federal income tax purposes was $468,573,067.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$61,707,646 and $52,695,717 for the six months ended June 30, 1997 and the year
ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- ---------------------------------------------------------
<S> <C> <C>
Shares sold....................................... 4,769,107 $ 53,839,314
Shares issued to shareholders in reinvestment of
dividends........................................ 1,770,001 19,950,816
--------- ------------
Total issued...................................... 6,539,108 73,790,130
Shares redeemed................................... (1,066,394) (12,082,484)
--------- ------------
Net increase...................................... 5,472,714 $ 61,707,646
========= ============
- ---------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1996 Shares Amount
- ---------------------------------------------------------
<S> <C> <C>
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
========== ============
- ---------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1996, the Fund had net capital loss carryforward of
approximately $295,000, all of which expires in 2003. These amounts will be
available to offset like amounts of any future taxable gains.
6. SUBSEQUENT EVENT:
On July 1, 1997, the Board of Directors declared a net investment income
dividend of $.092806 per share payable on July 31, 1997 to shareholders of
record as of June 30, 1997.
128
<PAGE> 130
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Index 500 Fund's total investment
return was +20.28%, based on a change in per share net asset value from $10.17
to $12.21, and assuming reinvestment of $0.018 per share income dividends and
$0.003 per share capital gains distributions. The Standard & Poor's 500
Composite Index (S&P 500) had a total return of +20.55% for the same period. The
Fund's cumulative tracking deviation for this period relative to the total
return of the S&P 500 Index was -0.27%.
For the period since inception (December 13, 1996) through June 30, 1997, the
Fund's aggregate total return was +22.35%. (Total returns do not include the
effect of insurance-related fees and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the quarter's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although real gross domestic product growth for the first quarter
of the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
will remain positive.
PORTFOLIO MATTERS
The six-month period ended June 30, 1997 was a productive, though volatile,
period for US equity markets. After reaching new all-time highs with a strong
showing in January, the S&P 500 Index spent much of February and early March
with the Index in a fairly narrow trading range of 780--810. However, on the
heels of the preemptive increase in short-term interest rates by the Federal
Open Market Committee on March 25, 1997, the stock market began a significant
decline which culminated in a 20.69 point drop on April 11. This was the Index's
third-largest decline in history, closing at 737.65 and 9.63% off the high
established in mid-February. This became the launching point for a powerful
second-quarter rebound for the S&P 500 Index, propelled by continued prospects
for subdued inflation and a rallying bond market. For the month of May, the S&P
500 Index produced a total return of +6.01%, exactly matching its return for the
month of April. In June, the market continued to show strong momentum with a
total return of +4.49%. This brought the S&P 500 Index's total return for the
second quarter to +17.43% and to +20.55% for the first half of 1997. Having
ended 1996 at 740.74, the S&P 500 Index completed the first half of 1997 with a
gain of 144 points, up 19.49%, to close at 885.14 on June 30.
While the recent advances in the equity market have been somewhat broader than
in recent months, the S&P 500 Index continues to be powered by the
largest-capitalization stocks in the Index and strong returns within the capital
goods, consumer staples and financial sectors. The credit cyclicals, consumer
services and utilities sectors lagged the market in the first half of 1997.
We added several new equity positions to the Fund during the first half of
1997, as Standard & Poor's Corp. revised the composition of the S&P 500 Index in
response to merger and acquisition activity affecting its constituents. Through
June 30, 1997, there were (unofficially) eight such changes made to the S&P 500
Index. As a result, we established positions in the following stocks:
HEALTHSOUTH Corp. on January 7; Conseco, Inc. on January 14; Parametric
Technology Corp. on April 2; Adobe Systems, Inc. on May 5; Cardinal Health, Inc.
on May 23; The
129
<PAGE> 131
- --------------------------------------------------------------------------------
Charles Schwab Corporation on May 30; Countrywide Credit Industries, Inc. on
June 17; and Equifax, Inc. on June 18.
Having commenced operations on December 13, 1996 with a cash inflow of $10
million, net assets of the Fund grew rapidly during the first half of 1997,
increasing from $10.76 million on December 31, 1996 to $144.63 million on June
30, 1997. Nearly all of the Fund's assets are held in the form of a fully
replicating portfolio of all 500 stocks that comprise the S&P 500. As of June
30, 1997, our equity portfolio was valued at $121.45 million. In addition, we
held a long position of 53 S&P 500 September 1997 futures contracts. It is our
intention to be 100% invested in the S&P 500 Index at all times.
IN CONCLUSION
We appreciate your investment in Index 500 Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook with
you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Eric S. Mitofsky
Eric S. Mitofsky
Vice President and Portfolio Manager
August 13, 1997
130
<PAGE> 132
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
<S> <C> <C>
General Electric Co.++.... 58,497 $ 3,824,241
Coca-Cola Co. (The) ...... 44,201 2,983,568
Exxon Corp.++ ............ 44,254 2,721,621
+Microsoft
Corporation++........... 21,371 2,700,760
Merck & Co., Inc. ........ 21,514 2,226,699
Royal Dutch Petroleum
Co. .................... 38,092 2,071,252
Intel Corp. .............. 14,586 2,068,477
Philip Morris Companies,
Inc.++ ................. 43,288 1,920,905
Procter & Gamble Co. ..... 12,103 1,709,549
International Business
Machines Corp. ......... 17,701 1,596,409
Johnson & Johnson......... 23,738 1,528,134
Bristol-Myers Squibb
Co. .................... 17,790 1,440,990
Pfizer, Inc. ............. 11,507 1,375,086
Wal-Mart Companies,
Inc. ................... 40,378 1,365,281
duPont (E.I.) de Nemours &
Co. .................... 20,121 1,265,108
American International
Group, Inc. ............ 8,342 1,246,086
Lilly (Eli) & Co. ........ 9,899 1,082,084
PepsiCo, Inc. ............ 27,311 1,025,869
American Telephone &
Telegraph Co. .......... 28,958 1,015,340
Hewlett-Packard Co. ...... 18,111 1,014,216
SBC Communications,
Inc. ................... 16,290 1,007,944
Citicorp.................. 8,222 991,265
Mobil Corp. .............. 13,998 978,110
Disney (Walt) Company
(The)................... 12,034 965,729
Gillette Co. ............. 9,930 940,868
Abbott Laboratories....... 13,799 921,083
American Home Products
Corp. .................. 11,473 877,685
Chevron Corp. ............ 11,647 861,150
NationsBank Corp. ........ 13,011 839,209
Federal National Mortgage
Association............. 18,910 824,949
Lucent Technologies,
Inc. ................... 11,405 821,873
BellSouth Corp. .......... 17,690 820,374
BankAmerica Corp. ........ 12,639 816,006
Motorola, Inc. ........... 10,592 804,992
Ford Motor Co. ........... 21,204 800,451
+Cisco Systems, Inc. ..... 11,828 793,955
Amoco Corp. .............. 8,833 767,919
Minnesota Mining &
Manufacturing Co. ...... 7,424 757,248
GTE Corp. ................ 17,020 746,752
Chase Manhattan Corp. .... 7,684 745,828
General Motors Corp. ..... 12,995 723,659
Travelers Corporation..... 11,431 720,867
Boeing Co. ............... 12,846 681,641
Ameritech Corporation..... 9,758 662,934
American Express Co. ..... 8,418 627,141
Schering-Plough Corp. .... 13,041 624,338
Unilever N.V. ............ 2,842 619,556
Warner-Lambert Co. ....... 4,817 598,512
Home Depot, Inc.(The)..... 8,656 596,723
McDonald's Corp. ......... 12,295 594,002
Bell Atlantic Corp. ...... 7,777 590,080
+Oracle Corporation....... 11,646 586,667
Allstate Corporation...... 7,898 576,554
Schlumberger, Ltd. ....... 4,375 546,875
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
<S> <C> <C>
Texaco Inc. .............. 4,698 $ 510,907
+WorldCom, Inc. .......... 15,913 509,216
BancOne Corp. ............ 10,356 501,619
Kimberly-Clark Corp. ..... 9,975 496,256
+Compaq Computer Corp. ... 4,892 485,531
Time Warner, Inc. ........ 9,963 480,715
First Union Corp. ........ 5,101 471,843
Columbia/HCA Healthcare
Corp. .................. 11,927 468,880
MCI Communications
Corp. .................. 12,245 468,754
Standard & Poor's
Depositary Receipts..... 5,300 467,891
Xerox Corp. .............. 5,766 454,793
Monsanto Co. ............. 10,544 454,051
NYNEX Corp. .............. 7,817 450,455
Eastman Kodak Co. ........ 5,864 450,062
Morgan Stanley, Dean
Witter, Discover ....... 10,178 438,292
Emerson Electric Co. ..... 7,959 438,242
Wells Fargo & Co. ........ 1,594 429,583
Federal Home Loan Mortgage
Corp. .................. 12,387 425,803
AlliedSignal Inc. ........ 5,024 422,016
Northern Telecom Ltd. .... 4,634 421,694
Campbell Soup Co. ........ 8,305 415,250
Atlantic Richfield Co. ... 5,715 402,908
Sprint Corp. ............. 7,646 402,371
Chrysler Corp. ........... 12,261 402,314
Norwest Corp. ............ 6,659 374,569
Sears, Roebuck & Co. ..... 6,954 373,777
Anheuser-Busch Companies,
Inc. ................... 8,871 372,028
Caterpillar, Inc. ........ 3,400 365,075
Dow Chemical Co. ......... 4,158 362,266
Computer Associates
International, Inc. .... 6,471 360,354
Sara Lee Corporation...... 8,581 357,184
Lockheed Martin Corp. .... 3,422 354,391
United Technologies
Corp. .................. 4,256 353,248
Merrill Lynch & Co.,
Inc. ................... 5,904 352,026
First Data Corporation.... 7,997 351,368
+Dell Computer Corp. ..... 2,985 350,551
Morgan (J.P.) & Co.,
Inc. ................... 3,305 344,959
Medtronic, Inc. .......... 4,257 344,817
Colgate-Palmolive Co. .... 5,261 343,280
First Chicago Corp. ...... 5,567 336,803
U S West Communications
Group................... 8,543 321,964
Kellogg Co. .............. 3,703 317,069
Pharmacia & Upjohn
Inc. ................... 9,026 313,653
Union Pacific Corp. ...... 4,400 310,200
Duke Power Company........ 6,405 307,040
Heinz (H.J.) Company...... 6,535 301,427
Bank of New York Co.,
Inc. ................... 6,899 300,107
Nike, Inc. (Class B)...... 5,119 298,822
Fleet Financial Group,
Inc. ................... 4,659 294,682
Texas Instruments,
Inc. ................... 3,376 283,795
+Amgen, Inc. ............. 4,721 274,408
Aetna Inc. ............... 2,678 274,160
ConAgra, Inc. ............ 4,273 274,006
General Re Corp. ......... 1,465 266,630
</TABLE>
131
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
<S> <C> <C>
Seagram Co. Ltd. ......... 6,616 $ 266,294
+3Com Corp. .............. 5,917 266,265
Southern Co. ............. 12,149 265,759
Westinghouse Electric
Corp. .................. 11,328 261,960
International Paper
Co. .................... 5,332 258,935
Baxter International,
Inc. ................... 4,954 258,847
McDonnell Douglas
Corp. .................. 3,768 258,108
Deere & Co. .............. 4,578 251,218
Gannett Co., Inc. ........ 2,504 247,270
+Airtouch Communications,
Inc. ................... 8,967 245,472
Automatic Data Processing,
Inc. ................... 5,219 245,293
+Sun Microsystems,
Inc. ................... 6,578 244,825
Burlington Northern Santa
Fe Inc.................. 2,718 244,280
PNC Bank Corp. ........... 5,734 238,678
CIGNA Corp. .............. 1,335 236,963
CPC International,
Inc. ................... 2,553 235,674
Walgreen Co. ............. 4,371 234,395
Aluminum Co. of America... 3,081 232,230
Penney (J.C.) Co. ........ 4,377 228,425
Corning, Inc. ............ 4,079 226,894
+Applied Materials,
Inc. ................... 3,189 225,821
Rockwell International
Corp. .................. 3,798 224,082
Norfolk & Southern
Corp. .................. 2,222 223,866
KeyCorp................... 4,004 223,723
Archer-Daniels-Midland
Co. .................... 9,507 223,415
Illinois Tool Works
Inc. ................... 4,442 221,822
Household International,
Inc. ................... 1,888 221,722
+U S West Media Group,
Inc. ................... 10,808 218,862
Sun Trust Banks, Inc. .... 3,962 218,158
MBNA Corp. ............... 5,934 217,333
Raytheon Co. ............. 4,193 213,843
CSX Corp. ................ 3,853 213,842
+Boston Scientific
Corp. .................. 3,444 211,591
Tyco International,
Ltd. ................... 3,001 208,757
Mellon Bank Corp. ........ 4,600 207,575
National City
Corporation............. 3,947 207,217
Marsh & McLennan
Companies, Inc. ........ 2,902 207,130
Chubb Corp. .............. 3,092 206,775
American General Corp. ... 4,290 204,848
Dayton Hudson Corporation
(Class A)............... 3,850 204,772
Waste Management, Inc. ... 6,370 204,636
Loews Corporation......... 2,043 204,555
Phillips Petroleum Co. ... 4,675 204,531
First Bank Systems,
Inc. ................... 2,389 203,961
May Department
Stores Co. ............. 4,224 199,584
CoreStates Financial
Corp. .................. 3,682 197,908
Textron Inc. ............. 2,939 195,076
Gap, Inc.(The)............ 4,916 191,110
Bank of Boston Corp. ..... 2,618 188,660
+Viacom, Inc. (Class B)... 6,286 188,580
+CUC International,
Inc. ................... 7,280 187,915
General Mills, Inc. ...... 2,868 186,779
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
PPG Industries, Inc. ..... 3,213 $ 186,756
Barnett Banks, Inc. ...... 3,543 186,008
Enron Corp. .............. 4,520 184,473
Pitney Bowes, Inc. ....... 2,636 183,202
Weyerhaeuser Co. ......... 3,522 183,144
Edison International...... 7,284 181,190
+Tellabs, Inc. ........... 3,220 179,917
+Toys 'R' Us, Inc. ....... 5,093 178,255
Pacific Gas and
Electric Co. ........... 7,323 177,583
Halliburton Co. .......... 2,224 176,252
+TCI Communications, Inc.
(Class A)............... 11,840 176,120
Mattel, Inc. ............. 5,196 176,014
Goodyear Tire & Rubber
Co. .................... 2,760 174,743
Unocal Corp. ............. 4,447 172,599
United Healthcare
Corporation............. 3,319 172,588
ITT Hartford Group
Inc. ................... 2,085 172,534
Honeywell, Inc. .......... 2,248 170,567
+EMC Corporation.......... 4,366 170,274
USBANCORP, Inc. .......... 2,645 169,611
Wachovia Corp. ........... 2,879 167,882
Avon Products, Inc. ...... 2,360 166,528
+HFS Inc. ................ 2,818 163,444
Albertson's, Inc. ........ 4,472 163,228
AMP, Inc. ................ 3,902 162,909
Air Products and
Chemicals, Inc. ........ 1,982 161,038
+Tenet Healthcare
Corp. .................. 5,353 158,248
Praxair, Inc. ............ 2,778 155,568
Ralston Purina Co. ....... 1,884 154,841
Fifth Third Bank.......... 1,883 154,524
+Seagate Technology,
Inc. ................... 4,371 153,805
Aon Corporation........... 2,966 153,491
+HEALTHSOUTH Corp. ....... 6,113 152,443
CVS Corporation........... 2,956 151,495
Hershey Foods Corp. ...... 2,728 150,892
FPL Group, Inc. .......... 3,250 149,703
+AMR Corp. ............... 1,616 149,480
+Micron Technology,
Inc. ................... 3,714 148,328
USX Marathon Group,
Inc. ................... 5,108 147,493
Occidental Petroleum
Corp.................... 5,842 146,415
Barrick Gold
Corporation............. 6,643 146,146
Service Corporation....... 4,266 140,245
American Electric Power
Company, Inc. .......... 3,330 139,860
Marriott International,
Inc. ................... 2,273 139,505
Alcan Aluminium, Ltd. .... 4,018 139,374
Georgia-Pacific Corp. .... 1,623 138,564
Wrigley (W.M.) Jr. Co.
(Class B)............... 2,064 138,288
Texas Utilities Company... 3,989 137,371
Tenneco, Inc. ............ 3,032 137,008
Great Western Financial
Corp. .................. 2,447 131,526
+Kroger Co. .............. 4,527 131,283
Comerica Inc. ............ 1,908 129,744
+Federated Department
Stores, Inc. ........... 3,692 128,297
</TABLE>
132
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
<S> <C> <C>
TRW Inc. ................. 2,257 $ 128,226
American Stores Co. ...... 2,587 127,733
Schwab (Charles)
Corporation (The)....... 3,122 127,026
+ITT Corp. ............... 2,068 126,277
Browning Ferris
Industries, Inc......... 3,778 125,619
+Costco Companies Inc. ... 3,763 123,709
Comcast Corp.-Special
(Class A)............... 5,769 123,312
Consolidated Edison
Company of New York
Group, Inc. ............ 4,175 122,902
Dover Corp. .............. 1,997 122,816
Williams Companies,
Inc. ................... 2,787 121,931
Crown Company, Inc. ...... 2,278 121,731
Clorox Company............ 917 121,044
Cognizant Corporation..... 2,985 120,893
Conseco, Inc. ............ 3,265 120,805
Dominion Resources,
Inc. ................... 3,287 120,386
Bankers Trust New York
Corp. .................. 1,383 120,321
Ingersoll-Rand Company.... 1,942 119,918
Eaton Corp. .............. 1,370 119,618
Lincoln National Corp. ... 1,854 119,351
Masco Corporation......... 2,851 119,029
Hilton Hotels
Corporation............. 4,446 118,097
+Federal Express Corp. ... 2,026 117,002
Pioneer Hi-Bred
International, Inc. .... 1,461 116,880
Dresser Industries,
Inc. ................... 3,122 116,295
Entergy Corp. ............ 4,236 115,961
PacifiCorp................ 5,235 115,170
+Fortune Brands, Inc. .... 3,064 114,326
Lowe's Companies, Inc. ... 3,068 113,899
Sysco Corp. .............. 3,108 113,442
Union Pacific Resources
Group................... 4,523 112,510
St. Paul Companies,
Inc. ................... 1,473 112,316
ALLTEL Corp. ............. 3,356 112,216
Guidant Corp. ............ 1,316 111,860
Newell Co. ............... 2,821 111,782
Becton, Dickinson and
Company................. 2,205 111,628
Freeport-McMoRan Copper &
Gold Inc. (Class B)..... 3,573 111,210
Cardinal Health, Inc. .... 1,941 111,122
Transamerica
Corporation............. 1,177 110,123
Genuine Parts Company..... 3,208 108,671
Rite Aid Corporation...... 2,176 108,528
Quaker Oats Company....... 2,414 108,328
Delta Air Lines, Inc. .... 1,319 108,158
Newmont Mining
Corporation............. 2,772 108,108
Salomon Inc. ............. 1,936 107,690
Union Carbide Corp. ...... 2,262 106,455
+K Mart Corp. ............ 8,644 105,889
Republic New York
Corporation............. 981 105,457
Tribune Co. .............. 2,187 105,113
SAFECO Corporation........ 2,251 105,094
Cooper Industries,
Inc. ................... 2,100 104,475
UNUM Corporation.......... 2,487 104,454
McGraw-Hill, Inc. ........ 1,767 103,922
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
Public Service
Enterprise.............. 4,134 $ 103,350
Rohm & Haas Co. .......... 1,136 102,311
MGIC Investment Corp. .... 2,095 100,429
Equifax, Inc. ............ 2,694 100,183
Winn-Dixie Stores,
Inc. ................... 2,680 99,830
Baker Hughes, Inc. ....... 2,571 99,466
Coastal Corp. ............ 1,869 99,408
International Flavors &
Fragrances, Inc......... 1,964 99,182
+Digital Equipment
Corporation............. 2,762 97,878
Burlington Resources
Inc. ................... 2,217 97,825
CINergy Corporation....... 2,800 97,475
Limited, Inc. (The)....... 4,813 97,463
+Computer Sciences
Corporation............. 1,351 97,441
+Parametric Technology
Corp. .................. 2,286 97,298
Carolina Power &
Light Company........... 2,689 96,468
VF Corp. ................. 1,130 96,191
Donnelley (R.R.) & Sons
Co. .................... 2,608 95,518
Sherwin-Williams Company.. 3,050 94,169
Times Mirror Co. ......... 1,704 94,146
Phelps Dodge Corp. ....... 1,104 94,047
Champion International
Corp. .................. 1,697 93,759
+Bay Networks Inc. ....... 3,506 93,128
Reynolds Metals Co. ...... 1,298 92,482
Amerada Hess Corp. ....... 1,653 91,845
UST, Inc. ................ 3,307 91,769
Consolidated Natural Gas
Co. .................... 1,684 90,620
+Thermo Electron
Corporation............. 2,649 90,066
Northrop Grumman Corp. ... 1,025 90,008
+Advanced Micro Devices,
Inc. ................... 2,500 90,000
Inco Ltd. ................ 2,990 89,887
Case Corp. ............... 1,303 89,744
Houston Industries
Inc. ................... 4,162 89,223
Torchmark Corp. .......... 1,250 89,062
Interpublic Group of
Companies, Inc. ........ 1,441 88,351
Jefferson Pilot Corp. .... 1,263 88,252
Nucor Corporation......... 1,558 88,027
Eastman Chemical Co. ..... 1,380 87,630
Hercules Inc. ............ 1,817 86,989
Greentree Financial
Corp. .................. 2,440 86,925
MBIA, Inc. ............... 767 86,527
Unicom Corp. ............. 3,829 85,195
New York Times Co. ....... 1,718 85,041
General Dynamics
Corporation............. 1,121 84,075
Allegheny Teledyne
Inc. ................... 3,096 83,592
Peco Energy Co. .......... 3,952 82,992
Fluor Corporation......... 1,487 82,064
Parker Hannifin Corp. .... 1,320 80,107
+LSI Logic Corporation.... 2,495 79,840
Knight-Ridder, Inc. ...... 1,624 79,677
Central and South West
Corp. .................. 3,745 79,581
Dun & Bradstreet Corp. ... 3,023 79,354
</TABLE>
133
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
<S> <C> <C>
Rubbermaid Inc. .......... 2,661 $ 79,165
Sonat, Inc. .............. 1,532 78,515
+Cabletron Systems,
Inc. ................... 2,772 78,482
+National Semiconductor
Corp. .................. 2,519 77,144
Ahmanson (H.F) & Co. ..... 1,793 77,099
Laidlaw Inc. ............. 5,577 77,032
General Public Utilities
Corp. .................. 2,142 76,844
Morton International,
Inc. ................... 2,529 76,344
Avery Dennison Corp. ..... 1,850 74,231
Grainger (W.W.) Inc. ..... 942 73,653
TJX Companies Inc. ....... 2,760 72,795
Grace (W.R.) & Co. ....... 1,317 72,600
Whirlpool Corp. .......... 1,320 72,022
Golden West Financial
Corporation............. 1,019 71,330
DTE Energy Holdings
Company................. 2,578 71,217
Nordstrom, Inc. .......... 1,443 70,797
Baltimore Gas & Electric
Company................. 2,622 69,975
+Western Atlas, Inc. ..... 953 69,807
Dillard Department Stores
Inc. ................... 2,015 69,769
Placer Dome Inc. ......... 4,254 69,659
Willamette Industries,
Inc. ................... 989 69,230
Dow Jones & Co., Inc. .... 1,715 68,922
Dana Corp. ............... 1,807 68,666
Union Electric Company.... 1,813 68,327
Beneficial Corp. ......... 955 67,865
+Humana, Inc. ............ 2,887 66,762
Southwest Airlines Co. ... 2,576 66,654
Hasbro, Inc. ............. 2,295 65,121
PACCAR Inc. .............. 1,401 65,059
Columbia Gas System,
Inc. ................... 979 63,880
Pennzoil Co. ............. 827 63,472
Northern States Power
Co...................... 1,226 63,445
+St. Jude Medical,
Inc. ................... 1,623 63,297
Stanley Works (The)....... 1,579 63,160
+Autozone, Inc. .......... 2,666 62,818
Black & Decker
Corporation............. 1,675 62,289
Circuit City Stores,
Inc. ................... 1,740 61,879
Union Camp Corp. ......... 1,237 61,850
Sigma-Aldrich Corp. ...... 1,753 61,465
Perkin-Elmer
Corporation............. 768 61,104
Ashland Oil Inc. ......... 1,317 61,076
+General Instrument
Corp. .................. 2,432 60,800
Wendy's International,
Inc. ................... 2,341 60,720
Johnson Controls, Inc. ... 1,472 60,444
Harcourt General Inc. .... 1,262 60,103
Brown-Forman Corp. (Class
B)...................... 1,226 59,844
Ikon Office Solutions..... 2,393 59,675
Block (H & R), Inc. ...... 1,847 59,566
+Ceridian Corp. .......... 1,402 59,235
Liz Claiborne, Inc. ...... 1,269 59,167
Raychem Corp. ............ 795 59,128
Ohio Edison Company....... 2,710 59,112
PP&L Resources Inc. ...... 2,926 58,337
Harris Corp. ............. 692 58,128
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
Countrywide Credit
Industries, Inc. ....... 1,862 $ 58,071
Frontier Corp. ........... 2,906 57,938
Mead Corp. ............... 928 57,768
+Woolworth Corp. ......... 2,373 56,952
Westvaco Corp. ........... 1,810 56,902
James River Corp. of
Virginia................ 1,528 56,536
Great Lakes Chemical
Corporation............. 1,067 55,884
Ecolab Inc. .............. 1,147 54,769
WMX Technologies, Inc. ... 1,704 54,741
Kerr-McGee Corp. ......... 863 54,693
Brunswick Corp. .......... 1,748 54,625
Tandy Corp. .............. 968 54,208
ITT Industries Inc. ...... 2,098 54,023
Armstrong World
Industries, Inc. ....... 733 53,784
Engelhard Corporation..... 2,555 53,495
Providian Corporation..... 1,664 53,456
Temple-Inland Inc. ....... 985 53,190
USX-US Steel Group,
Inc. ................... 1,500 52,594
+FMC Corporation.......... 659 52,349
Pall Corp. ............... 2,229 51,824
Pacific Enterprises....... 1,511 50,807
Mallinckrodt Group
Inc. ................... 1,313 49,894
Deluxe Corporation........ 1,461 49,857
American Greetings Corp.
(Class A)............... 1,337 49,636
Thomas & Betts Corp. ..... 943 49,566
Cummins Engine Company,
Inc. ................... 701 49,464
+USAir Group, Inc. ....... 1,396 48,860
United States Surgical
Corp. .................. 1,304 48,574
+Silicon Graphics,
Inc. ................... 3,155 47,325
USF&G Corp. .............. 1,967 47,208
Whitman Corp. ............ 1,843 46,651
Maytag Corp. ............. 1,779 46,476
+DSC Communications
Corp. .................. 2,087 46,436
Bausch & Lomb, Inc. ...... 985 46,418
Nalco Chemical Company.... 1,197 46,234
Reebok International
Ltd. ................... 987 46,142
+Andrew Corp. ............ 1,601 45,028
Polaroid Corp. ........... 807 44,788
Adobe Systems, Inc. ...... 1,277 44,775
Ryder System, Inc. ....... 1,339 44,187
+ALZA Corp. .............. 1,504 43,616
+Novell, Inc. ............ 6,192 42,957
+Rowan Companies, Inc. ... 1,518 42,789
Snap-On, Inc. ............ 1,082 42,604
+Tandem Computers,
Inc. ................... 2,103 42,586
+Fruit of the Loom,
Inc. ................... 1,367 42,377
Goodrich (B.F.) Co. ...... 953 41,277
Super Valu, Inc. ......... 1,194 41,193
Mercantile Stores Company,
Inc. ................... 654 41,161
Louisiana-Pacific
Corp. .................. 1,931 40,792
Cyprus Amax Minerals
Co. .................... 1,657 40,597
National Service
Industries, Inc. ....... 833 40,557
Tupperware Corporation.... 1,104 40,296
</TABLE>
134
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
<S> <C> <C>
Bemis Company, Inc. ...... 930 $ 40,223
Sun Company, Inc. ........ 1,296 40,176
Echlin Inc. .............. 1,102 39,672
Owens-Corning Fiberglass
Corp. .................. 918 39,589
Timken Co. ............... 1,112 39,545
+Oryx Energy Co. ......... 1,861 39,314
General Signal Corp. ..... 884 38,565
Pep Boys-Manny, Moe &
Jack.................... 1,101 37,503
Noram Energy Corp. ....... 2,438 37,179
Allergan, Inc. ........... 1,163 36,998
Biomet, Inc. ............. 1,983 36,933
Bard (C.R.), Inc. ........ 1,012 36,748
Manor Care, Inc. ......... 1,115 36,377
Harnischfeger Industries,
Inc. ................... 872 36,188
Tektronix, Inc. .......... 583 34,980
Louisiana Land &
Exploration Co. ........ 606 34,618
Giant Food, Inc. (Class
A)...................... 1,060 34,583
Crane Co. ................ 815 34,077
Homestake Mining Co. ..... 2,606 34,041
Millipore Corp. .......... 768 33,792
+Harrah's Entertainment,
Inc. ................... 1,827 33,343
Autodesk, Inc. ........... 838 32,106
+Apple Computer, Inc. .... 2,252 32,091
NICOR Inc. ............... 884 31,713
Worthington Industries,
Inc. ................... 1,722 31,534
Cooper Tire & Rubber
Co. .................... 1,417 31,174
Moore Corp. Ltd. ......... 1,562 30,752
Boise Cascade Corp. ...... 861 30,404
Scientific-Atlanta,
Inc. ................... 1,374 30,056
Foster Wheeler Corp. ..... 721 29,201
+Beverly Enterprises,
Inc. ................... 1,763 28,649
McDermott International,
Inc. ................... 975 28,458
Alberto-Culver Company
(Class B)............... 991 27,748
Meredith Corp. ........... 950 27,550
ENSERCH Corporation....... 1,238 27,546
+Santa Fe Energy
Resources, Inc. ........ 1,772 26,026
Caliber Systems, Inc. .... 695 25,889
Helmerich & Payne,
Inc. ................... 442 25,470
Stone Container
Corporation............. 1,761 25,204
Darden Restaurants,
Inc. ................... 2,727 24,713
+Unisys Corp. ............ 3,106 23,683
Aeroquip-Vickers Inc. .... 497 23,483
Battle Mountain Gold
Company................. 4,094 23,285
ASARCO, Inc. ............. 760 23,275
Peoples Energy Corp. ..... 620 23,211
King World Productions,
Inc. ................... 663 23,205
Potlatch Corp. ........... 511 23,123
Shared Medical Systems
Corp. .................. 422 22,788
Inland Steel Co. ......... 870 22,729
+Navistar International
Corp. .................. 1,307 22,546
SHARES VALUE
COMMON STOCKS HELD (NOTE 1a)
- -------------------------------------------------------
Briggs & Stratton
Corp. .................. 448 $ 22,400
+Niagara Mohawk Power
Corp. .................. 2,564 21,954
+Bethlehem Steel Corp. ... 1,985 20,719
Centex Acceptance
Corp. .................. 506 20,556
Russell Corp. ............ 678 20,086
Springs Industries,
Inc. ................... 359 18,937
EG&G, Inc. ............... 841 18,923
Fleetwood Enterprises,
Inc. ................... 632 18,842
+Amdahl Corp. ............ 2,153 18,839
Great Atlantic & Pacific
Tea Co., Inc. .......... 678 18,433
Jostens, Inc. ............ 687 18,377
Cincinnati Milacron,
Inc. ................... 707 18,338
+Data General Corp. ...... 700 18,200
Longs Drug Stores
Corp. .................. 694 18,174
Coors (Adolph) Co. (Class
B)...................... 664 17,679
Safety-Kleen Corp. ....... 1,034 17,449
Ball Corp. ............... 543 16,324
ONEOK, Inc. .............. 484 15,579
Echo Bay Mines Ltd. ...... 2,473 14,220
Pulte Corp. .............. 398 13,756
Harland (John H.) Co. .... 550 12,547
Eastern Enterprises....... 361 12,522
Giddings & Lewis, Inc. ... 598 12,483
Kaufman and Broad Home
Corp. .................. 690 12,118
Fleming Companies,
Inc. ................... 670 12,060
Stride Rite Corp. ........ 880 11,330
+Charming Shoppes,
Inc. ................... 1,845 9,629
Nacco Industries, Inc.
(Class A)............... 145 8,183
+Armco, Inc. ............. 1,894 7,339
+Intergraph Corp. ........ 819 6,961
Autoliv AB................ 3 117
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST--$111,155,648)--84.0%.. 121,453,607
- -------------------------------------------------------
FACE
SHORT-TERM OBLIGATIONS AMOUNT
- -------------------------------------------------------
Associates Corporation of
North America, 6.15% due
7/01/1997............... $6,107,000 6,107,000
Federal National Mortgage
Association*, 5.41% due
7/14/1997............... 10,000,000 9,980,464
General Motors Acceptance
Corp., 6.25% due
7/01/1997............... 7,000,000 7,000,000
- -------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(COST--$23,087,464)--15.9% 23,087,464
- -------------------------------------------------------
TOTAL INVESTMENTS
(COST--$134,243,112)--99.9%.. 144,541,071
VARIATION MARGIN ON STOCK
INDEX FUTURES
CONTRACTS**--(0.1%)....... (171,845)
OTHER ASSETS LESS
LIABILITIES--0.2%......... 260,629
-----------
NET ASSETS--100.0%........ $144,629,855
===========
</TABLE>
- --------------------------------------------------------------------------------
135
<PAGE> 137
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
+ 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 June 30, 1997 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE DATE (NOTE 1b)
- --------------------------------------------------------------------
<C> <S> <C> <C>
53 S&P 500 Stock Index September 1997 $23,591,625
- --------------------------------------------------------------------
TOTAL STOCK INDEX FUTURES CONTRACTS PURCHASED
(CONTRACT PRICE--$23,084,939)....................... $23,591,625
===========
- --------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
136
<PAGE> 138
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$134,243,112) (Note 1a)............................ $144,541,071
Receivables:
Capital shares sold...................................................................... $319,196
Dividends................................................................................ 122,965 442,161
--------
Deferred organization expenses (Note 1e)................................................... 14,852
------------
Total assets............................................................................... 144,998,084
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Variation margin on stock index futures contracts (Note 1b)................................ 171,845
Payables:
Securities purchased..................................................................... 133,377
Investment adviser (Note 2).............................................................. 27,805
Capital shares redeemed.................................................................. 321 161,503
--------
Accrued expenses and other liabilities..................................................... 34,881
------------
Total liabilities.......................................................................... 368,229
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................. $144,629,855
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized............................... $ 1,184,868
Paid-in capital in excess of par........................................................... 128,598,800
Undistributed investment income--net....................................................... 1,160,993
Undistributed realized capital gains on investments--net................................... 2,880,549
Unrealized appreciation on investments--net................................................ 10,804,645
------------
NET ASSETS--Equivalent to $12.21 per share based on 11,848,676 shares outstanding.......... $144,629,855
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
137
<PAGE> 139
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Dividends (net of $3,045 foreign withholding tax)........................................... $ 643,849
Interest and discount earned................................................................ 605,952
-----------
Total income................................................................................ 1,249,801
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................................................... $132,515
Registration fees (Note 1e)................................................................. 12,788
Custodian fees.............................................................................. 10,155
Accounting services (Note 2)................................................................ 7,497
Transfer agent fees (Note 2)................................................................ 1,695
Professional fees........................................................................... 1,659
Amortization of organization expenses (Note 1e)............................................. 939
Directors' fees and expenses................................................................ 352
Pricing services............................................................................ 247
Other....................................................................................... 519
--------
Total expenses before reimbursement......................................................... 168,366
Reimbursement of expenses (Note 2).......................................................... (79,567)
--------
Expenses after reimbursement................................................................ 88,799
-----------
Investment income--net...................................................................... 1,161,002
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1d & 3):
Realized gain on investments--net........................................................... 2,885,592
Change in unrealized appreciation on investments--net....................................... 10,651,511
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ $14,698,105
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
138
<PAGE> 140
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED DEC. 13, 1996+
JUNE 30, TO DEC. 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net.................................................... $ 1,161,002 $ 16,863
Realized gain (loss) on investments--net.................................. 2,885,592 (193)
Change in unrealized appreciation on investments--net..................... 10,651,511 153,134
------------ -----------
Net increase in net assets resulting from operations...................... 14,698,105 169,804
------------ -----------
- -------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net.................................................... (16,872) --
Realized gain on investments--net......................................... (4,850) --
------------ -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders............................................................ (21,722) --
------------ -----------
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions........ 119,201,632 582,036
------------ -----------
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets.............................................. 133,878,015 751,840
Beginning of period....................................................... 10,751,840 10,000,000
------------ -----------
End of period*............................................................ $144,629,855 $ 10,751,840
============ ===========
- -------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.................................... $ 1,160,993 $ 16,863
============ ===========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
139
<PAGE> 141
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION MONTHS ENDED DEC. 13, 1996+
PROVIDED IN THE FINANCIAL STATEMENTS. JUNE 30, TO DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................................... $ 10.17 $ 10.00
-------- -------
Investment income--net......................................................... .10 .02
Realized and unrealized gain on investments--net............................... 1.96 .15
-------- -------
Total from investment operations............................................... 2.06 .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................................................. $ 12.21 $ 10.17
======== =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................................. 20.28%++++ 1.68%++++
======== =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................................. .20%* .00%*
======== =======
Expenses....................................................................... .38%* .60%*
======== =======
Investment income--net......................................................... 2.63%* 3.08%*
======== =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....................................... $144,630 $ 10,752
======== =======
Portfolio turnover............................................................. 16.90% .04%
======== =======
Average commission rate paid................................................... $ .0154 $ .0120
======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
++++ Aggregate total investment return.
See Notes to Financial Statements.
140
<PAGE> 142
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Index 500 Fund (the "Fund") is classified as
"diversified", as defined in the Investment Company Act of 1940. These unaudited
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. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--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. Securities traded in the
NASDAQ National Market System are valued at the last sale 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. Short-term securities
are valued at amortized cost, which approximates market value. 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--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
- - Financial futures contracts--The Fund may purchase or sell futures contracts
and options on such futures contracts for the purpose 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.
- - Options--The Fund is authorized to purchase and write covered call and put
options. When the 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.
(c) Income taxes--It is the Fund'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
141
<PAGE> 143
- --------------------------------------------------------------------------------
required. Under the applicable foreign tax law, a withholding tax may be imposed
on interest, dividends and capital gains at various rates.
(d) 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. 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.
(e) Deferred organization expenses and pre-paid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Pre-paid registration fees are charged to expense as the
related shares are issued.
(f) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.30% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, MLAM earned fees of $132,515, of which
$79,567 was voluntarily waived.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $113,045,501 and $11,780,446, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Gains
- --------------------------------------------------------------------------
<S> <C> <C>
Long-term investments.......................... $ 550,347 $10,297,959
Short-term investments......................... (936) --
Options purchased.............................. 5,707 --
Options written................................ 3,732 --
Stock index futures contracts.................. 2,326,742 506,686
---------- ------------
Total.......................................... $2,885,592 $10,804,645
========== ===========
- -------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $10,297,959, of which $11,233,309 related to appreciated securities
and $935,350 related to depreciated securities. At June 30, 1997, the aggregate
cost of investments for Federal income tax purposes was $134,243,112.
Transactions in put options written for the six months ended June 30, 1997
were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Nominal Value
Covered by Put
Options
Written Premiums Paid
- -----------------------------------------------------------------------
<S> <C> <C>
Outstanding put options written,
beginning of period................... -- --
Options written........................ 300 $ 5,541
Options closed......................... (300) (5,541)
---- -------
Outstanding put options written, end of
period................................ -- $ --
==== =======
- -------------------------------------------------------
</TABLE>
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$119,201,632 and $582,036 for the six months ended June 30, 1997 and for the
period December 13, 1996 to December 31, 1996, respectively.
143
<PAGE> 144
- --------------------------------------------------------------------------------
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- -------------------------------------------------------------------------
<S> <C> <C>
Shares sold................................... 13,368,916 $147,077,349
Shares issued to shareholders in reinvestment
of dividends and distributions............... 2,129 21,722
---------- ------------
Total issued.................................. 13,371,045 147,099,071
Shares redeemed............................... (2,579,716) (27,897,439)
---------- ------------
Net increase.................................. 10,791,329 $119,201,632
========== ============
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
For the Period December 13, 1996+ to December Dollar
31, 1996 Shares Amount
- -------------------------------------------------------------------------
<S> <C> <C>
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.
</TABLE>
143
<PAGE> 145
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, International Equity Focus Fund's
total investment return was +14.53%, based on a change in per share net asset
value from $11.63 to $12.96, and assuming reinvestment of $0.226 per share
income dividends and $0.087 per share capital gains.
For the one-year period ended June 30, 1997, the Fund's average annual total
return was +13.56%. For the period since inception (July 1, 1993) through June
30, 1997, the Fund's average annual total return was +9.33%. (Total returns do
not include the effect of insurance-related fees and expenses.)
PORTFOLIO MATTERS
International equity markets rose relatively sharply during the six months
ended June 30, 1997. The unmanaged Financial Times/Standard & Poor's--Actuaries
World (ex-US) Index total return for the period was +11.33% in US dollar terms.
International Equity Focus Fund returned +14.53% over the same period,
substantially outperforming the Index.
In general, equity markets significantly outperformed bond markets as a
strengthening of economic activity expectations coincided with a period of
continued low inflation. The six-month period was characterized by continued
appreciation of the US dollar against the Deutschemark, which reduced returns in
US dollar terms from relatively strong equity markets in Europe. After weakening
in the first quarter of 1997, the yen appreciated significantly during the six
months ended June 30, 1997. The strong yen coincided with an improvement in
expectations of Japanese economic growth and resulted in the Nikkei 225 stock
index appreciating 23.83% in the June quarter.
The Fund's outperformance for the June period reflected several factors
including:
- Significant gains in a number of large-cap Japanese manufacturing stocks,
which outperformed the Japanese market.
- An overweighted position in emerging markets equities--initially Turkey, and
then Greece, Brazil and India--which all performed strongly.
- Small hedges out of the yen and Deutschemark into the US dollar, which were
largely closed out in the March quarter.
INVESTMENT PROCESS CHANGES
During the six months ended June 30, 1997, we began to use a new index for
monitoring Japanese stock performance--the unmanaged Goldman Sachs
Cross-Holdings Adjusted (GSCA) Index--which adjusts Japanese market weights for
extensive cross-holdings among companies in Japan. The GSCA Index significantly
reduces the effective benchmark weight of Japanese banks in a neutral Japanese
portfolio.
At the same time, we modified the Fund's investment decision-making process to
emphasize adding value primarily by effecting strategic asset allocations among
countries. We will also seek to generally maintain a strategic overweighting in
emerging and smaller markets. Finally, we will use a combination of quantitative
and fundamental investment techniques to select stocks in larger, developed
equity markets such as Japan, the United Kingdom, Germany, France and Australia.
INVESTMENT ACTIVITY AND STRATEGY
At June 30, 1997, the Fund's effective equity exposure was approximately 84%
of net assets, up slightly from 81% six months earlier. The Fund's Japanese
effective equity exposure was 33%, although early in July we cut exposure by
about 2%.
We consistently trimmed back European equity exposure over the past six months
in favor of emerging markets exposure. By June 30, 1997, Continental European
equity exposure was only about 13% of the Fund's net assets, compared to about
17% six months earlier.
We eliminated all Spanish exposure and reduced holdings in Switzerland and
Germany. In contrast, the UK equity exposure was increased and represented
almost 12% of net assets at June 30, 1997, up from 4% at December 31, 1996.
Greater confidence in UK economic management and improved relative equity market
valuations provided a spur to increase exposure.
The Fund's major investment position relative to an unmanaged benchmark
remains in emerging equity markets where, at June 30, 1997, almost 13% of net
assets were invested, with significant concentrations in Latin America and
India.
144
<PAGE> 146
- --------------------------------------------------------------------------------
IN CONCLUSION
With the exception of Continental Europe, we remain positive on the
intermediate-term potentials for most international equity markets. Going
forward, the investment process for International Equity Focus Fund is expected
to concentrate on seeking to add value primarily through country selection and
secondly through selecting portfolios of stocks in larger markets which reflect
a combination of fundamental and quantitative analysis.
We thank you for your interest in International Equity Focus Fund of Merrill
Lynch Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Andrew Bascand
Andrew Bascand
Vice President and Senior Portfolio Manager
August 13, 1997
145
<PAGE> 147
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
AFRICA INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH AFRICA BANKING 119,277 Nedcor Ltd.
(GDR)(b)(i)(j)......... $ 1,334,304 $ 2,594,275 0.6%
10,259 Nedcor Ltd. (Ordinary)... 151,495 227,400 0.0
------------ ------------ ------
1,485,799 2,821,675 0.6
-----------------------------------------------------------------------------------------------------
BEVERAGES 138,736 South African Breweries,
Ltd. .................. 3,702,680 4,260,915 1.0
-----------------------------------------------------------------------------------------------------
FOREST PRODUCTS 29,000 Sappi Limited............ 277,418 262,241 0.1
-----------------------------------------------------------------------------------------------------
INSURANCE 49,800 Liberty Life Association
of Africa.............. 1,352,849 1,350,993 0.3
-----------------------------------------------------------------------------------------------------
MINING 5,150 Anglo American Corp. of
South Africa, Ltd. .... 347,236 310,374 0.1
23,800 Anglo American Corp. of
South Africa, Ltd.
(ADR)(a)............... 1,522,851 1,430,975 0.3
47,300 Evander Gold Mines
Ltd. .................. 511,564 198,214 0.0
------------ ------------ ------
2,381,651 1,939,563 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AFRICA 9,200,397 10,635,387 2.4
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
LATIN AMERICA
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARGENTINA BANKING 32,300 Banco de Galicia y Buenos
Aires S.A. de C.V.
(ADR)(a)............... 819,646 847,875 0.2
74,153 Banco Frances del Rio de
la Plata S.A.
(ADR)(a)............... 1,749,849 2,409,973 0.5
------------ ------------ ------
2,569,495 3,257,848 0.7
-----------------------------------------------------------------------------------------------------
OIL & RELATED 275,011 Companhia Naviera Perez
Companc
S.A.C.F.I.M.F.A. (Class
B)..................... 1,604,857 2,205,941 0.5
40,900 Yacimientos Petroliferos
Fiscales S.A. (YPF)
(ADR)(a)............... 1,213,749 1,257,675 0.3
------------ ------------ ------
2,818,606 3,463,616 0.8
-----------------------------------------------------------------------------------------------------
REAL ESTATE 10,700 IRSA Inversiones y
Representaciones S.A.
(GDR)(b)............... 411,249 468,125 0.1
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 48,000 Telefonica de Argentina
S.A. (Class B)
(ADR)(a)............... 1,564,000 1,662,000 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ARGENTINA 7,363,350 8,851,589 2.0
- ---------------------------------------------------------------------------------------------------------------------
BRAZIL BANKING 139,240,000 Banco Bradesco S.A. PN
(Preferred)............ 1,075,689 1,403,394 0.3
-----------------------------------------------------------------------------------------------------
BEVERAGES 2,270,000 Companhia Cervejaria
Brahma S.A. PN
(Preferred)............ 1,153,770 1,729,122 0.4
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 23,794 Telecomunicacoes
Brasileiras S.A.-
Telebras (ADR)(a)...... 1,575,856 3,610,740 0.8
-----------------------------------------------------------------------------------------------------
UTILITIES 41,000 Companhia Energetica de
Minas Gerais S.A.
(CEMIG) (ADR)(a)....... 1,253,624 2,065,375 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
BRAZIL 5,058,939 8,808,631 1.9
- ---------------------------------------------------------------------------------------------------------------------
CHILE UTILITIES 20,480 Enersis S.A. (ADR)(a).... 530,086 728,320 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CHILE 530,086 728,320 0.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
146
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AMERICA SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MEXICO BEVERAGES 130,900 Fomento Economico
Mexicano, S.A. de C.V.
(Femsa) (Class B)...... $ 694,407 $ 779,304 0.2%
-----------------------------------------------------------------------------------------------------
BUILDING & 62,100 Empresas ICA Sociedad
CONSTRUCTION Controladora, S.A. de
C.V.................... 902,419 988,754 0.2
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 249,500 Cementos Mexicanos, S.A.
de C.V. (Cemex) (Class
B)..................... 1,030,355 1,218,452 0.3
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 140,800 Alfa, S.A. de C.V. ...... 835,421 956,979 0.2
-----------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 75,600 Kimberly-Clark de Mexico,
S.A. de C.V. (ADR)
(a).................... 1,431,882 1,483,650 0.3
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 184,600 Grupo Carso, S.A. de C.V.
'A1'................... 1,379,507 1,284,881 0.3
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 314,900 Carso Global Telecom,
S.A. de C.V. 'A1'...... 874,214 1,260,393 0.3
1,041,300 Telefonos de Mexico, S.A.
de C.V. (Series L)..... 2,301,162 2,484,965 0.5
------------ ------------ ------
3,175,376 3,745,358 0.8
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MEXICO 9,449,367 10,457,378 2.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
LATIN AMERICA 22,401,742 28,845,918 6.4
- ---------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
---------------------------------------------------------------------------------------------------------------------
CANADA ALUMINUM 48,000 Alcan Aluminium Ltd. .... 1,655,993 1,638,855 0.3
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 46,401 Noranda Forest, Inc. .... 333,285 341,406 0.1
-----------------------------------------------------------------------------------------------------
GOLD PRODUCERS 72,000 Barrick Gold
Corporation............ 1,631,428 1,568,394 0.3
-----------------------------------------------------------------------------------------------------
METAL & MINING 76,000 Noranda, Inc. ........... 1,647,591 1,639,000 0.4
-----------------------------------------------------------------------------------------------------
OIL 86,000 Ranger Oil Ltd. ......... 805,491 804,204 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA 6,073,788 5,991,859 1.3
- ---------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN
---------------------------------------------------------------------------------------------------------------------
AUSTRALIA AUTO-RELATED 153,100 Orbital Engine
Corporation Ltd. (i)... 101,098 100,979 0.0
-----------------------------------------------------------------------------------------------------
BANKING 105,000 Australia and New Zealand
Banking Group Ltd...... 647,142 779,105 0.2
27,900 Bank of Melbourne Ltd.... 199,497 198,613 0.0
93,000 National Australia Bank
Ltd.................... 1,191,498 1,322,275 0.3
127,000 Westpac Banking
Corporation Ltd........ 717,132 758,636 0.2
------------ ------------ ------
2,755,269 3,058,629 0.7
-----------------------------------------------------------------------------------------------------
BEVERAGES 352,000 Foster's Brewing Group
Ltd.................... 745,591 649,007 0.2
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 192,000 Boral Ltd................ 593,537 600,080 0.1
179,000 CSR Ltd.................. 690,946 688,243 0.2
31,100 Plutonic Resources
Limited................ 99,222 96,501 0.0
------------ ------------ ------
1,383,705 1,384,824 0.3
-----------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 25,000 Mayne Nickless Ltd....... 142,510 144,654 0.0
-----------------------------------------------------------------------------------------------------
</TABLE>
147
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA CONTAINERS 78,000 Amcor Ltd................ $ 518,475 $ 514,457 0.1%
(CONCLUDED)
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 29,200 Email Limited............ 102,629 103,737 0.0
COMPANIES
-----------------------------------------------------------------------------------------------------
ENGINEERING & 86,500 Australian National
CONSTRUCTION Industries Ltd......... 102,236 105,027 0.0
-----------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 15,400 Arnotts Ltd.............. 100,420 101,572 0.0
56,200 Burns, Philp & Co., Ltd.
(Ordinary)............. 102,741 103,620 0.1
48,000 Coca-Cola Amatil, Ltd.... 437,994 618,787 0.1
71,600 National Foods Ltd....... 100,996 99,815 0.0
------------ ------------ ------
742,151 923,794 0.2
-----------------------------------------------------------------------------------------------------
HOTELS & MOTELS 160,500 AAPC Limited............. 102,285 105,859 0.0
-----------------------------------------------------------------------------------------------------
INVESTMENT 54,400 Australian Foundation
MANAGEMENT Investment Company
Ltd.................... 99,667 101,932 0.0
-----------------------------------------------------------------------------------------------------
MEDIA 22,636 The News Corp., Ltd.
(Ordinary)............. 119,206 107,732 0.0
52,364 The News Corp., Ltd.
(Preferred)............ 222,611 204,868 0.1
------------ ------------ ------
341,817 312,600 0.1
-----------------------------------------------------------------------------------------------------
METALS & MINING 35,500 Aberfoyle Ltd............ 99,964 98,447 0.1
72,000 Ashton Mining Ltd........ 100,285 98,214 0.0
84,000 CRA Ltd.................. 1,270,171 1,421,592 0.3
39,800 Newcrest Mining Ltd...... 100,536 109,148 0.0
81,700 QCT Resources Ltd........ 99,747 99,812 0.0
26,600 RGC Ltd.................. 99,007 96,693 0.0
113,000 WMC Ltd.................. 739,973 707,191 0.2
------------ ------------ ------
2,509,683 2,631,097 0.6
-----------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 56,000 Woodside Petroleum
Ltd. .................. 407,267 478,481 0.1
-----------------------------------------------------------------------------------------------------
PROPERTY 36,927 Lend Lease Corp.......... 693,489 774,950 0.2
-----------------------------------------------------------------------------------------------------
REAL ESTATE 55,000 Capital Property Trust... 99,829 100,171 0.0
INVESTMENT TRUSTS 38,700 Stockland Trust Group.... 100,446 100,940 0.1
------------ ------------ ------
200,275 201,111 0.1
-----------------------------------------------------------------------------------------------------
RESOURCES 175,000 Broken Hill Proprietary
Co. Ltd................ 2,310,729 2,555,439 0.6
-----------------------------------------------------------------------------------------------------
TELEVISION 24,700 Seven Network Ltd........ 100,472 106,559 0.0
-----------------------------------------------------------------------------------------------------
TRANSPORTATION 26,000 Brambles Industries
Ltd. .................. 450,591 510,384 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 13,809,939 14,763,520 3.3
- ---------------------------------------------------------------------------------------------------------------------
HONG KONG AIRLINES 462,000 Cathay Pacific Airways... 713,718 957,182 0.2
-----------------------------------------------------------------------------------------------------
BANKING 100,000 Dao Heng Bank Group
Ltd. .................. 471,968 547,323 0.1
149,242 HSBC Holdings PLC........ 2,157,967 4,488,742 1.0
126,000 Hang Seng Bank Ltd. ..... 1,396,042 1,797,258 0.4
------------ ------------ ------
4,025,977 6,833,323 1.5
-----------------------------------------------------------------------------------------------------
</TABLE>
148
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HONG KONG DIVERSIFIED 155,000 Citic Pacific Ltd........ $ 845,941 $ 968,400 0.2%
(CONCLUDED) 232,140 Hutchison Whampoa
Ltd. .................. 1,478,305 2,007,717 0.5
109,500 Jardine Strategic
Holdings Ltd. ......... 378,921 412,268 0.1
61,500 Swire Pacific Ltd.
(Class A).............. 470,294 553,729 0.1
298,500 Swire Pacific Ltd. (Class
B)..................... 393,371 452,751 0.1
------------ ------------ ------
3,566,832 4,394,865 1.0
-----------------------------------------------------------------------------------------------------
FOODS 3,076,000 C.P. Pokphand Co. Ltd.... 1,051,836 952,961 0.2
-----------------------------------------------------------------------------------------------------
PROPERTY 116,000 Cheung Kong (Holdings)
Ltd.................... 828,352 1,145,505 0.3
4,192,000 China Overseas Land &
Investment............. 1,182,026 3,382,042 0.7
124,000 Great Eagle Holdings
Ltd. .................. 367,528 408,969 0.1
301,000 Henderson Investment
Ltd.................... 310,742 332,208 0.1
105,302 Henderson Land
Development Co. Ltd.... 983,272 934,517 0.2
256,000 Hong Kong Land Holdings
Ltd.................... 548,939 680,960 0.1
94,000 New World Development Co.
Ltd.................... 517,459 560,593 0.1
139,000 Sun Hung Kai Properties
Ltd.................... 1,474,069 1,673,175 0.4
161,000 Wharf (Holdings) Ltd..... 607,417 698,301 0.2
------------ ------------ ------
6,819,804 9,816,270 2.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 672,800 Hong Kong
Telecommunications
Ltd.................... 1,134,433 1,606,702 0.3
-----------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 184,000 China Light & Power Co.
Ltd.................... 828,397 1,042,702 0.2
103,000 Hong Kong Electric
Holdings Ltd........... 360,830 414,829 0.1
------------ ------------ ------
1,189,227 1,457,531 0.3
-----------------------------------------------------------------------------------------------------
UTILITIES--GAS 406,000 Hong Kong and China Gas
Co. Ltd................ 650,033 812,335 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HONG KONG 19,151,860 26,831,169 5.9
- ---------------------------------------------------------------------------------------------------------------------
JAPAN AUTOMOBILES 300,000 Mitsubishi Motors
Corp. ................. 2,210,484 2,149,035 0.5
58,000 Toyota Motor Corp........ 1,555,956 1,712,588 0.4
------------ ------------ ------
3,766,440 3,861,623 0.9
-----------------------------------------------------------------------------------------------------
BANKING 4,000,000 Japanese Bank (Warrants)
(c).................... 4,126,000 4,326,800 1.0
232,000 Mitsubishi Trust and
Banking................ 2,480,161 3,668,385 0.8
269,000 Sakura Bank Ltd.......... 1,924,634 2,063,265 0.4
------------ ------------ ------
8,530,795 10,058,450 2.2
-----------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 22,000 Nippon Broadcasting
System Inc............. 1,779,160 2,440,814 0.5
-----------------------------------------------------------------------------------------------------
CAPITAL GOODS 338,000 Mitsubishi Heavy
Industries, Ltd........ 2,859,288 2,595,457 0.6
-----------------------------------------------------------------------------------------------------
CHEMICALS 351,000 Kaneka Corp.............. 1,804,925 2,201,607 0.5
114,000 Shin-Etsu Chemical Co.,
Ltd. (Ordinary)........ 2,093,206 3,027,518 0.7
------------ ------------ ------
3,898,131 5,229,125 1.2
-----------------------------------------------------------------------------------------------------
</TABLE>
149
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN CONTAINERS 1,000 Toyo Seikan Kaisha,
(CONTINUED) Ltd. .................. $ 30,312 $ 22,189 0.0%
-----------------------------------------------------------------------------------------------------
ELECTRICAL 61,000 Taihei Dengyo Kaisha,
CONSTRUCTION Ltd. .................. 1,103,158 420,984 0.1
-----------------------------------------------------------------------------------------------------
ELECTRICAL 151,000 Anritsu Corp. ........... 1,762,368 2,268,891 0.5
EQUIPMENT 376,000 Fujikura Ltd. ........... 2,881,857 3,514,633 0.8
56,000 Murata Manufacturing Co.,
Ltd. .................. 1,921,119 2,230,803 0.5
209,000 NEC Corporation ......... 2,475,107 2,921,289 0.7
35,000 Rohm Co., Ltd. .......... 1,994,407 3,607,932 0.8
241,000 Sharp Corporation........ 3,539,473 3,326,461 0.7
------------ ------------ ------
14,574,331 17,870,009 4.0
-----------------------------------------------------------------------------------------------------
ELECTRONICS 36,600 Advantest Corp. ......... 1,930,891 2,813,663 0.6
252,000 Hitachi Ltd. ............ 2,307,821 2,817,856 0.6
166,000 Pioneer Electronic
Corp. ................. 3,195,947 4,031,449 0.9
38,300 Sony Corp. .............. 2,789,535 3,342,509 0.8
95,000 Uniden Corporation....... 1,323,639 1,402,551 0.3
------------ ------------ ------
11,547,833 14,408,028 3.2
-----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 32,000 Japan Associated Finance
Co. ................... 1,859,406 2,462,829 0.5
-----------------------------------------------------------------------------------------------------
GLASS 287,000 Asahi Glass Co., Ltd. ... 2,604,317 2,858,216 0.6
-----------------------------------------------------------------------------------------------------
MACHINERY 424,000 NSK Ltd. ................ 2,463,055 2,729,868 0.6
-----------------------------------------------------------------------------------------------------
MANUFACTURING 310,000 Dainippon Screen
Manufacturing Co.,
Ltd. .................. 2,475,687 2,924,784 0.7
820,000 Ube Industries Ltd. ..... 2,316,308 2,385,429 0.5
------------ ------------ ------
4,791,995 5,310,213 1.2
-----------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 210,000 Ricoh Co., Ltd. ......... 2,522,476 2,751,813 0.6
-----------------------------------------------------------------------------------------------------
PAPER PRODUCTS 437,000 Oji Paper Co., Ltd. ..... 2,780,243 2,706,674 0.6
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 260,000 Fujisawa Pharmaceutical
Co., Ltd. ............. 2,390,396 2,680,178 0.6
105,000 Taisho Pharmaceutical
Co., Ltd. (Ordinary)... 2,157,457 2,834,367 0.6
------------ ------------ ------
4,547,853 5,514,545 1.2
-----------------------------------------------------------------------------------------------------
PLASTICS 222,000 Nippon Zeon.............. 1,111,867 1,097,685 0.2
-----------------------------------------------------------------------------------------------------
REAL ESTATE 244,000 Mitsubishi Estate Co.,
Ltd. .................. 2,814,724 3,538,394 0.8
215,000...... Mitsui Fudosan Co.,
Ltd. .................. 2,270,611 2,967,590 0.6
------------ ------------ ------
5,085,335 6,505,984 1.4
-----------------------------------------------------------------------------------------------------
RETAILING 140,000 Isetan Co., Ltd. ........ 1,461,920 1,736,700 0.4
55,000 Ito Yokado Co., Ltd.
(Ordinary)............. 3,138,143 3,195,160 0.7
241,000 Takashimaya Co. ......... 2,474,939 3,284,354 0.7
85,000 Uny Co., Ltd. ........... 1,410,705 1,663,318 0.4
------------ ------------ ------
8,485,707 9,879,532 2.2
-----------------------------------------------------------------------------------------------------
STEEL 756,000 Kawasaki Steel Corp. .... 2,074,725 2,463,423 0.5
962,000 Nippon Steel Co. ........ 2,603,671 3,075,845 0.7
------------ ------------ ------
4,678,396 5,539,268 1.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 359 DDI Corp. ............... 2,164,527 2,653,219 0.6
-----------------------------------------------------------------------------------------------------
TEXTILES 474,000 Teijin Ltd. ............. 1,905,547 2,236,044 0.5
-----------------------------------------------------------------------------------------------------
TIRE & RUBBER 112,000 Bridgestone Corp. ....... 2,012,344 2,602,603 0.6
-----------------------------------------------------------------------------------------------------
TOBACCO 412 Japan Tobacco, Inc. ..... 2,726,963 3,257,273 0.7
-----------------------------------------------------------------------------------------------------
</TABLE>
150
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN TRADING 367,000 Mitsui & Co. ............ $ 2,753,154 $ 3,526,688 0.8%
(CONCLUDED) 726,000 Nissho Iwai Corp. ....... 2,634,439 3,297,982 0.7
------------ ------------ ------
5,387,593 6,824,670 1.5
-----------------------------------------------------------------------------------------------------
TRANSPORTATION 330,000 Nippon Express Co.,
Ltd. .................. 2,024,829 2,637,809 0.6
270,000 Tobu Railway Co.,
Ltd. .................. 1,304,960 1,247,751 0.3
500,000 Tokyu Corp. ............. 3,069,961 3,105,617 0.7
------------ ------------ ------
6,399,750 6,991,177 1.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
JAPAN 109,616,822 128,828,292 28.5
- ---------------------------------------------------------------------------------------------------------------------
MALAYSIA AGRICULTURE 160,000 IOI Corporation BHD...... 201,835 182,589 0.1
OPERATIONS
-----------------------------------------------------------------------------------------------------
AIRLINES 41,500 Malaysian Airline System
BHD.................... 107,809 103,598 0.0
-----------------------------------------------------------------------------------------------------
AUTOMOBILES 15,000 Edaran Otomobil Nasional
BHD.................... 143,191 127,789 0.0
39,000 Perusahaan Otomobil
Nasional BHD........... 227,085 182,351 0.1
------------ ------------ ------
370,276 310,140 0.1
-----------------------------------------------------------------------------------------------------
BANKING 36,000 Commerce Asset Holding
BHD.................... 110,053 94,861 0.0
7,200 Commerce Asset Holding
BHD (Rights)........... 0 257 0.0
4,500 Commerce Asset Holding
BHD (Rights)(e)........ 0 695 0.0
36,000 Malayan Banking BHD...... 379,678 378,016 0.1
81,166 Public Bank (Malayala)
BHD 'Foreign'.......... 158,798 126,716 0.0
------------ ------------ ------
648,529 600,545 0.1
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 65,500 Hume Industries
(Malaysia) BHD......... 428,363 301,066 0.1
70,000 Kedah Cement Holdings
BHD.................... 109,533 109,284 0.0
------------ ------------ ------
537,896 410,350 0.1
-----------------------------------------------------------------------------------------------------
CHEMICALS 15,000 Malaysian Oxygen BHD..... 76,593 76,079 0.0
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 92,000 Berjaya Group BHD........ 107,247 113,009 0.0
130,000 Malayan United Industries
BHD.................... 95,332 94,781 0.0
89,000 Multi-Purpose Holdings
BHD.................... 146,106 124,841 0.1
58,000 Renong BHD............... 100,166 75,841 0.0
97,000 Sime Darby BHD........... 298,683 322,859 0.1
38,000 United Engineers
(Malaysia) Ltd. ....... 267,242 274,042 0.1
34,000 YTL Corporation BHD...... 134,870 105,084 0.0
------------ ------------ ------
1,149,646 1,110,457 0.3
-----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 21,600 Hong Leong Credit BHD.... 92,118 80,453 0.0
1,800 Hong Leong Credit BHD
(Rights)(f)............ 0 1,783 0.0
3,600 Hong Leong Credit BHD
(Rights)(g)............ 0 0 0.0
105,000 Idris Hydraulic
(Malaysia) BHD(i)...... 119,775 116,912 0.1
16,000 Rashid Hussain BHD....... 107,276 101,438 0.0
2,285 Rashid Hussain BHD
(Rights)(h)............ 0 0 0.0
------------ ------------ ------
319,169 300,586 0.1
-----------------------------------------------------------------------------------------------------
FOODS 14,000 Nestle (Malaysia) BHD.... 107,967 104,846 0.0
-----------------------------------------------------------------------------------------------------
</TABLE>
151
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MALAYSIA FOREST PRODUCTS 55,000 Lingui Development BHD... $ 95,324 $ 84,123 0.0%
(CONCLUDED)
-----------------------------------------------------------------------------------------------------
LEISURE 19,000 Berjaya Sports Toto BHD.. 88,621 89,591 0.0
24,000 Genting BHD.............. 130,702 115,069 0.1
53,000 Magnum Corporation BHD... 86,405 79,803 0.0
32,000 Resorts World BHD........ 113,648 96,366 0.0
------------ ------------ ------
419,376 380,829 0.1
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 19,500 Telekom Malaysia BHD..... 104,105 91,176 0.0
-----------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 36,000 Tenaga Nasional BHD...... 165,206 175,457 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIA 4,303,731 3,930,775 0.9
- ---------------------------------------------------------------------------------------------------------------------
NEW ZEALAND CHEMICALS 10,000 Fernz Corporation
Ltd. .................. 27,213 33,875 0.0
-----------------------------------------------------------------------------------------------------
ELECTRONICS 17,000 PDL Holdings Ltd. ....... 82,587 89,261 0.0
-----------------------------------------------------------------------------------------------------
FINANCE 850,000 Wrightson Ltd. .......... 620,332 541,323 0.1
-----------------------------------------------------------------------------------------------------
FOREST PRODUCTS 590,000 Fletcher Challenge
Forests................ 809,187 855,412 0.2
-----------------------------------------------------------------------------------------------------
TEXTILES 210,150 Lane Walker Rudkin
Industries, Ltd. ...... 235,544 222,108 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NEW
ZEALAND 1,774,863 1,741,979 0.4
- ---------------------------------------------------------------------------------------------------------------------
SINGAPORE AIRLINES 79,000 Singapore Airlines
Ltd. .................. 678,479 707,479 0.2
-----------------------------------------------------------------------------------------------------
BANKING 54,000 Development Bank of
Singapore Ltd. ........ 683,501 680,053 0.1
72,000 Overseas-Chinese Banking
Corporation Ltd. ...... 753,189 745,540 0.2
65,000 Overseas Union Bank
Ltd. .................. 398,417 404,744 0.1
85,000 United Overseas Bank
Ltd. .................. 895,841 874,204 0.2
------------ ------------ ------
2,730,948 2,704,541 0.6
-----------------------------------------------------------------------------------------------------
BEVERAGES 55,000 Fraser & Neave Ltd. ..... 397,998 392,500 0.1
-----------------------------------------------------------------------------------------------------
DISTRIBUTION 66,400 Inchcape Berhad.......... 242,457 239,250 0.0
-----------------------------------------------------------------------------------------------------
NEWSPAPER/ 22,000 Singapore Press Holdings
PUBLISHING Ltd. .................. 440,736 443,294 0.1
-----------------------------------------------------------------------------------------------------
REAL ESTATE 113,000 City Developments
Ltd. .................. 1,077,482 1,106,836 0.2
153,000 DBS Land Limited......... 504,015 483,845 0.1
77,000 Singapore Land Ltd. ..... 358,744 350,171 0.1
419,700 United Industrial
Corporation Ltd. ...... 316,979 317,131 0.1
122,000 Wing Tai Holdings
Ltd. .................. 364,710 351,669 0.1
------------ ------------ ------
2,621,930 2,609,652 0.6
-----------------------------------------------------------------------------------------------------
STEEL 192,000 NatSteel Ltd. ........... 504,789 488,967 0.1
-----------------------------------------------------------------------------------------------------
TRANSPORTATION 192,000 Keppel Corporation
SERVICES Ltd. .................. 832,959 853,005 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SINGAPORE 8,450,296 8,438,688 1.9
- ---------------------------------------------------------------------------------------------------------------------
SOUTH KOREA BANKING & FINANCIAL 10,000 Kookmin Bank
(GDR)(b)(i)............ 242,500 217,500 0.1
-----------------------------------------------------------------------------------------------------
ELECTRONICS 3,300 Samsung Electronics
Company (GDR)(b)(i).... 198,000 191,400 0.0
-----------------------------------------------------------------------------------------------------
</TABLE>
152
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH KOREA TELECOMMUNICATIONS 41,123 SK Telecom Co. Ltd.
(CONCLUDED) (ADR)(a)(i)............ $ 539,571 $ 413,800 0.1%
-----------------------------------------------------------------------------------------------------
UTILITIES 17,580 Korea Electric Power
Corp. ................. 752,967 525,813 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTH KOREA 1,733,038 1,348,513 0.3
- ---------------------------------------------------------------------------------------------------------------------
THAILAND UTILITIES-- 518,000 TelecomAsia Corporation
COMMUNICATIONS Public Company Ltd.
'Foreign'(i)........... 990,931 625,725 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THAILAND 990,931 625,725 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 159,831,480 186,508,661 41.3
- ---------------------------------------------------------------------------------------------------------------------
SOUTHEAST ASIA
---------------------------------------------------------------------------------------------------------------------
INDIA AUTO & TRUCK 61,000 Tata Engineering and
Locomotive Company Ltd.
(GDR)(b)............... 914,634 936,350 0.2
-----------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 37,400 Mahindra & Mahindra Ltd.
(GDR)(b)(i)............ 548,916 551,650 0.1
-----------------------------------------------------------------------------------------------------
BANKING 71,500 State Bank of India
(GDR)(b)............... 1,817,380 1,894,750 0.4
-----------------------------------------------------------------------------------------------------
CHEMICALS 28,200 Reliance Industries Ltd.
(GDR)(b)(i)............ 638,871 648,600 0.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 6,500 Grasim Industries Ltd.
(GDR)(b)............... 90,687 91,000 0.0
40,900 Metal Manufactures
Limited................ 99,801 101,160 0.0
------------ ------------ ------
190,488 192,160 0.0
-----------------------------------------------------------------------------------------------------
HOTELS 15,700 Indian Hotels Co., Ltd.
(GDR)(b)(j)............ 354,333 372,875 0.1
-----------------------------------------------------------------------------------------------------
INSURANCE 7,400 Indian Rayon and
Industries Ltd.
(GDR)(b)............... 92,920 92,500 0.0
-----------------------------------------------------------------------------------------------------
MACHINERY & 11,300 Larsen & Toubro Ltd.
ENGINEERING (GDR)(b)............... 216,113 194,925 0.1
-----------------------------------------------------------------------------------------------------
MANUFACTURING 20,700 Arvind Mills Ltd.
(GDR)(b)(i)............ 91,894 102,983 0.0
33,900 Gujarat Ambujaya Cement
(GDR)(b)............... 368,056 394,088 0.1
28,500 Hindalco Industries Ltd.
(GDR)(b)(i)............ 1,014,788 1,007,475 0.2
20,700 Indian Petrochemicals
Corporation Ltd.
(GDR)(b)............... 279,450 289,800 0.1
------------ ------------ ------
1,754,188 1,794,346 0.4
-----------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 11,600 Ranbaxy Laboratories
PRESCRIPTION Ltd.................... 276,726 272,600 0.1
-----------------------------------------------------------------------------------------------------
STEEL 42,900 Steel Authority of India
Ltd. (GDR)(b).......... 356,074 378,593 0.1
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 52,500 Videsh Sanchar Nigam Ltd.
(GDR)(b)(i)............ 1,111,567 1,089,375 0.2
-----------------------------------------------------------------------------------------------------
TOBACCO 20,700 I.T.C. Limited
(ADR)(a)............... 366,520 377,775 0.1
-----------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 23,100 BSES Ltd. (Registered
Shares) (GDR)(b)....... 472,547 612,150 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDIA 9,111,277 9,408,649 2.1
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
153
<PAGE> 155
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SOUTHEAST ASIA SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDONESIA BUILDING MATERIALS 305,000 P.T. Semen Gresik........ $ 992,608 $ 684,054 0.1%
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 24,100 P.T. Telekomunikasi
Indonesia (ADR)(a)..... 786,702 783,250 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDONESIA 1,779,310 1,467,304 0.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTHEAST ASIA 10,890,587 10,875,953 2.4
- ---------------------------------------------------------------------------------------------------------------------
WESTERN EUROPE
---------------------------------------------------------------------------------------------------------------------
CZECH BROADCAST--MEDIA 10,000 Central European Media
REPUBLIC Enterprises Ltd. (Class
A)(i).................. 275,000 260,000 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
CZECH REPUBLIC 275,000 260,000 0.1
- ---------------------------------------------------------------------------------------------------------------------
FINLAND DIVERSIFIED 39,958 Outokumpu OY............. 661,721 793,704 0.2
-----------------------------------------------------------------------------------------------------
MACHINERY 1,757 Rauma OY................. 37,549 40,322 0.0
-----------------------------------------------------------------------------------------------------
PAPER & FOREST 88,842 Enso-Gutzeit OY (Class
PRODUCTS A)..................... 688,029 822,389 0.2
149,200 Metsa Serla OY (Class
B)..................... 1,124,023 1,217,102 0.2
56,823 UPM-Kymmene OY........... 1,210,787 1,314,992 0.3
------------ ------------ ------
3,022,839 3,354,483 0.7
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FINLAND 3,722,109 4,188,509 0.9
- ---------------------------------------------------------------------------------------------------------------------
FRANCE AUTOMOBILES 15,144 Peugeot S.A. ............ 1,828,567 1,464,160 0.3
-----------------------------------------------------------------------------------------------------
BANKING 5,237 Banque Nationale de
Paris.................. 199,209 215,902 0.0
15,900 Compagnie Financiere de
Paribas (Ordinary)..... 867,231 1,098,810 0.2
10,388 Societe Generale de
Surveillance S.A.
(Class A) (Ordinary)... 1,134,705 1,159,939 0.3
------------ ------------ ------
2,201,145 2,474,651 0.5
-----------------------------------------------------------------------------------------------------
COMMUNICATION 12,610 Alcatel Alsthom Cie
EQUIPMENT Generale d'Electricite
S.A. .................. 1,176,528 1,579,765 0.4
-----------------------------------------------------------------------------------------------------
ENGINEERING & 12,749 Bouygues S.A............. 1,308,489 1,049,233 0.2
CONSTRUCTION
-----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 4,902 EuraFrance S.A. ......... 1,818,898 2,010,897 0.4
-----------------------------------------------------------------------------------------------------
FOODS 7,364 Groupe Danone S.A. ...... 1,183,532 1,217,118 0.3
-----------------------------------------------------------------------------------------------------
HOTELS 6,403 Accor S.A. .............. 895,741 959,104 0.2
-----------------------------------------------------------------------------------------------------
INSURANCE 40,291 Assurances Generales de
France S.A. (AGF)...... 1,303,040 1,287,962 0.3
18,277 Axa-UAP.................. 1,122,701 1,137,082 0.2
------------ ------------ ------
2,425,741 2,425,044 0.5
-----------------------------------------------------------------------------------------------------
OIL & RELATED 12,210 Societe Nationale Elf
Aquitaine.............. 1,021,480 1,317,663 0.3
-----------------------------------------------------------------------------------------------------
RETAIL 1,568 Castorama Dubois
Investisse............. 244,304 220,725 0.1
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 9,300 SGS-Thomson
Microelectronics
N.V. (i)............... 508,324 734,515 0.2
-----------------------------------------------------------------------------------------------------
STEEL 100,760 Usinor-Sacilor S.A. ..... 1,516,364 1,817,999 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FRANCE 16,129,113 17,270,874 3.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
154
<PAGE> 156
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GERMANY AIRLINES 15,632 Deutsche Lufthansa AG.... $ 220,086 $ 300,063 0.1%
-----------------------------------------------------------------------------------------------------
AUTOMOBILES 2,662 Volkswagen AG............ 1,173,382 2,042,404 0.5
-----------------------------------------------------------------------------------------------------
CHEMICALS 4,199 Henkel KGaA.............. 180,333 222,890 0.0
36,747 Henkel KGaA
(Preferred)............ 1,687,139 2,087,658 0.5
------------ ------------ ------
1,867,472 2,310,548 0.5
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 12,286 Thyssen AG............... 2,523,745 2,911,809 0.6
-----------------------------------------------------------------------------------------------------
ENGINEERING & 1,800 Philipp Holzmann AG
CONSTRUCTION (i).................... 688,664 506,140 0.1
-----------------------------------------------------------------------------------------------------
MACHINERY 30,295 Kloeckner Werke AG (i)... 2,032,755 2,103,578 0.5
-----------------------------------------------------------------------------------------------------
RETAIL 3,921 Karstadt AG.............. 1,413,210 1,397,303 0.3
-----------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 5,500 Moebel Walther AG........ 306,369 334,558 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GERMANY 10,225,683 11,906,403 2.7
- ---------------------------------------------------------------------------------------------------------------------
GREECE BANKING 362 Ergo Bank S.A.
(Ordinary)............. 20 21,743 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GREECE 20 21,743 0.0
- ---------------------------------------------------------------------------------------------------------------------
HUNGARY TELECOMMUNICATIONS 4,500 Magyar TarKozlesi
Reszvenytarsasag
(Ordinary)(j).......... 715,438 1,634,877 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HUNGARY 715,438 1,634,877 0.4
- ---------------------------------------------------------------------------------------------------------------------
ITALY BUILDING MATERIALS 173,519 Italcementi S.p.A. ...... 957,388 1,081,878 0.3
-----------------------------------------------------------------------------------------------------
CHEMICALS 1,629,171 Montedison S.p.A. ....... 1,332,753 1,075,190 0.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 868,104 Compagnie Industrial
Riunite S.p.A.
(CIR)(i)............... 750,239 553,001 0.1
-----------------------------------------------------------------------------------------------------
INSURANCE 72,081 Assicurazioni Generali
S.p.A. ................ 1,312,979 1,310,101 0.3
534,954 Istituto Nazionale delle
Assicurazioni (INA)
S.p.A. ................ 742,434 814,970 0.2
------------ ------------ ------
2,055,413 2,125,071 0.5
-----------------------------------------------------------------------------------------------------
PUBLISHING 643,016 Seat S.p.A. (i).......... 178,951 134,269 0.0
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 415,742 Stet Societa Finanziaria
Telefonica S.p.A. ..... 879,519 1,442,784 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ITALY 6,154,263 6,412,193 1.4
- ---------------------------------------------------------------------------------------------------------------------
NETHERLANDS CHEMICALS 11,223 Akzo Nobel N.V. ......... 1,410,212 1,539,357 0.3
35,921 European Vinyls
Corporation
International N.V. .... 1,395,027 910,297 0.2
------------ ------------ ------
2,805,239 2,449,654 0.5
-----------------------------------------------------------------------------------------------------
ELECTRICAL 29,507 Philips Electronics
EQUIPMENT N.V. .................. 1,239,262 2,115,380 0.5
-----------------------------------------------------------------------------------------------------
ENGINEERING & 22,873 Volker Wessels Stevin
CONSTRUCTION N.V. .................. 482,694 642,618 0.1
-----------------------------------------------------------------------------------------------------
HOLDING COMPANY 13,940 Internatio-Muller NV..... 310,390 439,979 0.1
-----------------------------------------------------------------------------------------------------
INSURANCE 40,295 Internationale
Nederlanden Groep
N.V. .................. 1,370,014 1,859,422 0.4
-----------------------------------------------------------------------------------------------------
</TABLE>
155
<PAGE> 157
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NETHERLANDS TELECOMMUNICATIONS 59,213 Koninklijke KNP BT
(CONCLUDED) N.V. .................. $ 1,283,584 $ 1,349,593 0.3%
28,367 Royal PTT Nederland
N.V. .................. 1,037,618 1,113,736 0.3
------------ ------------ ----------
2,321,202 2,463,329 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 8,528,801 9,970,382 2.2
- ---------------------------------------------------------------------------------------------------------------------
NORWAY OIL & GAS PRODUCERS 19,173 Saga Petroleum A.S.
(Class B).............. 210,967 335,114 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORWAY 210,967 335,114 0.1
- ---------------------------------------------------------------------------------------------------------------------
POLAND AUTOMOTIVE & 19,000 T.C. Debica S.A. ........ 299,311 390,411 0.1
EQUIPMENT
-----------------------------------------------------------------------------------------------------
BANKING 17,078 Wielkopolsky Bank
Kredytowy S.A. ........ 108,118 97,737 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
POLAND 407,429 488,148 0.1
- ---------------------------------------------------------------------------------------------------------------------
PORTUGAL ELECTRONIC 37,730 Electricidade de
COMPONENTS & Portugal, S.A. ........ 486,490 692,707 0.1
DISTRIBUTION
-----------------------------------------------------------------------------------------------------
FOREST PRODUCTS 38,273 Sonae Investimentos-SGPS
S.A. .................. 880,494 1,600,927 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGAL 1,366,984 2,293,634 0.5
- ---------------------------------------------------------------------------------------------------------------------
RUSSIA NATURAL GAS 36,194 RAO Gazprom
(ADR)(a)(j)............ 622,839 622,537 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
RUSSIA 622,839 622,537 0.1
- ---------------------------------------------------------------------------------------------------------------------
SWEDEN APPLIANCES 23,257 Electrolux AB............ 1,167,158 1,678,532 0.4
-----------------------------------------------------------------------------------------------------
BUILDING RELATED 16,269 Svedala Industry AB...... 277,888 338,788 0.1
-----------------------------------------------------------------------------------------------------
ENGINEERING 12,297 SKF AB 'A'............... 216,307 306,176 0.0
-----------------------------------------------------------------------------------------------------
FOREST PRODUCTS 24,684 Mo Och Domsjo AB (Class
B)..................... 723,186 810,944 0.2
487,211 Rottneros Bruks AB....... 640,388 535,646 0.1
50,357 Stora Kopparbergs
Bergslags AB........... 639,127 814,164 0.2
------------ ------------ ----------
2,002,701 2,160,754 0.5
-----------------------------------------------------------------------------------------------------
INSURANCE 45,700 Skandia Forsakrings AB... 1,089,395 1,684,624 0.4
-----------------------------------------------------------------------------------------------------
METALS & MINING 90,389 Avesta Sheffield AB...... 884,702 1,046,358 0.2
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 16,615 Pharmacia & Upjohn,
Inc.................... 507,086 560,896 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWEDEN 6,145,237 7,776,128 1.7
- ---------------------------------------------------------------------------------------------------------------------
SWITZERLAND BANKING 6,233 CS Holding AG
(Registered)........... 666,243 801,734 0.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 24,121 Oerlikon-Buehrle Holding
AG..................... 2,483,884 2,829,588 0.6
-----------------------------------------------------------------------------------------------------
JEWELRY 4,738 SMH AG (Societe Suisse
pour la
Microelectronique et
l'Horlogerie).......... 673,901 642,752 0.2
-----------------------------------------------------------------------------------------------------
LEISURE 1,548 Fotolabo S.A. ........... 606,926 493,805 0.1
-----------------------------------------------------------------------------------------------------
MACHINERY 916 Saurer AG (i)............ 419,330 607,650 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWITZERLAND 4,850,284 5,375,529 1.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
156
<PAGE> 158
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN EUROPE SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TURKEY BEVERAGES 7,915,658 Erciyas Biracilik Ve Malt
Sanayii A.S. .......... $ 1,131,316 $ 946,785 0.2%
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
TURKEY 1,131,316 946,785 0.2
- ---------------------------------------------------------------------------------------------------------------------
UNITED AUTOMOBILE RENTAL 148,431 Thorn PLC................ 362,075 419,629 0.1
KINGDOM
-----------------------------------------------------------------------------------------------------
AUTOMOBILES & 548,471 LucasVarity PLC.......... 1,778,654 1,897,183 0.4
EQUIPMENT
-----------------------------------------------------------------------------------------------------
BANKING 66,041 National Westminster Bank
PLC (Ordinary)......... 722,653 886,846 0.2
-----------------------------------------------------------------------------------------------------
BEVERAGES 52,201 Bass PLC................. 666,265 636,319 0.1
108,662 Grand Metropolitan PLC
(Ordinary)............. 764,834 1,044,474 0.2
44,083 Guinness PLC............. 444,806 431,063 0.1
89,433 Matthew Clark PLC........ 658,311 359,920 0.1
------------ ------------ ------
2,534,216 2,471,776 0.5
-----------------------------------------------------------------------------------------------------
CHEMICALS 136,940 Imperial Chemical
Industries PLC
(Ordinary)............. 1,685,596 1,899,278 0.4
166,500 Inspec Group PLC......... 487,132 548,241 0.1
------------ ------------ ------
2,172,728 2,447,519 0.5
-----------------------------------------------------------------------------------------------------
COMPUTER SERVICES 33,568 Misys PLC................ 467,832 754,177 0.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 607,847 BTR PLC.................. 2,243,714 2,077,296 0.5
-----------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 114,959 Allied Domecq PLC
(Ordinary)............. 797,507 824,928 0.2
120,616 Cadbury Schweppes PLC.... 978,868 1,075,132 0.2
------------ ------------ ------
1,776,375 1,900,060 0.4
-----------------------------------------------------------------------------------------------------
FOOD PROCESSING 640,294 ASDA Group PLC........... 1,168,807 1,320,363 0.3
94,228 Unilever PLC............. 1,997,054 2,693,693 0.6
------------ ------------ ------
3,165,861 4,014,056 0.9
-----------------------------------------------------------------------------------------------------
GLASS 304,569 Pilkington PLC........... 613,651 698,968 0.2
-----------------------------------------------------------------------------------------------------
MERCHANDISING 50,495 W.H. Smith Group PLC..... 314,910 303,143 0.1
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 80,764 Glaxo Wellcome PLC....... 1,218,129 1,668,808 0.4
-----------------------------------------------------------------------------------------------------
RETAIL 218,310 Tesco PLC (Ordinary)..... 1,207,380 1,346,914 0.3
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 150,623 Cable & Wireless PLC..... 1,076,516 1,377,673 0.3
-----------------------------------------------------------------------------------------------------
UTILITIES 104,000 Anglian Water PLC........ 963,111 1,132,836 0.2
45,838 Severn Trent PLC......... 514,342 593,821 0.1
107,000 Thames Water PLC......... 1,203,395 1,227,793 0.3
115,500 United Utilities PLC..... 1,024,248 1,263,863 0.3
------------ ------------ ------
3,705,096 4,218,313 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED KINGDOM 23,359,790 26,482,361 5.9
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPE 83,845,273 95,985,217 21.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
157
<PAGE> 159
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE VALUE PERCENT OF
SECURITIES AMOUNT ISSUE COST (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* US$5,000,000 Alpine Securitization
Co., 5.58% due
8/07/1997.............. $ 4,970,550 $ 4,970,550 1.1%
12,000,000 CSW Credit, Inc., 5.57%
due 8/06/1997.......... 11,931,303 11,931,303 2.7
15,000,000 Finova Capital Corp.,
5.70% due 7/18/1997.... 14,957,250 14,957,250 3.3
14,600,000 General Motors Accept-
ance Corp., 6.25% due
7/01/1997.............. 14,597,465 14,597,465 3.2
15,000,000 National Fleet Funding
Corp., 5.58% due
7/18/1997.............. 14,958,150 14,958,150 3.3
Old Line Funding Corp.:
10,000,000 5.57% due 7/14/1997.... 9,978,339 9,978,339 2.2
10,000,000 5.60% due 7/28/1997.... 9,956,444 9,956,444 2.2
------------ ------------ ----------
81,349,501 81,349,501 18.0
-----------------------------------------------------------------------------------------------------
FOREIGN DM23,000,000 German Treasury Bills,
GOVERNMENT 2.91% due 10/17/1997... 13,150,987 13,085,820 2.9
OBLIGATIONS* Sek53,000,000 Swedish Treasury Bills,
4.02% due 7/16/1997.... 6,878,567 6,843,474 1.5
------------ ------------ ----------
20,029,554 19,929,294 4.4
-----------------------------------------------------------------------------------------------------
US GOVERNMENT United States Treasury
OBLIGATIONS* Bills(d):
US$1,000,000 4.88% due 7/03/1997.... 999,593 999,760 0.3
5,500,000 5.07% due 7/03/1997.... 5,497,676 5,498,680 1.2
------------ ------------ ----------
6,497,269 6,498,440 1.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 107,876,324 107,777,235 23.9
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
NOMINAL
VALUE
OPTIONS COVERED BY PREMIUMS
PURCHASED OPTIONS ISSUE PAID
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALL OPTIONS 44,801 Nikkei Index, expiring
PURCHASED January 1998
(3-month look back).... 894,895 1,350,042 0.3
348 Nikkei Index, expiring
October 1997 at
(Yen) 257.6............ 89,659 90,532 0.0
1,868,261 Thailand Index, expiring
April 1998 at
US$1.9838.............. 280,239 28,398 0.0
------------ ------------ ----------
1,264,793 1,468,972 0.3
-----------------------------------------------------------------------------------------------------
CURRENCY PUT 5,600,000 Deutschemark, expiring
OPTIONS PURCHASED July 1997 at DM1.55.... 64,848 606,648 0.2
17,000,000 Japanese Yen, expiring
July 1997 at
(Yen) 115.50........... 237,575 115,600 0.0
4,000,000 Japanese Yen, expiring
February 1998 at
(Yen) 120.............. 59,800 30,000 0.0
4,600,000 Swiss Franc, expiring
July 1997 at
Chf1.285............... 62,100 534,060 0.1
------------ ------------ ----------
424,323 1,286,308 0.3
-----------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED 1,689,116 2,755,280 0.6
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 401,808,707 449,375,510 99.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
158
<PAGE> 160
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOMINAL
VALUE
COVERED BY PREMIUMS VALUE PERCENT OF
OPTIONS WRITTEN OPTIONS ISSUE RECEIVED (NOTE 1a) NET ASSETS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PUT OPTIONS WRITTEN 1,868,261 Thailand Index, expiring
April 1998 at
US$1.9838.............. $ (280,239) $ (762,437) (0.2)%
-----------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (280,239) (762,437) (0.2)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN................... $401,528,468 448,613,073 99.4
=============
VARIATION MARGIN ON STOCK INDEX FUTURES CONTRACTS**......... (61,254) 0.0
UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE
CONTRACTS***................................................ (401,860) (0.1)
OTHER ASSETS LESS LIABILITIES............................... 3,038,258 0.7
------------ ----------
NET ASSETS.................................................. $451,188,217 100.0%
============= ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain Foreign and US Government 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 June 30, 1997 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTE 1a & 1b)
- ---------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
108 All Ordinaries.................................. SFE September 1997 $ 5,597,416
109 FTSE 100........................................ LIFFE September 1997 20,872,895
84 Tokyo Topix..................................... TFE September 1997 11,359,483
---------------------------------------------------------------------------------------------------------------------
TOTAL STOCK INDEX FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT PRICE--$37,718,817) $ 37,829,794
==============
---------------------------------------------------------------------------------------------------------------------
Stock index futures contracts sold as of June 30, 1997 were as follows:
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTE 1a & 1b)
- ---------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
23 DAX Index....................................... DTB September 1997 $ 5,007,575
---------------------------------------------------------------------------------------------------------------------
TOTAL STOCK INDEX FUTURES CONTRACTS SOLD (TOTAL CONTRACT PRICE--$4,943,561) $ 5,007,575
==============
---------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Forward foreign exchange contracts as of June 30, 1997 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
EXPIRATION (DEPRECIATION)
FOREIGN CURRENCY PURCHASED DATE (NOTE 1b)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
C$ 12,406,500............................................................ July 1997 $ (6,524)
Chf 2,955,500............................................................ July 1997 (111,452)
DM 4,207,143............................................................ July 1997 (210,991)
DM 110,459,128............................................................ August 1997 (1,147,107)
(Pounds Sterling) 4,291,845..................................... ...................... July 1997 136,592
(Pounds Sterling) 17,208,604............................................................ August 1997 478,933
(Yen) 981,750,000............................................................ July 1997 107,732
- ---------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$122,060,746) (752,817)
--------------
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- ---------------------------------------------------------------------------------------------------------------------
DM 48,160,000............................................................ August 1997 419,589
(Pounds Sterling) 16,995,992............................................................ August 1997 (238,894)
(Yen) 618,968,000............................................................ July 1997 170,262
- ---------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$61,717,592) 350,957
--------------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET $ (401,860)
===============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and the number of shares are subject to
adjustment under certain conditions until the expiration date.
(d) Securities held as collateral in connection with open futures contracts.
(e) The rights may be exercised until 7/14/1997.
(f) The rights may be exercised until 7/24/1997.
159
<PAGE> 161
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
(g) The rights may be exercised until 7/01/1997.
(h) The rights may be exercised until 7/03/1997.
(i) Non-income producing securities.
(j) The securities may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
See Notes to Financial Statements.
160
<PAGE> 162
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$400,119,591) (Note 1a)........................... $446,620,230
Options purchased, at value (cost--$1,689,116) (Notes 1a & 1b)............................ 2,755,280
Foreign cash (Note 1c).................................................................... 14,702,822
Cash on deposit for stock index futures contracts......................................... 268,215
Receivables:
Securities sold......................................................................... $ 4,060,643
Dividends............................................................................... 1,029,092
Capital shares sold..................................................................... 79,854 5,169,589
-----------
Deferred organization expenses (Note 1f).................................................. 2,090
Prepaid registration fees and other assets (Note 1f)...................................... 200,895
------------
Total assets.............................................................................. 469,719,121
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$280,239) (Notes 1a & 1b)................... 762,437
Unrealized depreciation on forward foreign exchange contracts (Note 1b)................... 401,860
Variation margin on stock index futures contracts (Note 1b)............................... 61,254
Payables:
Securities purchased.................................................................... 14,366,059
Capital shares redeemed................................................................. 496,699
Investment adviser (Note 2)............................................................. 279,647 15,142,405
-----------
Accrued expenses and other liabilities.................................................... 2,162,948
------------
Total liabilities......................................................................... 18,530,904
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................ $451,188,217
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized.............................. $ 3,481,554
Paid-in capital in excess of par.......................................................... 385,160,354
Undistributed investment income--net...................................................... 1,719,845
Undistributed realized capital gains on investments and foreign currency
transactions--net....................................................................... 14,040,764
Unrealized appreciation on investments and foreign currency transactions--net............. 46,785,700
------------
NET ASSETS--Equivalent to $12.96 per share based on 34,815,538 shares outstanding......... $451,188,217
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
161
<PAGE> 163
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $304,562 foreign withholding tax)........................................ $ 3,310,337
Interest and discount earned (net of $394 foreign withholding tax)......................... 2,345,307
-----------
Total income............................................................................... 5,655,644
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2).......................................................... $ 1,417,810
Custodian fees............................................................................. 145,390
Accounting services (Note 2)............................................................... 45,160
Pricing services........................................................................... 15,054
Professional fees.......................................................................... 14,349
Registration fees (Note 1f)................................................................ 8,939
Directors' fees and expenses............................................................... 3,446
Transfer agent fees (Note 2)............................................................... 2,241
Amortization of organization expenses (Note 1f)............................................ 646
Other...................................................................................... 5,387
-----------
Total expenses............................................................................. 1,658,422
-----------
Investment income--net..................................................................... 3,997,222
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET
(NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net......................................................................... 18,036,793
Foreign currency transactions--net....................................................... (1,561,922) 16,474,871
-----------
Change in unrealized appreciation/depreciation on:
Investments--net......................................................................... 34,701,105
Foreign currency transactions--net....................................................... 283,722 34,984,827
----------- -----------
Net realized and unrealized gain on investments and foreign currency transactions.......... 51,459,698
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $55,456,920
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
162
<PAGE> 164
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................................... $ 3,997,222 $ 6,166,768
Realized gain on investments and foreign currency transactions--net......... 16,474,871 9,939,138
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net.................................................. 34,984,827 2,510,537
------------ ------------
Net increase in net assets resulting from operations........................ 55,456,920 18,616,443
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net...................................................... (6,787,677) (3,669,329)
Realized gain on investments--net........................................... (2,626,115) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders.............................................................. (9,413,792) (3,669,329)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions.......... 56,065,260 68,530,474
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................................ 102,108,388 83,477,588
Beginning of period......................................................... 349,079,829 265,602,241
------------ ------------
End of period*.............................................................. $451,188,217 $349,079,829
============ ============
- ------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net....................................... $ 1,719,845 $ 4,510,300
============ ============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
163
<PAGE> 165
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS FOR THE SIX FOR THE YEAR ENDED FOR THE PERIOD
HAVE BEEN DERIVED FROM INFORMATION MONTHS ENDED DECEMBER 31, JULY 1, 1993+ TO
PROVIDED IN THE FINANCIAL STATEMENTS. JUNE 30, ---------------------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997++ 1996++ 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 11.63 $ 11.06 $ 10.90 $ 11.03 $ 10.00
-------- -------- -------- -------- -------
Investment income--net........................... .12 .23 .20 .19 .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net.............................. 1.53 .49 .37 (.13) 1.02
-------- -------- -------- -------- -------
Total from investment operations................. 1.65 .72 .57 .06 1.03
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net......................... (.23) (.15) (.01) (.18) --
Realized gain on investments--net.............. (.09) -- (.17) (.01) --
In excess of realized gain on
investments--net............................. -- -- (.23) -- --
-------- -------- -------- -------- -------
Total dividends and distributions................ (.32) (.15) (.41) (.19) --
-------- -------- -------- -------- -------
Net asset value, end of period................... $ 12.96 $ 11.63 $ 11.06 $ 10.90 $ 11.03
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 14.53%++ 6.62% 5.48% .55% 10.30%++
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................... .88%* .89% .89% .97% 1.14%*
======== ======== ======== ======== =======
Investment income--net........................... 2.11%* 1.96% 1.95% 1.09% .30%*
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $451,188 $349,080 $265,602 $247,884 $ 76,906
======== ======== ======== ======== =======
Portfolio turnover............................... 72.09% 49.87% 100.02% 58.84% 17.39%
======== ======== ======== ======== =======
Average commission rate paid***.................. $ .0006 $ .0004 -- -- --
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
*** For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into 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.
164
<PAGE> 166
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. International Equity Focus Fund (the "Fund")
is classified as "diversified", as defined in the Investment Company Act of
1940. These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term
securities are valued at amortized cost, which approximates market value.
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--The Fund 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--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--The Fund may write and purchase call and put options. When the 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--The Fund may purchase or sell futures contracts
and options on such futures contracts for the purpose 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
165
<PAGE> 167
- --------------------------------------------------------------------------------
value of the contract at the time it was opened and the value at the time it was
closed.
- - Foreign currency options and futures--The Fund 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 Fund'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 Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.75% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $7,161 in commissions on the execution of
portfolio security transactions.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
166
<PAGE> 168
- --------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $230,230,337 and $209,132,125, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Realized Unrealized
Gains Gains
(Losses) (Losses)
- --------------------------------------------------------------------------
<S> <C> <C>
Investments:
Long-term................................ $14,628,896 $ 46,599,729
Short-term............................... (4,655) (99,090)
Stock index futures contracts............ 3,986,598 46,963
Options purchased........................ (691,296) 204,179
Options written.......................... 117,250 (482,198)
----------- -----------
Total investments......................... 18,036,793 46,269,583
----------- -----------
Currency transactions:
Options written.......................... 9,040 --
Options purchased........................ (109,205) 861,985
Foreign currency transactions............ 65,084 55,992
Forward foreign exchange contracts....... (1,526,841) (401,860)
----------- -----------
Total currency transactions............... (1,561,922) 516,117
----------- -----------
Total..................................... $16,474,871 $ 46,785,700
=========== ===========
- -------------------------------------------------------
</TABLE>
Transactions in options written for the six months ended June 30, 1997, were
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Nominal Value
Covered by Written Premiums
Call Options Written Options Received
- -----------------------------------------------------------------------------
<S> <C> <C>
Outstanding call options written, beginning
of period................................... 35 $ 117,250
Options expired.............................. (35) (117,250)
----------- -----------
Outstanding call options written, end of
period...................................... -- $ --
=========== ===========
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Nominal Value
Covered by Written Premiums
Put Options Written Options Received
- -----------------------------------------------------------------------------
<S> <C> <C>
Outstanding put options written, beginning of
period....................................... -- --
Options written............................... 1,868,261 $280,239
--------- --------
Outstanding put options written, end of
period....................................... 1,868,261 $280,239
========= ========
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $46,222,620, of which $53,957,459 related to appreciated securities
and $7,734,839 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments, net of investment options, for Federal income tax
purposes was $400,119,591.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$56,065,260 and $68,530,474 for the six months ended June 30, 1997 and the year
ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
Shares sold..................................... 5,242,840 $ 61,749,776
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 835,400 9,413,792
---------- -----------
Total issued.................................... 6,078,240 71,163,568
Shares redeemed................................. (1,290,396) (15,098,308)
---------- -----------
Net increase.................................... 4,787,844 $ 56,065,260
========== ===========
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
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
========= ===========
- ---------------------------------------------------------
</TABLE>
5. COMMITMENTS:
At June 30, 1997, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
agreed to purchase and sell various foreign currencies with values of
approximately $1,479,000 and $109,000, respectively.
167
<PAGE> 169
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Natural Resources Focus Fund's total
investment return was +3.82%, based on a change in per share net asset value
from $13.12 to $12.65, and assuming reinvestment of $0.206 per share income
dividends and $0.724 per share capital gains distributions.
For the one-year and five-year periods ended June 30, 1997, the Fund's average
annual total returns were +9.80% and +8.68%, respectively. For the period since
inception (June 1, 1988) through June 30, 1997, the Fund's average annual total
return was 5.48%. (Total returns do not include the effect of insurance-related
fees and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was confirmed shortly after
the quarter's close when, as widely expected, the Federal Reserve Board (FRB)
chose to leave monetary policy unchanged. This confluence of positive indicators
helped produce a significant rally in the US stock market. A slight decline in
interest rates resulted in a modest positive total return for US fixed-income
investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although real gross domestic product growth for the first quarter
of the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
will remain positive.
PORTFOLIO MATTERS
The environment for investments in the natural resources industries was mixed
for the six-month period ended June 30, 1997. Investor sentiment for the
resource sector was initially boosted by surprisingly strong growth in the US
economy. While economic growth in the rest of the industrialized nations was
less robust, investors remained hopeful that monetary policy would support an
acceleration of economic activity in these markets. This environment of moderate
global economic growth and modest inflationary pressures encouraged expectations
of an extended economic cycle, which would be positive for the demand outlook
for many basic materials. In response, commodity prices generally trended higher
as supply/demand fundamentals for many commodities strengthened. However, this
positive sentiment moderated somewhat in March and April, as rising interest
rates in the United States led investors to question the sustainability of
economic growth rates, particularly in the United States.
Commodity prices were mixed over the period. Base metals prices, led by
aluminum and zinc, rose as inventory levels continued to be reduced on the major
commodity exchanges. There were also some price increases announced by companies
in the steel and paper products areas, but it is still uncertain whether these
will be accepted.
Oil and natural gas prices were volatile during the six-month period. After
rising significantly in the fourth quarter of 1996, both oil and natural gas
prices fell sharply through the first quarter of 1997 as inventory levels rose,
primarily in response to weak demand resulting from warmer-than-normal
temperatures across much of the United States. Oil prices have since stabilized,
but remain near their recent lows as inventories have continued to build more
quickly than expected. Natural gas prices have recovered significantly from
their lows in March as inventory levels remain near historical lows.
Conversely, gold prices moved lower on concerns about possible increases in
the supply of gold to the marketplace, particularly from sales by central banks.
The Fund's exposure to the paper and forest products sector contributed
positively to returns during the six-month period ended June 30,
168
<PAGE> 170
- --------------------------------------------------------------------------------
1997. Share prices of companies in this area have underperformed our investment
universe for the past two years as commodity prices fell significantly from
their highs in 1995. Currently, there are some indications that commodity prices
may be bottoming. There have been several attempts by the industry to implement
price increases over the last six months, but these generally have failed. The
companies are finally responding by announcing production downtime for many
paper grades in an attempt to strengthen supply/demand balances. In addition,
recent poor pricing is expected to keep capacity additions limited for most
paper grades over the next few years. This should allow industry fundamentals to
improve as operating rates gradually move higher, thereby giving the industry
greater pricing flexibility in the future. There also has been an increasing
trend toward consolidation in the group which should help support a positive
turn in industry prospects. In addition, there are signs that company
managements are adopting more shareholder-oriented policies, including share
repurchases, debt reduction and an increased focus on the returns from all
capital expenditures.
Fund returns also benefited from our significant exposure to the base metals
sector. Share prices of companies in this group rose in response to an improved
industry outlook. An acceleration in economic activity boosted the demand for
these materials which, in turn, led to declining inventory levels for most base
metals, particularly aluminum, copper and zinc. Commodity prices of most base
metals rallied in response to this strengthening of industry supply/demand
fundamentals. We expect that inventory levels will continue to trend downward
over the next 12 months--18 months since demand is likely to remain strong and
limited new supply will come on line. We expect this to support a favorable
pricing environment for most base metals, and could lead to an improved earnings
outlook for many producing companies.
The Fund's large exposure to the energy sector, with particular emphasis on
exploration and production companies, also contributed positively to returns
during the six-month period. Share prices of energy-related companies rose
during the period as oil and natural gas prices stabilized and recovered
somewhat from their sharp fall in the first quarter of 1997. The Fund's holdings
in non-US energy companies showed particular strength, after having lagged the
strong returns of US energy companies for much of 1996.
Fund returns were hurt by our exposure to gold mining stocks. Gold shares fell
as gold prices suffered from continued low inflationary expectations and
investor concerns about possible increases in the supply of gold resulting from
potential sales by central banks. Gold shares also suffered from the negative
sentiment surrounding the Canadian-based gold exploration company, Bre-X
Minerals Ltd. The shares of Bre-X Minerals Ltd. collapsed after due-diligence
drilling by Freeport-McMoRan Copper & Gold Inc., its partner in the Busang gold
project in Indonesia, found insignificant amounts of gold. Subsequent testing on
this property has shown that it would be uneconomical to develop it. As a
result, gold shares weakened considerably as investors reduced the valuation
levels they were willing to put on the gold reserves of these companies. While
we believe that the supply/demand fundamentals in the gold market remain tight,
we do not expect gold prices to move substantially higher in the near term.
Investments in the gold sector remain focused on low-cost producers with strong
production and reserve growth potentials.
During the six-month period ended June 30, 1997, we made no significant
geographic or industry allocation changes to the Fund. The Fund's primary
investment focus remained in the energy sector, followed by a significant
exposure to the base metals sector. We sold our position in Santa Fe Pacific
Gold Corp., which rose sharply after a merger agreement with Newmont Mining
Corp. was signed. We also used the strength in stock prices in the energy sector
as an opportunity to realize profits in some of our energy holdings which were
nearing our price targets. This included the elimination of our holdings in
Vastar Resources, Inc., Occidental Petroleum Corp. and IHC Caland N.V. In
addition, we believe there is some modest downside risk to oil prices in the
near term as inventories of crude oil and oil products have been building more
quickly than expected. We increased our exposure to the refining and marketing
sector through the purchases of Sun Co., Inc., an energy company, and Ashland
Inc., a chemical conglomerate with significant corporate restructuring
potential. We also increased our exposure to the paper and forest products
sector by initiating positions in James River Corp., Stone Container Corp. and
Champion International Corp.
Looking ahead, we continue to be optimistic about the outlook for the natural
resource sector. Although uncertainty lingers over the
169
<PAGE> 171
- --------------------------------------------------------------------------------
sustainability of recent advances in economic growth, and there is much debate
over the implications of this growth for the financial markets, we remain
encouraged by recent positive economic trends. We believe we may be moving
toward a period of synchronized growth in both the industrialized and developing
economies. We expect this to keep the demand for most basic commodities on an
upward trend and strengthen fundamental supply/demand prospects for most natural
resource-related industries which, in turn, should have positive implications
for the earnings of many resourcerelated companies.
IN CONCLUSION
We appreciate your investment in Natural Resources Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Peter A. Lehman
Peter A. Lehman
Vice President and Portfolio Manager
August 13, 1997
170
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALUMINUM 8,000 Alcan Aluminium, Ltd. ........... $ 167,560 $ 277,500 0.7%
10,300 +Alumax, Inc. ................... 353,056 390,756 1.0
3,300 Aluminum Co. of America.......... 172,714 248,738 0.7
----------- ----------- ------
693,330 916,994 2.4
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS 2,700 Air Products & Chemicals,
Inc. .......................... 154,427 219,375 0.6
4,800 BASF AG.......................... 115,117 177,528 0.5
2,200 Dow Chemical Co. ................ 150,915 191,675 0.5
7,400 duPont (E.I.) de Nemours &
Co. ........................... 174,697 465,275 1.2
----------- ----------- ------
595,156 1,053,853 2.8
- ---------------------------------------------------------------------------------------------------------------------
DIAMONDS 11,100 +Aber Resources, Ltd. ........... 186,043 155,295 0.4
25,000 +SouthernEra Resources Ltd. ..... 155,268 141,356 0.4
----------- ----------- ------
341,311 296,651 0.8
- ---------------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCE 20,000 Asahi Glass Co., Ltd. ........... 240,000 199,179 0.5
COMPANIES 5,300 Ashland Inc. .................... 223,873 245,788 0.7
5,100 Coastal Corp. ................... 137,570 271,256 0.7
16,000 Cyprus Amax Minerals Co. ........ 417,585 392,000 1.1
8,400 Norcen Energy Resources Ltd. .... 108,534 200,333 0.5
51,000 North Limited.................... 193,442 193,034 0.5
52,300 RGC Ltd. ........................ 206,473 190,114 0.5
----------- ----------- ------
1,527,477 1,691,704 4.5
- ---------------------------------------------------------------------------------------------------------------------
GOLD 134,000 +Acacia Resources Ltd. .......... 270,990 174,753 0.5
35,700 +Amax Gold, Inc. ................ 209,600 218,663 0.6
17,500 Ashanti Goldfields Co. Ltd.
(GDR)**........................ 434,367 204,750 0.5
23,500 Cambior Inc. .................... 315,479 267,452 0.7
23,000 +Casmyn Corp. ................... 211,713 169,625 0.4
173,300 Delta Gold N.L. ................. 333,170 287,053 0.8
30,600 Driefontein Consolidated Ltd. ... 477,914 205,845 0.5
6,300 Freeport-McMoRan Copper & Gold,
Inc. (Class B)................. 217,128 196,088 0.5
11,700 +Getchell Gold Corp.............. 517,867 412,425 1.1
155,000 Great Central Mines N.L. ........ 467,243 292,987 0.8
67,600 +Miramar Mining Corp............. 345,062 245,016 0.6
21,064 Newmont Mining Corp. ............ 807,080 821,496 2.2
35,000 Placer Dome Inc. ................ 767,891 573,125 1.5
24,800 Prime Resources Group, Inc. ..... 242,631 179,775 0.5
199,000 Resolute Ltd. ................... 412,978 351,995 0.9
22,200 +Sutton Resources Ltd. .......... 199,967 181,044 0.5
30,000 +TVX Gold, Inc. ................. 241,535 159,375 0.4
43,666 +William Resources Inc. ......... 131,760 68,055 0.2
----------- ----------- ------
6,604,375 5,009,522 13.2
- ---------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL 6,900 Amerada Hess Corp. .............. 374,019 383,381 1.0
COMPANIES 3,000 Amoco Corp. ..................... 162,710 260,813 0.7
10,400 British Petroleum, Co. PLC
(ADR)*......................... 396,812 778,700 2.0
11,600 Ente Nazionale Idrocarburi S.p.A
(ENI) (ADR)*................... 542,300 659,750 1.7
2,000 OMV AG........................... 214,068 256,285 0.7
25,000 Petro-Canada..................... 272,871 406,250 1.1
4,400 Repsol, S.A. .................... 127,618 186,160 0.5
8,200 Societe Nationale Elf Aquitaine
(ADR)*......................... 302,991 446,388 1.2
8,000 Total, S.A. (Class B)............ 492,331 808,865 2.1
9,500 Yacimientos Petroliferos
Fiscales, S.A. (YPF) (ADR)*.... 175,633 292,125 0.8
----------- ----------- ------
3,061,353 4,478,717 11.8
- ---------------------------------------------------------------------------------------------------------------------
METALS & MINING 10,800 ASARCO Inc. ..................... 305,116 330,750 0.9
281,000 +Centaur Mining & Exploration
Ltd. .......................... 424,224 358,036 0.9
25,600 Falconbridge Ltd. ............... 565,318 502,907 1.3
7,400 Inco Ltd. ....................... 244,911 222,463 0.6
</TABLE>
171
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
METALS & MINING 60,800 Industrias Penoles, S.A. de
(CONCLUDED) C.V. .......................... $ 267,270 $ 290,034 0.8%
465,000 M.I.M. Holdings Ltd. ............ 867,286 683,094 1.8
34,376 Minsur S.A. (T Shares)........... 111,555 130,240 0.3
71,000 Mitsubishi Materials Corp. ...... 356,046 284,074 0.7
18,000 Noranda Inc. .................... 323,879 388,184 1.0
25,500 Outokumpu OY..................... 455,626 506,518 1.3
9,400 P.T. Tambang Timah (GDR)**(b).... 115,742 143,350 0.4
124,400 Pasminco Ltd. ................... 170,833 250,810 0.7
4,400 Phelps Dodge Corp. .............. 256,635 374,825 1.0
108,000 QNI Ltd. ........................ 216,381 193,461 0.5
6,000 Rio Algom Ltd. .................. 116,616 146,575 0.4
39,400 Rio Tinto PLC.................... 517,819 685,690 1.8
300,000 Savage Resources Ltd. ........... 228,130 269,820 0.7
41,000 Savage Resources Ltd.
(Warrants)(a).................. 5,506 8,451 0.0
46,000 Sumitomo Metal Mining Co.
Ltd. .......................... 383,546 325,500 0.9
16,500 Trelleborg 'B' Fria.............. 216,697 271,038 0.7
126,900 WMC Ltd. ........................ 734,286 794,181 2.1
44,700 +Westmin Resources, Inc. ........ 234,380 213,860 0.6
----------- ----------- ------
7,117,802 7,373,861 19.4
- ---------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 17,400 Apache Corp. .................... 466,089 565,500 1.5
14,000 +Benton Oil & Gas Co. ........... 213,500 210,000 0.6
37,000 +Chauvco Resources Ltd. ......... 437,096 529,721 1.4
10,200 +Chieftain International,
Inc. .......................... 227,716 223,763 0.6
34,100 +Enserch Exploration Inc. ....... 331,601 372,969 1.0
38,700 Enterprise Oil PLC............... 251,630 433,130 1.1
74,300 +Gulf Canada Resources, Ltd. .... 556,159 617,619 1.6
7,300 Louisiana Land and Exploration
Co. (The)...................... 283,067 417,013 1.1
21,400 Mitchell Energy & Development
Corp. (Class B)................ 374,226 465,450 1.2
22,600 +Northrock Resources Ltd. ....... 182,121 289,975 0.8
13,000 +Oryx Energy Co. ................ 216,739 274,625 0.7
8,000 PanCanadian Petroleum Ltd. ...... 152,305 168,177 0.5
54,500 Ranger Oil Ltd. ................. 365,099 507,531 1.3
9,200 Sonat, Inc. ..................... 344,919 471,500 1.2
----------- ----------- ------
4,402,267 5,546,973 14.6
- ---------------------------------------------------------------------------------------------------------------------
OIL SERVICES 10,400 Coflexip Stena Offshore, Inc.
(ADR)*......................... 214,310 313,300 0.8
7,300 +Petroleum Geo-Services ASA
(ADR)*......................... 214,215 356,787 0.9
2,700 Schlumberger Ltd. ............... 154,584 337,500 0.9
8,300 Smedvig ASA (ADR)*............... 176,375 211,650 0.6
5,800 Transocean Offshore Inc.......... 357,163 421,225 1.1
----------- ----------- ------
1,116,647 1,640,462 4.3
- ---------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 12,266 Aracruz Celulose S.A. (ADR)*..... 196,780 249,920 0.7
33,100 Avenor Inc. ..................... 641,492 643,045 1.7
5,300 Champion International Corp. .... 272,681 292,825 0.8
15,800 Empresa Nacional de Celulosas,
S.A. .......................... 233,184 278,981 0.7
4,300 Georgia-Pacific Corp. ........... 294,448 367,112 1.0
5,000 International Paper Co. ......... 168,113 242,812 0.6
5,100 James River Corp. ............... 155,299 188,700 0.5
49,000 Metsa Serla OY 'B'............... 424,931 399,718 1.1
9,700 Mo Och Domsjo AB 'B' Co. ........ 233,273 318,674 0.8
52,000 Slocan Forest Products Ltd. ..... 523,964 518,304 1.4
12,000 Stone Container Corp. ........... 147,680 171,750 0.5
10,800 Weyerhaeuser Co. ................ 435,093 561,600 1.4
6,000 Willamette Industries, Inc. ..... 251,250 420,000 1.1
----------- ----------- ------
3,978,188 4,653,441 12.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
172
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PLANTATIONS 136,000 Golden Hope Plantations BHD...... $ 240,608 $ 233,879 0.6%
90,000 Kuala Lumpur Kepong BHD.......... 120,553 222,887 0.6
----------- ----------- ------
361,161 456,766 1.2
- ---------------------------------------------------------------------------------------------------------------------
REFINING 15,000 Sun Co. ......................... 398,883 465,000 1.2
40,300 Total Petroleum (North America),
Ltd............................ 506,525 397,962 1.1
----------- ----------- ------
905,408 862,962 2.3
- ---------------------------------------------------------------------------------------------------------------------
STEEL 83,000 British Steel PLC................ 218,182 206,353 0.5
7,800 Koninklijke Nederlandsche
Hoogovens en Staalfabrienken
N.V. .......................... 314,789 435,101 1.2
128,000 Nippon Steel Corp. .............. 434,280 409,260 1.1
214,000 Sumitomo Metal Industries,
Ltd. .......................... 672,370 609,452 1.6
----------- ----------- ------
1,639,621 1,660,166 4.4
- ---------------------------------------------------------------------------------------------------------------------
WOOD PRODUCTS 15,400 Louisiana-Pacific Corp. ......... 366,874 325,325 0.8
14,000 +Pacific Forest Products Ltd. ... 242,724 256,252 0.7
26,800 Riverside Forest Products
Ltd. .......................... 352,710 297,238 0.8
----------- ----------- ------
962,308 878,815 2.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 33,306,404 36,520,887 96.3
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM INVESTMENTS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER*** $1,374,000 General Motors Acceptance Corp.,
6.25% due 7/01/1997............ 1,373,761 1,373,761 3.6
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS 1,373,761 1,373,761 3.6
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS................ $34,680,165 37,894,648 99.9
===========
OTHER ASSETS LESS LIABILITIES.... 48,969 0.1
----------- ------
NET ASSETS....................... $37,943,617 100.0%
=========== ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 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.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
* 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.
See Notes to Financial Statements.
173
<PAGE> 175
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified--cost $34,680,165) (Note 1a)................................. $37,894,648
Cash........................................................................................... 67
Foreign cash (Note 1c)......................................................................... 14,245
Dividends receivable........................................................................... 82,670
Prepaid expenses and other assets.............................................................. 403
-----------
Total assets................................................................................... 37,992,033
-----------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser (Note 2).................................................................. $21,286
Capital shares redeemed...................................................................... 20,624 41,910
-------
Accrued expenses and other liabilities......................................................... 6,506
-----------
Total liabilities.............................................................................. 48,416
-----------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS..................................................................................... $37,943,617
===========
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized................................... $ 299,996
Paid-in capital in excess of par............................................................... 31,528,214
Undistributed investment income--net........................................................... 250,026
Undistributed realized capital gains on investments and foreign currency transactions--net..... 2,652,249
Unrealized appreciation on investments and foreign currency transactions--net.................. 3,213,132
-----------
NET ASSETS--Equivalent to $12.65 per share based on 2,999,965 shares outstanding............... $37,943,617
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
174
<PAGE> 176
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $34,747 foreign withholding tax)......................................... $ 384,650
Interest and discount earned............................................................... 25,952
------------
Total income............................................................................... 410,602
------------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2).......................................................... $ 130,415
Custodian fees............................................................................. 12,657
Pricing services........................................................................... 4,745
Accounting services (Note 2)............................................................... 4,110
Professional fees.......................................................................... 3,500
Transfer agent fees (Note 2)............................................................... 2,333
Directors' fees and expenses............................................................... 411
Other...................................................................................... 721
------------
Total expenses............................................................................. 158,892
------------
Investment income--net..................................................................... 251,710
------------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET
(NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net......................................................................... 2,661,530
Foreign currency transactions--net....................................................... (3,083) 2,658,447
------------
Change in unrealized appreciation/depreciation on:
Investments--net......................................................................... (1,474,245)
Foreign currency transactions--net....................................................... (3,416) (1,477,661)
------------ ------------
Net realized and unrealized gain on investments and foreign currency transactions.......... 1,180,786
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $ 1,432,496
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
175
<PAGE> 177
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net..................................................... $ 251,710 $ 656,331
Realized gain on investments and foreign currency transactions--net........ 2,658,447 2,957,459
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net................................................. (1,477,661) 2,057,873
----------- -----------
Net increase in net assets resulting from operations....................... 1,432,496 5,671,663
----------- -----------
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net..................................................... (223,099) (722,544)
Realized gain on investments--net.......................................... (2,977,040) (740,711)
----------- -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders............................................................... (3,200,139) (1,463,255)
----------- -----------
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share transactions......... (5,485,735) (2,113,764)
----------- -----------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets.................................... (7,253,378) 2,094,644
Beginning of period........................................................ 45,196,995 43,102,351
----------- -----------
End of period*............................................................. $37,943,617 $45,196,995
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net..................................... $ 250,026 $ 221,415
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
176
<PAGE> 178
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. MONTHS ENDED -----------------------------------------
JUNE 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 13.12 $ 11.95 $ 10.82 $ 10.82 $ 9.84
------- ------- ------- ------- -------
Investment income--net................................... .09 .18 .20 .17 .11
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net....................... .36 1.40 1.15 (.02) .92
------- ------- ------- ------- -------
Total from investment operations......................... .45 1.58 1.35 .15 1.03
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................. (.06) (.20) (.19) (.15) (.05)
Realized gain on investments--net...................... (.86) (.21) (.03) -- --
------- ------- ------- ------- -------
Total dividends and distributions........................ (.92) (.41) (.22) (.15) (.05)
------- ------- ------- ------- -------
Net asset value, end of period........................... $ 12.65 $ 13.12 $ 11.95 $ 10.82 $ 10.82
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... 3.82%+ 13.52% 12.65% 1.44% 10.47%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. .79%* .78% .78% .87% 1.13%
======= ======= ======= ======= =======
Investment income--net................................... 1.25%* 1.43% 1.75% 1.91% 1.34%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $ 37,944 $45,197 $43,102 $39,715 $14,778
======= ======= ======= ======= =======
Portfolio turnover....................................... 13.35% 31.11% 30.15% 10.94% 58.44%
======= ======= ======= ======= =======
Average commission rate paid++........................... $ .0322 $ .0225 -- -- --
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into 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.
177
<PAGE> 179
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Natural Resources Focus Fund (the "Fund") is
classified as "non-diversified", as defined in the Investment Company Act of
1940. These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term investments are valued at amortized cost, which
approximates market value. 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--The Fund 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--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--The Fund may write and purchase call and put options. When the 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--The Fund may purchase or sell futures contracts
and options on such futures contracts for the purpose 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
178
<PAGE> 180
- --------------------------------------------------------------------------------
value of the contract at the time it was opened and the value at the time it was
closed.
- - Foreign currency options and futures--The Fund 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 Fund'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) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's portfolios and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.65% of the average daily value of the
Fund's net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $1,679 in commissions on the
execution of portfolio security transactions.
For the six months ended June 30, 1997, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $8,163 for providing security price
quotations to compute the Fund's net asset value.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $5,253,015 and $14,158,279, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $2,661,530 $3,214,483
Foreign currency transactions.......... (3,083) (1,351)
----------- -----------
Total.................................. $2,658,447 $3,213,132
=========== ===========
- -------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $3,214,483, of which $5,819,750 related to
179
<PAGE> 181
- --------------------------------------------------------------------------------
appreciated securities and $2,605,267 related to
depreciated securities. At June 30, 1997, the aggregate cost of investments for
Federal income tax purposes was $34,680,165.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$5,485,735 and $2,113,764 for the six months ended June 30, 1997 and the year
ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
Shares sold........................................ 4,426 $ 54,808
Shares issued to shareholders in reinvestment of
dividends and distributions....................... 264,256 3,200,139
---------- -----------
Total issued....................................... 268,682 3,254,947
Shares redeemed.................................... (712,500) (8,740,682)
---------- -----------
Net decrease....................................... (443,818) $(5,485,735)
========== ===========
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
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)
========== ===========
- ---------------------------------------------------------
</TABLE>
180
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Prime Bond Fund's net annualized yield
was 6.71%. Total investment return for the Fund for the six-month period ended
June 30, 1997 was +2.65%, based on a change in per share net asset value from
$11.91 to $11.82, and assuming reinvestment of $0.396 per share income
dividends.
For the one-year, five-year and ten-year periods ended June 30, 1997, the
Fund's average annual total returns were +7.63%, +7.08% and +8.21%,
respectively. The Fund's standardized 30-day yield as of June 30, 1997 was
6.52%. (Total returns do not include the effect of insurance-related fees and
expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. At the beginning of the year, Federal
Reserve Board (FRB) Chairman Alan Greenspan cautioned investors about a possible
preemptive strike against inflation. While there were few signs of accelerating
inflation in the then-current data, he warned that monetary policy acts with a
lag and that it would be easier to tighten policy at that time, as a precaution,
rather than tighten later and more sharply once inflation was evident. A
mid-January market rally was halted and interest rates began to back up at the
beginning of February in anticipation of a central bank move. As Chairman
Greenspan warned, the FRB tightened monetary policy on March 25, 1997.
Since the March tightening, economic data have been more benign. Retail sales
fell, and inflation remained tame. The yield on the long-term bellwether
Treasury bond peaked at 7.17% in mid-April and then began to drop to its current
level of 6.57%. This market rally was fueled by a significant change in investor
expectations regarding the economy and in the outlook for interest rates. In
early May there was widespread agreement that the FRB was ready for another
tightening of monetary policy, and it was generally assumed that a further
tightening would be needed by July. However, the Consumer Price Index rose only
1.4% for the first five months of 1997, compared with a 3.8% increase over the
same period in 1996. At the same time, retail sales figures continued to
decline. As a result, a May increase in interest rates did not occur, and the
bond rally continued to gain momentum. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was confirmed further shortly
after the period's close when, as widely expected, the FRB chose to leave
monetary policy unchanged. This confluence of positive indicators helped produce
a significant rally in the US stock market. A slight decline in interest rates
resulted in a modest positive total return for US fixed-income investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although gross domestic product growth for the first quarter of
the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived most favorably by investors
for its ongoing growth and limited inflationary pressures. If economic data
releases continue to support this point of view, the outlook for the US capital
markets should remain positive.
PORTFOLIO MATTERS
We began to take a more defensive position in the Fund toward the end of
January. We reduced the Fund's duration from 4.7 years to 4.4 years. In the
weeks following the FRB's March 25, 1997 tightening, the bond market's yield
rose to its peak of 7.17%. We continued to be defensive and brought the Fund's
duration to 4.4 years to seek to protect the Fund against the erosion of net
asset value. We took a more optimistic view of market conditions at the
beginning of May, when we began to invest more aggressively, and by the end of
June had extended the Fund's duration to 4.6 years. Currently, the average
portfolio maturity is 9.4 years. The average credit quality remained the same at
AA- as measured by Standard & Poor's Corp. Most of the credit quality risk was
taken in financial institutions, followed by industrials
181
<PAGE> 183
- --------------------------------------------------------------------------------
and utilities. We hold underweighted positions in
Canadian bonds and Yankee bonds.
Because we expect a resumption of strength in the third and fourth quarters of
1997, we believe that the FRB may resume a tightening mode in the second half of
the year. With the yield curve remaining relatively flat, we expect further
duration extensions to be moderate. We do not anticipate any significant changes
in the asset allocation mix during the summer.
IN CONCLUSION
We appreciate your investment in Prime Bond Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Jay C. Harbeck
Jay C. Harbeck
Vice President and Portfolio Manager
August 13, 1997
182
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET-BACKED AAA Aaa $2,000,000 Arcadia Energy, 6.10% due
SECURITIES++--4.3% 6/15/2000................... $ 1,999,611 $ 2,002,500
AAA Aaa 7,000,000 Banc One Credit Card Master
Trust (Series B), 7.55% due
12/15/1999.................. 7,134,414 7,043,750
AAA Aaa 4,000,000 Citibank, Credit Card Master
Trust I, 5.932% due
12/10/2008.................. 3,998,440 3,988,720
AAA Aaa 5,500,000 First Bank, Corporate Card
Master Trust, 6.40% due
2/15/2003................... 5,493,248 5,443,405
AAA Aaa 3,454,285 GMAC Grantor Trust, 6.50% due
4/15/2002................... 3,453,322 3,476,531
------------ ------------
22,079,035 21,954,906
- ---------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--11.9% BBB+ A3 2,500,000 BB&T Corporation, 7.25% due
6/15/2007................... 2,488,325 2,505,600
Bank of New York Co., Inc.:
A A2 4,000,000 7.625% due 7/15/2002........ 4,306,000 4,132,760
A A2 2,000,000 7.875% due 11/15/2002....... 2,213,400 2,091,040
BankAmerica Corp.:
A+ Aa3 7,000,000 8.375% due 3/15/2002........ 7,361,550 7,427,980
A+ Aa3 1,000,000 7.125% due 5/12/2005........ 985,500 1,000,850
A- A2 2,000,000 First Interstate Bancorp,
11.25% due 3/27/2001........ 2,354,060 2,263,040
BBB A2 8,000,000 Fleet Capital Trust II, 7.92%
due 12/11/2026.............. 7,922,070 7,873,920
A- A3 2,000,000 Golden West Financial Corp.,
9.15% due 5/23/1998......... 2,271,480 2,051,300
BBB+ A3 1,000,000 +HSBC Americas Inc., 7.808%
due 12/15/2026.............. 988,460 957,674
BBB A1 1,500,000 Keycorp Institutional Capital,
Series A, 7.826% due
12/01/2026.................. 1,415,625 1,456,815
BBB+ A2 3,000,000 Mellon Capital II, 7.995% due
1/15/2027................... 2,860,410 2,996,400
A A2 5,000,000 NationsBank Corp., 6.50% due
8/15/2003................... 4,755,150 4,887,400
Norwest Corp.:
AA- Aa3 5,000,000 6.25% due 4/15/1999......... 4,983,600 4,996,900
AA- Aa3 2,500,000 6.75% due 5/12/2000......... 2,529,975 2,515,150
A A2 12,950,000 US Bancorp, 6.95% due
11/28/1997.................. 13,048,032 12,998,563
BBB+ A1 1,000,000 Wells Fargo Capital I, 7.96%
due 12/15/2026.............. 982,070 992,050
------------ ------------
61,465,707 61,147,442
- ---------------------------------------------------------------------------------------------------------------------
CANADIAN PROVINCES*--2.5% Province of Quebec
(Canada)(2):
A+ A2 3,500,000 8.80% due 4/15/2003......... 3,944,780 3,808,805
A+ A2 9,500,000 7.125% due 2/09/2024........ 7,990,800 8,935,320
------------ ------------
11,935,580 12,744,125
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
183
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCE--5.7% Associates Corp. of North
America:
AA- Aa3 $5,000,000 8.375% due 1/15/1998........ $ 5,016,100 $ 5,062,000
AA- Aa3 1,500,000 5.25% due 9/01/1998......... 1,454,385 1,484,190
AA- Aa3 1,000,000 7.25% due 9/01/1999......... 987,620 1,016,240
A A2 1,500,000 Beneficial Corporation, 6.42%
due 1/15/2002............... 1,474,635 1,477,215
A Aa3 6,100,000 CIT Capital Trust I, 7.70% due
2/15/2027................... 6,072,184 5,939,936
CIT Group Holdings, Inc.:
A+ Aa3 5,500,000 7% due 9/30/1997............ 5,547,490 5,515,840
A+ Aa3 1,500,000 6.50% due 7/13/1998......... 1,505,400 1,504,260
Commercial Credit Co.:
A+ A1 3,250,000 10% due 5/01/1999........... 3,626,350 3,452,638
A+ A1 3,000,000 6.70% due 8/01/1999......... 3,022,580 3,009,420
A+ A2 1,000,000 Transamerica Financial Corp.,
6.80% due 3/15/1999......... 999,730 1,007,170
------------ ------------
29,706,474 29,468,909
- ---------------------------------------------------------------------------------------------------------------------
FINANCE--OTHER--13.4% Bear Stearns Companies, Inc.
(The):
A A2 3,000,000 6.50% due 7/05/2000......... 2,994,540 2,994,540
A A2 5,000,000 6.75% due 8/15/2000......... 4,968,250 5,006,250
A A2 1,000,000 6.70% due 8/01/2003......... 1,002,800 984,000
Dean Witter, Discover & Co.:
A+ A1 3,500,000 6.75% due 8/15/2000......... 3,486,805 3,509,100
A+ A1 3,500,000 6.75% due 1/01/2016......... 3,500,000 3,223,255
A A2 4,000,000 Equitable Companies Inc., 9%
due 12/15/2004.............. 4,416,200 4,425,480
Equitable Life Assurance
Society:
A A2 4,355,000 +6.95% due 12/01/2005....... 4,110,249 4,278,696
A A2 1,500,000 +7.70% due 12/01/2015....... 1,489,740 1,498,050
A Baa1 10,000,000 Lehman Brothers Holdings,
Inc., 7.375% due 8/15/1997.. 9,987,000 10,017,200
BBB+ A3 5,000,000 MBNA Corporation, 6.131% due
6/17/2002................... 5,000,000 4,997,120
A+ A1 5,500,000 Morgan Stanley, Dean Witter,
Discover & Co., 6.875% due
3/01/2007................... 5,480,255 5,400,065
PaineWebber Group, Inc.:
BBB+ Baa1 3,000,000 9.25% due 12/15/2001........ 3,501,570 3,250,500
BBB+ Baa1 2,000,000 8.875% due 3/15/2005........ 2,012,540 2,175,500
Smith Barney Holdings, Inc.:
A A2 2,000,000 5.875% due 2/01/2001........ 1,993,680 1,941,952
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 1,958,460
A+ Aa3 2,000,000 Travelers Capital II, 7.75%
due 12/01/2036.............. 2,003,400 1,940,080
Travelers Corp. (The):
A+ A1 1,000,000 9.50% due 3/01/2002......... 1,084,200 1,103,880
A+ A1 6,000,000 7.875% due 5/15/2025........ 6,053,840 6,151,920
------------ ------------
69,053,949 68,789,728
- ---------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--CONSUMER Anheuser-Busch Cos., Inc.:
GOODS--3.6% A+ A1 2,500,000 8.75% due 12/01/1999........ 2,839,090 2,625,250
A+ A1 5,000,000 7.375% due 7/01/2023........ 5,127,300 4,878,650
A- A3 7,000,000 IBP, Inc., 6.125% due
2/01/2006................... 6,431,460 6,563,830
A A2 4,000,000 Philip Morris Companies, Inc.,
9% due 1/01/2001............ 4,071,540 4,256,240
------------ ------------
18,469,390 18,323,970
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
184
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL-- AA Aa2 $2,000,000 BP America Inc., 9.375% due
ENERGY--1.3% 11/01/2000.................. $ 2,204,960 $ 2,166,820
A- Aa3 3,000,000 Dresser Industries, Inc.,
7.60% due 8/15/2096......... 2,991,270 3,055,830
A+ A1 1,500,000 Texaco Capital Inc., 9% due
12/15/1999.................. 1,731,670 1,584,705
------------ ------------
6,927,900 6,807,355
- ---------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- Chrysler Finance Corporation:
MANUFACTURING--7.4% A- A3 6,500,000 10.95% due 8/01/2017........ 7,380,520 6,877,455
A- A3 2,000,000 7.45% due 3/01/2027......... 1,990,280 1,974,080
AA- Aa3 2,950,000 du Pont (E.I.) de Nemours &
Co., 8.25% due 1/15/2022.... 3,066,304 3,042,601
Ford Motor Credit Company:
A+ A1 3,000,000 7% due 9/25/2001............ 2,988,060 3,025,320
A+ A1 2,500,000 7.75% due 3/15/2005......... 2,497,725 2,593,825
AAA Aaa 3,245,000 General Electric Capital
Corp., 8.125% due
5/15/2012................... 3,449,052 3,542,923
General Motors Acceptance
Corp.:
A- A3 3,000,000 7.125% due 5/11/1998........ 3,033,840 3,024,780
A- A3 4,000,000 7.70% due 4/15/2016......... 3,967,000 4,115,880
Lockheed Martin Corp.:
BBB+ A3 7,000,000 6.625% due 6/15/1998........ 6,999,090 7,034,510
BBB+ A3 2,500,000 6.55% due 5/15/1999......... 2,498,800 2,503,975
------------ ------------
37,870,671 37,735,349
- ---------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A+ A1 2,500,000 Bass America, Inc., 8.125% due
SERVICES--9.5% 3/31/2002................... 2,668,930 2,639,375
A A2 4,000,000 Carnival Cruise Lines, Inc.,
7.70% due 7/15/2004......... 4,208,480 4,121,240
Columbia/HCA Healthcare Corp.:
A- A2 5,000,000 6.41% due 6/15/2000......... 4,997,000 4,967,000
A- A2 1,845,000 7.05% due 12/01/2027........ 1,729,946 1,714,835
Dillard's, Inc.:
A+ A2 5,000,000 7.375% due 6/15/1999........ 5,305,840 5,090,000
A+ A2 3,000,000 9.125% due 8/01/2011........ 3,240,150 3,486,480
A A2 1,992,316 +Disney Enterprises, Inc.,
6.85% due 1/10/2007++....... 1,990,981 1,974,585
A+ A1 7,000,000 +Electronic Data Systems
Corp., 6.85% due
5/15/2000................... 6,994,470 7,054,880
AAA Aaa 3,000,000 Johnson & Johnson Co., 8.72%
due 11/01/2024.............. 3,000,000 3,286,770
A- A2 7,000,000 Sears, Roebuck & Co., 6.82%
due 10/17/2002.............. 7,014,280 6,970,530
AA Aa2 7,000,000 Wal-Mart Stores, Inc., 8.50%
due 9/15/2024............... 7,036,810 7,374,080
------------ ------------
48,186,887 48,679,775
- ---------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- AA A1 9,500,000 Boeing Co., 6.35% due
TRANSPORTATION--3.6% 6/15/2003................... 8,549,905 9,299,360
Southwest Airlines, Inc.:
A- A3 3,500,000 9.40% due 7/01/2001......... 4,021,990 3,805,935
A- A3 4,000,000 8% due 3/01/2005............ 3,980,450 4,207,240
A- A3 1,000,000 7.875% due 9/01/2007........ 992,600 1,050,950
------------ ------------
17,544,945 18,363,485
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
185
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UTILITIES-- GTE Corp.:
COMMUNICATIONS--3.6% A A3 $6,000,000 8.85% due 3/01/1998......... $ 6,278,360 $ 6,105,660
A A3 1,500,000 9.375% due 12/01/2000....... 1,647,090 1,621,575
A A3 3,500,000 9.10% due 6/01/2003......... 3,965,330 3,871,385
A A3 2,000,000 10.30% due 11/15/2017....... 2,187,020 2,125,920
AAA Aaa 2,500,000 Indiana Bell Telephone Co.,
Inc., 7.30% due 8/15/2026... 2,495,725 2,490,675
Southwestern Bell
Telecommunications Corp.:
AA Aa3 1,000,000 6.125% due 3/01/2000........ 1,005,000 991,160
AA Aa3 1,000,000 6.625% due 4/01/2005........ 958,450 982,160
------------ ------------
18,536,975 18,188,535
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES-- A+ NR* 7,000,000 Duke Power Co., 8% due
ELECTRIC--5.6% 11/01/1999.................. 6,966,520 7,230,020
A+ A1 3,000,000 Georgia Power Co., 6.125% due
9/01/1999................... 2,892,720 2,982,060
AA- A1 2,000,000 Northern States Power Company,
7.125% due 7/01/2025........ 2,122,360 1,950,880
Pennsylvania Power & Light
Co.:
A- A3 2,500,000 5.50% due 4/01/1998......... 2,488,425 2,490,250
A- A3 2,000,000 6.875% due 2/01/2003........ 2,032,580 1,999,480
A- A3 4,000,000 Public Service Electric & Gas
Co., 6.50% due 6/01/2000.... 3,998,315 3,999,000
A A2 7,500,000 Virginia Electric & Power Co.,
8.625% due 10/01/2024....... 7,416,540 8,004,075
------------ ------------
27,917,460 28,655,765
- ---------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES*--8.7% AA- Aa2 1,500,000 ABN AMRO Holding N.V., 7.125%
due 6/18/2007 (1)........... 1,499,265 1,503,405
A+ A1 6,000,000 Australia & New Zealand
Banking Group Ltd., 7.55%
due 9/15/2006 (1)........... 5,990,880 6,152,160
A- A3 3,000,000 +British Aerospace PLC, 7.50%
due 7/01/2027 (4)........... 2,973,840 2,964,030
A+ NR* 6,000,000 China Light & Power Co., Ltd.,
7.50% due 4/15/2006 (3)..... 5,992,380 6,100,500
Enersis S.A. (4):
A- Baa1 8,000,000 6.90% due 12/01/2006........ 7,979,360 7,770,240
A- Baa1 2,000,000 7.40% due 12/01/2016........ 1,989,440 1,937,860
A+ A1 2,000,000 Ford Capital B.V., 9.50% due
6/01/2010 (1)............... 2,217,880 2,352,020
A+ A2 5,500,000 Grand Metropolitan Investment
Corp., 6.50%
due 9/15/1999 (1)........... 5,615,810 5,512,265
A- Baa1 3,000,000 HSBC Americas Inc., 7% due
11/01/2006 (1).............. 2,974,800 2,946,090
AA- A1 6,000,000 Korea Electric Power
Corporation, 8% due
7/01/2002 (3)............... 6,312,060 6,284,160
A+ A1 1,000,000 +Petronas Corp., 6.875% due
7/01/2003 (4)............... 986,480 997,816
------------ ------------
44,532,195 44,520,546
- ---------------------------------------------------------------------------------------------------------------------
YANKEE AAA Aaa 2,000,000 Export-Import Bank of Japan,
SOVEREIGN*--2.2% 8.35% due 12/01/1999 (1).... 2,113,320 2,084,260
AA- A1 3,000,000 Korea Development Bank, 6.625%
due 11/21/2003 (2).......... 3,011,060 2,918,610
AAA Aaa 250,000 Metropolis of Tokyo (Japan),
9.25% due 11/08/2000 (2).... 268,427 269,917
BBB+ NR* 6,000,000 People's Republic of China,
6.625% due 1/15/2003 (2).... 5,970,960 5,873,280
------------ ------------
11,363,767 11,146,067
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS &
NOTES--83.3% 425,590,935 426,525,957
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
186
<PAGE> 188
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE US GOVERNMENT & VALUE
RATINGS RATINGS AMOUNT AGENCY OBLIGATIONS COST (NOTE 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US GOVERNMENT AGENCY AAA Aaa $7,000,000 Federal National Mortgage
OBLIGATIONS--1.4% Association, 7.85% due
9/10/2004................... $ 6,925,569 $ 7,155,330
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AAA Aaa 3,000,000 US Treasury Bonds, 6.50% due
OBLIGATIONS--7.8% 11/15/2026.................. 2,838,594 2,877,180
US Treasury Notes:
AAA Aaa 4,500,000 6.375% due 5/15/1999........ 4,526,719 4,522,500
AAA Aaa 1,000,000 6.25% due 2/15/2003......... 982,500 992,190
AAA Aaa 5,500,000 5.75% due 8/15/2003......... 5,371,953 5,310,910
AAA Aaa 11,500,000 5.875% due 2/15/2004........ 11,202,500 11,142,465
AAA Aaa 9,500,000 6.50% due 5/15/2005......... 9,385,904 9,482,140
AAA Aaa 3,000,000 6.50% due 10/15/2006........ 2,985,469 2,987,340
AAA Aaa 2,500,000 6.625% due 5/15/2007........ 2,488,828 2,520,700
------------ ------------
39,782,467 39,835,425
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--9.2% 46,708,036 46,990,755
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM SECURITIES
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER**--3.3% General Motors Acceptance
Corp.:
6,000,000 5.53% due 7/01/1997......... 5,999,078 5,999,078
11,000,000 5.70% due 7/07/1997......... 10,987,808 10,987,808
------------ ------------
16,986,886 16,986,886
- ---------------------------------------------------------------------------------------------------------------------
REPURCHASE 19,525,000 Morgan (J.P.) & Company, Inc.,
AGREEMENTS***--3.8% purchased on 6/30/1997 to
yield 6% to 7/01/1997....... 19,525,000 19,525,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM
SECURITIES--7.1% 36,511,886 36,511,886
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.6%...... $508,810,857 510,028,598
============
OTHER ASSETS LESS
LIABILITIES--0.4%............. 2,044,624
------------
NET ASSETS--100.0%............ $512,073,222
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Corresponding industry groups for foreign securities, which are denominated
in US dollars.
(1) Financial Institution
(2) Government Entity
(3) Utility
(4) Industrial
** 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 & Agency
Obligations.
+ The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
++ Subject to principal paydowns.
See Notes to Financial Statements.
187
<PAGE> 189
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$508,810,857) (Note 1a)............................ $510,028,598
Cash....................................................................................... 742
Receivables:
Interest................................................................................. $8,213,492
Capital shares sold...................................................................... 26,145
Loaned securities (Note 6)............................................................... 1,958 8,241,595
--------
Prepaid registration fees and other assets (Note 1d)....................................... 7,494
------------
Total assets............................................................................... 518,278,429
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased..................................................................... 5,968,380
Investment adviser (Note 2).............................................................. 184,816
Capital shares redeemed.................................................................. 8,497 6,161,693
--------
Accrued expenses and other liabilities..................................................... 43,514
------------
Total liabilities.......................................................................... 6,205,207
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................. $512,073,222
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized............................... $ 4,330,966
Paid-in capital in excess of par........................................................... 521,100,604
Undistributed investment income -- net..................................................... 2,873,637
Accumulated realized capital losses on investments -- net (Note 5)......................... (17,449,726)
Unrealized appreciation on investments -- net.............................................. 1,217,741
------------
NET ASSETS--Equivalent to $11.82 per share based on 43,309,662 shares outstanding.......... $512,073,222
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
188
<PAGE> 190
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and discount earned................................................................ $18,700,076
Other income................................................................................ 19,960
-----------
Total income................................................................................ 18,720,036
-----------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................................................... $1,115,433
Accounting services (Note 2)................................................................ 57,785
Professional fees........................................................................... 26,654
Custodian fees.............................................................................. 22,325
Directors' fees and expenses................................................................ 5,325
Pricing services............................................................................ 4,204
Registration fees (Note 1d)................................................................. 3,479
Transfer agent fees (Note 2)................................................................ 2,448
Other....................................................................................... 1,186
----------
Total expenses.............................................................................. 1,238,839
-----------
Investment income--net...................................................................... 17,481,197
-----------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET (NOTES 1c & 3):
Realized loss from investments--net......................................................... (1,718,478)
Change in unrealized appreciation on investments--net....................................... (2,469,818)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ $13,292,901
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
189
<PAGE> 191
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net..................................................... $17,481,197 $33,145,431
Realized gain (loss) on investments--net................................... (1,718,478) 215,210
Change in unrealized appreciation on investments--net...................... (2,469,818) (21,044,224)
----------- -----------
Net increase in net assets resulting from operations....................... 13,292,901 12,316,417
----------- -----------
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1e):
Investment income--net..................................................... (17,737,404) (32,511,472)
----------- -----------
Net decrease in net assets resulting from dividends to shareholders........ (17,737,404) (32,511,472)
----------- -----------
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions............................................................... (21,876,003) 68,750,815
----------- -----------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets.................................... (26,320,506) 48,555,760
Beginning of period........................................................ 538,393,728 489,837,968
----------- -----------
End of period*............................................................. $512,073,222 $538,393,728
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net...................................... $ 2,873,637 $ 3,129,844
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
190
<PAGE> 192
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL FOR THE SIX
STATEMENTS. MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 11.91 $ 12.45 $ 11.12 $ 12.64 $ 12.04
-------- -------- -------- -------- -------
Investment income--net................................ .40 .80 .82 .77 .70
Realized and unrealized gain (loss) on
investments--net.................................... (.09) (.55) 1.34 (1.36) .71
-------- -------- -------- -------- -------
Total from investment operations...................... .31 .25 2.16 (.59) 1.41
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net.............................. (.40) (.79) (.83) (.76) (.70)
Realized gain on investments--net................... -- -- -- -- (.11)
In excess of realized gain on investments--net...... -- -- -- (.17) --
-------- -------- -------- -------- -------
Total dividends and distributions..................... (.40) (.79) (.83) (.93) (.81)
-------- -------- -------- -------- -------
Net asset value, end of period........................ $ 11.82 $ 11.91 $ 12.45 $ 11.12 $ 12.64
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................... 2.65%++ 2.21% 20.14% (4.80%) 12.02%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................. .48%* .49% .50% .54% .63%
======== ======== ======== ======== =======
Investment income--net................................ 6.70%* 6.67% 7.00% 6.74% 5.86%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $512,073 $538,394 $489,838 $391,234 $314,091
======== ======== ======== ======== =======
Portfolio turnover.................................... 29.19% 91.88% 90.12% 139.89% 115.26%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
++ Aggregate total investment return.
See Notes to Financial Statements.
191
<PAGE> 193
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Prime Bond Fund (the "Fund") is classified
as "diversified", as defined in the Investment Company Act of 1940. These
unaudited 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. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--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. Short-term securities are valued at amortized cost, which approximates
market value. 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) Income taxes--It is the Fund'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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
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.
(d) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(e) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend date.
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 Fund. For such services, the Fund
pays a monthly fee based upon the aggregate daily value of net assets of the
Fund and the Company's High Current Income Fund at the following annual rates:
0.50% of these Fund aggregate average daily net assets not exceeding $250
million; 0.45% of such average daily net assets in excess of $250 million but
not more than $500 million; 0.40% of such average daily net assets in excess of
$500 million but not more than $750 million; and 0.35% of such average daily net
assets in excess of $750 million. For the six months ended June 30, 1997, the
aggregate average daily net assets of the Fund and the Company's High Current
Income Fund was approximately $964,046,000.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith, $3,712
for providing security price quotations to compute the net asset value of the
Fund.
192
<PAGE> 194
- --------------------------------------------------------------------------------
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $142,095,681 and $164,206,949, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Realized Unrealized
Losses Gains
- -----------------------------------------------------------------------------
<S> <C> <C>
Long-term investments............................ $(1,718,478) $1,217,741
----------- ----------
Total............................................ $(1,718,478) $1,217,741
=========== ==========
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $1,217,741, of which $6,632,809 related to appreciated securities and
$5,415,068 related to depreciated securities. At June 30, 1997, the aggregate
cost of investments for Federal income tax purposes was $508,810,857.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $(21,876,003) and $68,750,815 for the six months ended June 30, 1997 and
for the year ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
Shares sold..................................... 1,969,261 $ 23,153,430
Shares issued to shareholders in reinvestment of
dividends...................................... 1,513,462 17,737,404
---------- ------------
Total issued.................................... 3,482,723 40,890,834
Shares redeemed................................. (5,384,644) (62,766,837)
---------- ------------
Net decrease.................................... (1,901,921) $(21,876,003)
========== ============
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
Shares sold..................................... 5,521,436 $ 65,068,417
Shares issued to shareholders in reinvestment of
dividends...................................... 2,739,002 32,511,472
---------- ------------
Total issued.................................... 8,260,438 97,579,889
Shares redeemed................................. (2,399,918) (28,829,074)
---------- ------------
Net increase.................................... 5,860,520 $ 68,750,815
========== ============
- ---------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1996, the Fund had a net capital loss carryforward of
approximately $15,651,000, of which $14,796,000 expires in 2002 and $855,000
expires in 2003. This amount will be available to offset like amounts of any
future taxable gains.
6. LOANED SECURITIES:
At June 30, 1997, the Fund held US Treasury bonds having an aggregate value of
approximately $16,599,000 as collateral for portfolio securities loaned having a
market value of approximately $16,056,000.
7. SUBSEQUENT EVENT:
On July 1, 1997, the Board of Directors declared net investment income dividends
of $.066345 per share payable on July 1, 1997 to shareholders of record as of
June 30, 1997.
193
<PAGE> 195
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Quality Equity Fund's total investment
return was +16.07%, based on a change in per share net asset value from $32.83
to $36.05, and assuming reinvestment of $1.196 per share income dividends and
$0.558 per share capital gains distributions.
For the one-year, five-year and ten-year periods ended June 30, 1997, the
Fund's average annual total returns were +29.16%, +15.83% and +12.13%,
respectively. (Total returns do not include the effect of insurance-related fees
and expenses.)
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the quarter's close when, as widely expected, the Federal Reserve Board
(FRB) chose to leave monetary policy unchanged. This confluence of positive
indicators helped produce a significant rally in the US stock market. A slight
decline in interest rates resulted in a modest positive total return for US
fixed-income investments. Current consensus expectations are for the US
economy's rate of growth to lose some momentum. Although real gross domestic
product growth for the first quarter of the year was revised slightly upward to
5.9%, there are indications that the second quarter's rate of growth will be
lower. At the same time, inflationary pressures remain contained, supported by
the June employment report showing moderate growth in wages along with a slight
increase in unemployment. It remains to be seen whether economic activity
moderates enough to rule out future FRB monetary policy tightenings.
The US dollar continued to be strong relative to other currencies. In Europe,
investors appear uncertain regarding the viability of economic and monetary
union, while scandals continue to depress investor confidence in Japan. At
present, it appears that the US economy is perceived favorably by investors for
its ongoing growth and limited inflationary pressures. If economic data releases
continue to support this point of view, the outlook for the US capital markets
will remain positive.
PORTFOLIO MATTERS
As of June 30, 1997, the asset allocation for Quality Equity Fund was: US
equities, 85% of net assets; foreign equities, 10%; and cash reserves, 5%.
We did not raise our US equity weighting above 85% of net assets because of
our concern that a slower US economy in upcoming quarters could lead to earnings
disappointments. The largest concentration of assets remained in the financial
services, technology, energy and healthcare sectors. New positions in these
sectors included: Intel Corporation and Microsoft Corp. in technology;
Nationwide Financial Services, Inc. and MGIC Investment Corporation in financial
services; Smith International, Inc. in energy; and Tenet Healthcare Corporation
in healthcare.
In the foreign equity sector, new commitments were concentrated in the
American Depositary Receipts (ADRs) of companies in laggard groups, such as
basic materials. Investment additions in this sector included Rio Tinto PLC in
the United Kingdom and DeBeers Consolidated Mines Ltd. in South Africa. We also
initiated a commitment in the ADRs of Gucci Group NV and in Japan through the
ADRs of Sony Corporation.
IN CONCLUSION
We appreciate your investment in Quality Equity Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Thomas R. Robinson
Thomas R. Robinson
Vice President and Portfolio Manager
August 13, 1997
194
<PAGE> 196
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 185,200 AlliedSignal Inc. .......... $ 13,413,008 $ 15,556,800 1.9%
190,000 United Technologies
Corp. .................... 7,831,355 15,770,000 1.9
------------ ------------ -----
21,244,363 31,326,800 3.8
- ---------------------------------------------------------------------------------------------------------------------
AIRLINES 104,000 +US Airways Group Inc. ..... 3,659,666 3,640,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
AUTOMOBILE RENTAL & LEASING 217,100 +Hertz Corp. (Class A)...... 6,460,903 7,815,600 0.9
- ---------------------------------------------------------------------------------------------------------------------
BANKING 324,120 Banc One Corp. ............. 14,149,895 15,699,563 1.9
230,000 Bank of New York Co.,
Inc. ..................... 4,836,154 10,005,000 1.2
60,000 Bank of New York Co., Inc.
(Warrants) (c)............ 433,750 6,765,000 0.8
274,200 BankAmerica Corporation..... 14,200,338 17,703,038 2.1
64,000 Chase Manhattan
Corporation............... 6,571,713 6,212,000 0.7
------------ ------------ -----
40,191,850 56,384,601 6.7
- ---------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 192,750 +Oracle Corp. .............. 6,426,521 9,697,734 1.1
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS 240,000 Du Pont (E.I) de Nemours &
Co. ...................... 13,084,333 15,090,000 1.8
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 32,000 +Microsoft Corp. ........... 3,295,693 4,046,000 0.5
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 311,600 +BMC Software, Inc. ........ 11,552,980 17,254,850 2.1
254,300 Computer Associates
International, Inc. ...... 10,260,163 14,161,331 1.7
------------ ------------ -----
21,813,143 31,416,181 3.8
- ---------------------------------------------------------------------------------------------------------------------
COMPUTERS 243,200 +Cabletron Systems, Inc. ... 8,375,057 6,885,600 0.8
166,000 +Compaq Computer Corp. ..... 12,292,663 16,475,500 2.0
46,000 International Business
Machines Corp. ........... 2,488,255 4,148,625 0.5
------------ ------------ -----
23,155,975 27,509,725 3.3
- ---------------------------------------------------------------------------------------------------------------------
CONTAINERS 425,000 +Owens-Illinois, Inc. ...... 12,332,455 13,175,000 1.6
- ---------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 364,300 Sunbeam Corporation,
Inc. ..................... 13,871,579 13,752,325 1.6
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONICS 94,000 Intel Corporation .......... 12,998,401 13,306,875 1.6
- ---------------------------------------------------------------------------------------------------------------------
ENERGY & RELATED 690,300 Edison International........ 13,122,844 17,171,213 2.1
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 232,000 American Express Company.... 11,070,670 17,284,000 2.1
232,800 First Data Corp. ........... 8,289,174 10,228,650 1.2
380,000 MGIC Investment
Corporation............... 14,375,367 18,216,250 2.2
------------ ------------ -----
33,735,211 45,728,900 5.5
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--ARGENTINA* 180,000 Yacimientos Petroliferos
Fiscales S.A. (ADR)
(a)(12)................... 3,705,624 5,535,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA* 193,000 Canadian Pacific,
Ltd.(11).................. 3,955,344 5,488,438 0.7
90,400 Magna International, Inc.
(Class A)(2).............. 4,226,670 5,440,950 0.6
64,900 Potash Corp. of Saskatchewan
Inc.(10).................. 4,386,182 4,871,556 0.6
------------ ------------ -----
12,568,196 15,800,944 1.9
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--FRANCE* 110,000 Scor S.A. (ADR)(a)(8)....... 4,196,500 4,468,750 0.5
71,100 +SGS-Thomson
Microelectronics N.V. (NY
Registered Shares)(14).... 2,663,166 5,688,000 0.7
------------ ------------ -----
6,859,666 10,156,750 1.2
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--ITALY* 65,000 Gucci Group N.V. (NY
Registered Shares)(1)..... 4,717,338 4,184,375 0.5
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--JAPAN* 60,000 Sony Corporation (ADR)
(a)(6).................... 4,401,025 5,280,000 0.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
195
<PAGE> 197
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOREIGN--MEXICO* 154,000 Panamerican Beverages, Inc.
(Class A)(3).............. $ 3,042,928 $ 5,062,750 0.6%
122,000 Telefonos de Mexico, S.A. de
C.V. (ADR) (a)(16)........ 4,649,857 5,825,500 0.7
------------ ------------ -----
7,692,785 10,888,250 1.3
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--SOUTH AFRICA* 129,000 De Beers Consolidated Mines
Ltd. (ADR) (a)(9)......... 4,269,897 4,756,875 0.6
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--SOUTH KOREA* 178,388 +Hyundai Engineering &
Construction Co., Ltd.
(GDR) (b)(7)++............ 2,289,371 735,851 0.1
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--SWITZERLAND* 93,000 Novartis AG (ADR) (a)(13)... 4,067,375 7,440,000 0.9
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN--UNITED KINGDOM* 147,300 British Steel PLC (ADR)
(a)(15)................... 3,881,312 3,719,325 0.5
143,000 Grand Metropolitan PLC (ADR)
(a)(3).................... 3,842,630 5,603,813 0.7
87,000 Imperial Chemical Industries
PLC (ADR) (a)(4).......... 4,515,596 4,948,125 0.6
75,000 Rio Tinto PLC (ADR)
(a)(9).................... 4,511,938 5,315,625 0.6
93,000 Vodafone Group PLC (ADR)
(a)(5).................... 3,260,062 4,504,688 0.5
------------ ------------ -----
20,011,538 24,091,576 2.9
- ---------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 222,200 Black & Decker
Corporation............... 7,442,791 8,263,062 1.0
- ---------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 237,000 +Oxford Health Plans,
Inc. ..................... 14,443,034 17,004,750 2.0
544,000 +Tenet Healthcare
Corporation............... 14,135,231 16,082,000 1.9
------------ ------------ -----
28,578,265 33,086,750 3.9
- ---------------------------------------------------------------------------------------------------------------------
HOSPITAL SUPPLIES 170,300 Abbott Laboratories......... 6,954,146 11,367,525 1.4
- ---------------------------------------------------------------------------------------------------------------------
INSURANCE 143,000 Aetna Inc. ................. 10,458,866 14,639,625 1.7
204,000 Allstate Corp. ............. 7,027,039 14,892,000 1.8
95,100 +Hartford Life, Inc. (Class
A)........................ 3,085,805 3,566,250 0.4
92,900 Nationwide Financial
Services, Inc. ........... 2,206,433 2,467,656 0.3
280,000 Travelers Group, Inc. ...... 14,730,231 17,657,500 2.1
40,100 Travelers Property Casualty
Corp. (Class A)........... 1,551,925 1,598,987 0.2
392,000 UNUM Corporation............ 12,508,249 16,464,000 2.0
------------ ------------ -----
51,568,548 71,286,018 8.5
- ---------------------------------------------------------------------------------------------------------------------
LEISURE & TOURISM 466,000 Brunswick Corporation....... 11,563,456 14,562,500 1.7
96,834 TCI Pacific Communications
(Convertible Preferred)... 9,353,653 9,925,485 1.2
------------ ------------ -----
20,917,109 24,487,985 2.9
- ---------------------------------------------------------------------------------------------------------------------
MACHINERY 236,000 +American Standard
Companies, Inc............ 8,110,065 10,561,000 1.2
266,200 Ingersoll-Rand Company...... 11,982,947 16,437,850 2.0
------------ ------------ -----
20,093,012 26,998,850 3.2
- ---------------------------------------------------------------------------------------------------------------------
NATURAL GAS 330,000 Enron Corp. ................ 12,657,402 13,468,125 1.6
- ---------------------------------------------------------------------------------------------------------------------
NATURAL GAS PIPELINES 162,300 IMC Global, Inc. ........... 6,046,641 5,680,500 0.7
- ---------------------------------------------------------------------------------------------------------------------
OIL SERVICE 350,000 Dresser Industries, Inc. ... 8,202,968 13,037,500 1.6
54,000 Schlumberger Ltd. .......... 4,559,877 6,750,000 0.8
207,700 +Smith International,
Inc. ..................... 9,470,352 12,617,775 1.5
------------ ------------ -----
22,233,197 32,405,275 3.9
- ---------------------------------------------------------------------------------------------------------------------
PAPER 292,000 Kimberly-Clark
Corporation............... 11,227,298 14,527,000 1.7
- ---------------------------------------------------------------------------------------------------------------------
PETROLEUM 98,300 Pennzoil Co. ............... 4,198,464 7,544,525 0.9
267,000 Unocal Corp. ............... 8,987,715 10,362,937 1.2
------------ ------------ -----
13,186,179 17,907,462 2.1
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
196
<PAGE> 198
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PHARMACEUTICALS 230,000 American Home Products
Corporation............... $ 13,525,963 $ 17,595,000 2.1%
155,000 Merck & Co., Inc. .......... 9,424,559 16,042,500 1.9
------------ ------------ -----
22,950,522 33,637,500 4.0
- ---------------------------------------------------------------------------------------------------------------------
RAILROADS 121,000 Burlington Northern Santa Fe
Inc. ..................... 10,302,517 10,874,875 1.3
- ---------------------------------------------------------------------------------------------------------------------
REAL ESTATE 329,000 Prentiss Properties Trust... 6,849,900 8,430,625 1.0
INVESTMENT TRUSTS
- ---------------------------------------------------------------------------------------------------------------------
RETAIL 275,000 Sears, Roebuck & Co. ....... 11,050,732 14,781,250 1.8
- ---------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 340,100 Rite Aid Corporation........ 11,262,366 16,962,487 2.0
- ---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 266,000 +Airtouch Communications,
Inc....................... 7,257,322 7,281,750 0.9
350,000 +Tele-Communications, Inc.
(Class A) (Convertible
Preferred)................ 5,028,644 5,184,375 0.6
403,000 +WorldCom, Inc. ............ 10,119,966 12,870,812 1.5
------------ ------------ ----------
22,405,932 25,336,937 3.0
- ---------------------------------------------------------------------------------------------------------------------
TOBACCO 177,000 Philip Morris Companies,
Inc. ..................... 5,568,259 7,854,375 0.9
- ---------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 428,300 Carnival Corp. (Class A).... 12,648,699 17,667,375 2.1
206,550 Starwood Lodging Trust...... 5,380,668 8,817,103 1.1
------------ ------------ ----------
18,029,367 26,484,478 3.2
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 275,000 El Paso Natural Gas
Company................... 13,831,806 15,125,000 1.8
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS & WARRANTS..... 619,131,741 797,896,654 95.3
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER ** $34,480,000 General Motors Acceptance
Corp., 6.25% due
7/01/1997................. 34,474,014 34,474,014 4.1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 34,474,014 34,474,014 4.1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $653,605,755 832,370,668 99.4
=============
UNREALIZED APPRECIATION ON
FORWARD FOREIGN EXCHANGE
CONTRACTS***.............. 66,975 0.0
OTHER ASSETS LESS
LIABILITIES............... 4,881,559 0.6
------------ ----------
NET ASSETS.................. $837,319,202 100.0%
============= ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
* Corresponding industry groups for foreign securities:
<TABLE>
<S> <C> <C>
(1) Apparel (7) Engineering & Construction (13) Pharmaceuticals
(2) Automobile Parts (8) Insurance (14) Semiconductors
(3) Beverages (9) Mining (15) Steel
(4) Chemicals (10) Natural Gas Pipelines (16) Telecommunications
(5) Communications (11) Natural Resources
(6) Electronics (12) Petroleum
</TABLE>
** 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.
197
<PAGE> 199
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
*** Forward foreign exchange contracts sold as of June 30, 1997 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
FOREIGN CURRENCY SOLD DATE (NOTE 1b)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Pounds Sterling) 15,400,000.......................................................... August 1997 $ 66,975
- ---------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--
NET (US$ COMMITMENT--$25,656,092) $ 66,975
========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
See Notes to Financial Statements.
198
<PAGE> 200
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$653,605,755) (Note 1a)........................... $832,370,668
Unrealized appreciation on forward foreign exchange contracts (Note 1b)................... 66,975
Cash...................................................................................... 14
Receivables:
Securities sold......................................................................... $12,897,781
Dividends............................................................................... 975,661
Capital shares sold..................................................................... 20,013 13,893,455
-----------
Prepaid expenses and other assets (Note 1f)............................................... 7,995
------------
Total assets.............................................................................. 846,339,107
------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased.................................................................... 8,538,562
Investment adviser (Note 2)............................................................. 307,877
Capital shares redeemed................................................................. 117,644 8,964,083
-----------
Accrued expenses and other liabilities.................................................... 55,822
------------
Total liabilities......................................................................... 9,019,905
------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................ $837,319,202
============
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares authorized.............................. $ 2,322,775
Paid-in capital in excess of par.......................................................... 617,805,479
Undistributed investment income--net...................................................... 5,489,801
Undistributed realized capital gains on investments and foreign currency
transactions--net....................................................................... 32,869,259
Unrealized appreciation on investments and foreign currency transactions--net............. 178,831,888
------------
NET ASSETS--Equivalent to $36.05 per share based on 23,227,752 shares outstanding......... $837,319,202
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
199
<PAGE> 201
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $114,542 foreign withholding tax)....................................... $ 6,302,165
Interest and discount earned.............................................................. 1,028,794
Other income.............................................................................. 26,991
------------
Total income.............................................................................. 7,357,950
------------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)......................................................... $ 1,707,860
Accounting services (Note 2).............................................................. 83,939
Professional fees......................................................................... 34,331
Custodian fees............................................................................ 30,538
Directors' fees and expenses.............................................................. 7,168
Transfer agent fees (Note 2).............................................................. 2,430
Pricing................................................................................... 923
Other..................................................................................... 969
-----------
Total expenses............................................................................ 1,868,158
------------
Investment income--net.................................................................... 5,489,792
------------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET
(NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net........................................................................ 33,341,959
Foreign currency transactions--net...................................................... (6,027) 33,335,932
-----------
Change in unrealized appreciation on:
Investments--net........................................................................ 79,957,844
Foreign currency transactions--net...................................................... 66,975 80,024,819
----------- ------------
Net realized and unrealized gain on investments and foreign currency transactions......... 113,360,751
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................................... $118,850,543
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
200
<PAGE> 202
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................................... $ 5,489,792 $13,443,795
Realized gain on investments and foreign currency transactions--net......... 33,335,932 36,740,820
Change in unrealized appreciation on investments and foreign currency
transactions--net........................................................... 80,024,819 67,969,744
------------ ------------
Net increase in net assets resulting from operations........................ 118,850,543 118,154,359
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net...................................................... (5,217,029) (14,235,069)
Realized gain on investments--net........................................... (37,207,312) (84,325,410)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders................................................................ (42,424,341) (98,560,479)
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions.............................................................. (33,382,228) 130,130,747
------------ ------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................................ 43,043,974 149,724,627
Beginning of period......................................................... 794,275,228 644,550,601
------------ ------------
End of period*.............................................................. $837,319,202 $794,275,228
============ ============
- ------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................................... $ 5,489,801 $ 5,217,038
============ ============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
201
<PAGE> 203
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN FOR THE SIX
THE FINANCIAL STATEMENTS. MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997+ 1996+ 1995+ 1994+ 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 32.83 $ 32.76 $ 27.74 $ 29.02 $ 25.48
-------- -------- -------- -------- --------
Investment income--net...................... .23 .58 .58 .38 .24
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... 4.75 4.44 5.48 (.74) 3.46
-------- -------- -------- -------- --------
Total from investment operations............ 4.98 5.02 6.06 (.36) 3.70
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.................... (.22) (.66) (.45) (.25) (.12)
Realized gain on investments--net......... (1.54) (4.29) (.59) (.67) (.04)
-------- -------- -------- -------- --------
Total dividends and distributions........... (1.76) (4.95) (1.04) (.92) (.16)
-------- -------- -------- -------- --------
Net asset value, end of period.............. $ 36.05 $ 32.83 $ 32.76 $ 27.74 $ 29.02
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......... 16.07%++ 17.90% 22.61% (1.20%) 14.57%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... .48%* .49% .51% .54% .62%
======== ======== ======== ======== ========
Investment income--net...................... 1.41%* 1.89% 1.94% 1.39% 1.07%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $837,319 $794,275 $644,551 $464,360 $309,420
======== ======== ======== ======== ========
Portfolio turnover.......................... 44.00% 88.30% 140.32% 60.57% 88.25%
======== ======== ======== ======== ========
Average commission rate paid+++............. $ .0610 $ .0615 -- -- --
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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 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.
202
<PAGE> 204
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Quality Equity Fund (the "Fund") is
classified as "diversified", as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--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. Short-term securities are valued
at amortized cost, which approximates market value. 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--The Fund 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--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--The Fund may write covered call options. When the 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 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
gain or loss to the extent the cost of the closing transaction exceeds the
premium received).
Written options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) 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 Fund'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 already passed are subsequently
recorded when
203
<PAGE> 205
- --------------------------------------------------------------------------------
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) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. MLAM is responsible for the management of the Company's
portfolios and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee at the following annual rates:
0.500% of the Fund's average daily net assets not exceeding $250 million; 0.450%
of average daily net assets in excess of $250 million but not exceeding $300
million; 0.425% of average daily net assets in excess of $300 million but not
exceeding $400 million; and 0.400% of average daily net assets in excess of $400
million.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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 six months ended June 30, 1997, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $7,284 in commissions on the
execution of portfolio security transactions.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
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 Fund's distributor, and/or
ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1997 were $330,335,806 and $399,737,073, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Realized
Gains Unrealized
(Losses) Gains
---------------------------------------------------------
<S> <C> <C>
Long-term investments......................... $ 33,341,890 $178,764,913
Short-term investments........................ 69 --
Forward foreign exchange contracts............ -- 66,975
Foreign currency transactions................. (6,027) --
----------- ------------
Total......................................... $ 33,335,932 $178,831,888
=========== ============
- ---------------------------------------------------------
</TABLE>
At June 30, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $178,764,913, of which $183,367,614 related to appreciated securities
and $4,602,701 related to depreciated securities. At June 30, 1997, the
aggregate cost of investments for Federal income tax purposes was $653,605,755.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $(33,382,228) and $130,130,747 for the six months ended June 30, 1997 and
for the year ended December 31, 1996, respectively.
Transactions in capital shares were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended Dollar
June 30, 1997 Shares Amount
---------------------------------------------------------
<S> <C> <C>
Shares sold..................................... 457,973 $ 14,855,531
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 1,378,757 42,424,341
---------- ------------
Total issued.................................... 1,836,730 57,279,872
Shares redeemed................................. (2,803,222) (90,662,100)
---------- ------------
Net decrease.................................... (966,492) $(33,382,228)
========== ============
- ---------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
<S> <C> <C>
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
========= ============
- ---------------------------------------------------------
</TABLE>
204
<PAGE> 206
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
JUNE 30, 1997--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1997, Reserve Assets Fund's net annualized
yield was 5.01%*. The Fund's 7-day yield as of June 30, 1997 was 5.13%*. The
average portfolio maturity was 69 days at June 30, 1997, compared to 70 days at
December 31, 1996.
THE ENVIRONMENT
Shifting investor perceptions regarding the direction of the US economy
brought continued volatility to the US financial markets during much of the
six-month period ended June 30, 1997. Increasing evidence of noninflationary
economic growth boosted investor confidence, which was further confirmed shortly
after the quarter's close when, as widely expected, the Federal Reserve Board
chose to leave monetary policy unchanged. This confluence of positive indicators
helped produce a significant rally in the US stock market. A slight decline in
interest rates resulted in a modest positive total return for US fixed-income
investments.
Current consensus expectations are for the US economy's rate of growth to lose
some momentum. Although gross domestic product growth for the first quarter of
the year was revised slightly upward to 5.9%, there are indications that the
second quarter's rate of growth will be lower. At the same time, inflationary
pressures remain contained, supported by the June employment report showing
moderate growth in wages along with a slight increase in unemployment. It
remains to be seen whether economic activity moderates enough to rule out future
Federal Reserve Board monetary policy tightenings.
During the first three months of 1997 we maintained a relatively cautious
investment bias given the strength of the economy. During the second half of the
six-month period ended June 30, 1997 we grew more optimistic in response to
moderating economic growth.
The Fund's composition at the end of June and as of our last report is
detailed below:
<TABLE>
<CAPTION>
- -------------------------------------------------------
Issue 6/30/97 12/31/96
- -------------------------------------------------------
<S> <C> <C>
Bank Notes...................... 5.2% 1.3%
Certificates of Deposit......... 4.8 2.2
Certificates of Deposit--
Yankee........................ 0.5 --
Commercial Paper................ 47.1 43.5
Corporate Notes................. 4.2 8.7
Funding Agreements.............. 4.8 4.4
Master Notes.................... 4.8 4.4
Medium-Term Notes............... 3.6 --
US Government Agency &
Instrumentality
Obligations--Discount......... 2.8 5.6
US Government, Agency &
Instrumentality
Obligations--Non-Discount..... 21.7 30.7
Liabilities in Excess of Other
Assets........................ -- (0.8)
Other Assets Less Liabilities... 0.5 --
----- -----
Total........................... 100.0% 100.0%
===== =====
</TABLE>
IN CONCLUSION
We appreciate your investment in Reserve Assets Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Jacqueline Rogers
Jacqueline Rogers
Vice President and Portfolio Manager
August 13, 1997
- ---------------
* Based on a constant investment throughout the period, with dividends
compounded daily, and reflecting a net return to the investor after all
expenses.
205
<PAGE> 207
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--5.2% $ 300,000 Bank of America, N.T. & S.A............. 5.63% 12/30/97 $ 299,505
100,000 Bank of America, N.T. & S.A............. 5.93 6/24/98 99,890
300,000 First Bank, NA+......................... 5.648 11/19/97 299,989
200,000 KeyBank, N.A.+.......................... 5.57 5/06/98 199,918
200,000 Northern Trust Co., Chicago............. 5.96 6/17/98 199,827
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$1,099,744) 1,099,129
- ----------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT--4.8% 500,000 Chase Manhattan Bank USA, Delaware...... 5.53 7/22/97 499,930
500,000 Morgan Guaranty Trust Co. of N.Y. ...... 5.71 1/06/98 499,254
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$999,901) 999,184
- ----------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 100,000 Westdeutsche Landesbank Girozentrale.... 5.94 6/29/98 99,892
DEPOSIT--YANKEE--0.5%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT--YANKEE (COST--$99,933) 99,892
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--47.1% 895,000 Allomon Funding Corp. .................. 5.59 7/18/97 892,637
248,000 Associates First Capital Corp. ......... 5.60 8/04/97 246,688
1,006,000 Atlantic Asset Securitization Corp. .... 5.60 7/14/97 1,003,966
395,000 BBL North America Inc. ................. 5.60 8/20/97 391,922
421,000 Bear Stearns Companies, Inc. ........... 5.65 7/22/97 419,612
490,000 CSW Credit, Inc. ....................... 5.58 7/21/97 488,481
475,000 Countrywide Home Loans, Inc. ........... 5.67 7/21/97 473,509
278,000 Finova Capital Corp. ................... 5.67 7/09/97 277,649
450,000 Finova Capital Corp. ................... 5.68 8/04/97 447,590
964,000 General Electric Capital Corp. ......... 5.68 11/26/97 941,648
250,000 General Motors Acceptance Corp. ........ 5.48 7/09/97 249,685
350,000 General Motors Acceptance Corp. ........ 5.40 7/23/97 348,792
400,000 General Motors Acceptance Corp. ........ 5.71 12/01/97 390,395
155,000 Korea Development Bank.................. 5.70 8/12/97 153,986
245,000 Lehman Brothers Holdings, Inc. ......... 5.57 7/08/97 244,735
200,000 Lehman Brothers Holdings, Inc. ......... 5.70 8/04/97 198,929
700,000 Lexington Parker Capital Co. LLC........ 5.58 8/11/97 695,552
1,000,000 National Fleet Funding Corp. ........... 5.59 7/18/97 997,360
493,000 Toshiba International Finance (UK) PLC.. 5.64 7/14/97 491,994
500,000 Toshiba International Finance (UK) PLC.. 5.70 8/14/97 496,572
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$9,851,428) 9,851,702
- ----------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--4.2% 872,816 LABS Trust Series 1996-C Senior Notes+.. 5.688 12/29/97 872,816
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$872,816) 872,816
- ----------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--4.8% 1,000,000 Jackson National Life Insurance Co.+.... 5.72 5/01/98 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$1,000,000) 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
MASTER NOTES--4.8% 1,000,000 Goldman Sachs Group, L.P.+.............. 5.60 8/01/97 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (COST--$1,000,000) 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
MEDIUM-TERM NOTES--3.6% 250,000 Bank of Scotland Treasury Services PLC.. 5.95 6/18/98 249,850
100,000 International Business Machines
Corp. ................................ 5.67 1/28/98 99,810
400,000 International Business Machines
Corp. ................................ 5.93 3/18/98 399,472
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL MEDIUM-TERM NOTES (COST--$749,520) 749,132
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
206
<PAGE> 208
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US GOVERNMENT AGENCY & $ 62,000 Federal Home Loan Mortgage Corp. ....... 5.61% 8/05/97 $ 61,670
INSTRUMENTALITY OBLIGATIONS-- 90,000 Federal Home Loan Mortgage Corp. ....... 5.53 8/28/97 89,213
DISCOUNT--2.8% 340,000 Federal Home Loan Mortgage Corp. ....... 5.52 9/18/97 335,926
50,000 Federal National Mortgage Association... 5.62 8/04/97 49,742
20,000 Federal National Mortgage Association... 5.53 8/19/97 19,849
35,000 Federal National Mortgage Association... 5.54 8/26/97 34,704
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT AGENCY & INSTRUMENTALITY
OBLIGATIONS--DISCOUNT (COST--$591,023) 591,104
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY & 100,000 Federal Home Loan Bank.................. 5.95 12/29/98 99,797
INSTRUMENTALITY OBLIGATIONS-- 100,000 Federal Home Loan Mortgage Corp. ....... 6.36 5/20/99 99,845
NON-DISCOUNT--21.7% 300,000 Federal National Mortgage Association... 5.47 12/30/97 299,520
500,000 Federal National Mortgage
Association+.......................... 5.27 3/27/98 499,750
500,000 Federal National Mortgage
Association+.......................... 5.31 4/24/98 499,844
1,000,000 Federal National Mortgage
Association+.......................... 6.00 5/14/98 1,000,000
400,000 US Treasury Notes....................... 8.50 7/15/97 400,502
200,000 US Treasury Notes....................... 6.00 8/31/97 200,156
250,000 US Treasury Notes....................... 5.75 9/30/97 250,195
650,000 US Treasury Notes....................... 5.625 10/31/97 650,304
200,000 US Treasury Notes....................... 5.375 11/30/97 199,844
150,000 US Treasury Notes....................... 5.25 12/31/97 149,813
200,000 US Treasury Notes....................... 5.625 11/30/98 199,031
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$4,549,697) 4,548,601
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--
$20,814,062)--99.5%..................... 20,811,560
OTHER ASSETS LESS LIABILITIES--0.5%..... 114,223
-----------
NET ASSETS--100.0%...................... $20,925,783
===========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government, Agency & Instrumentality
Obligations are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund. Other securities bear
interest rate at the rates shown, payable at fixed dates or upon maturity. The
interest rates on variable rate securities are adjusted periodically based
upon appropriate indexes; the interest rates shown are the rates in effect at
June 30,1997.
+ Variable Rate Note.
See Notes to Financial Statements.
207
<PAGE> 209
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $20,814,062*) (Note 1a)............................. $20,811,560
Cash.......................................................................................... 1,790
Receivables:
Interest.................................................................................... $105,543
Capital shares sold......................................................................... 25,018 130,561
--------
Prepaid expenses and other assets............................................................. 2,585
-----------
Total assets.................................................................................. 20,946,496
-----------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser (Note 2)................................................................. 8,171
Capital shares redeemed..................................................................... 5,780 13,951
--------
Accrued expenses and other liabilities........................................................ 6,762
-----------
Total liabilities............................................................................. 20,713
-----------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................................................... $20,925,783
===========
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 500,000,000 shares authorized.................................. $ 2,092,828
Paid-in capital in excess of par.............................................................. 18,835,457
Unrealized depreciation on investments--net................................................... (2,502)
-----------
NET ASSETS--Equivalent to $1.00 per share based on 20,928,284 shares of beneficial interest
outstanding................................................................................. $20,925,783
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. As of June 30, 1997, net unrealized
depreciation for Federal income tax purposes amounted to $2,502, of which $752
related to appreciated securities and $3,254 related to depreciated
securities.
See Notes to Financial Statements.
208
<PAGE> 210
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and discount earned...................................................................... $600,596
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)................................................................. $53,498
Custodian fees.................................................................................... 4,211
Professional fees................................................................................. 2,937
Accounting services (Note 2)...................................................................... 2,770
Transfer agent fees (Note 2)...................................................................... 2,470
Directors' fees and expenses...................................................................... 175
Other............................................................................................. 191
-------
Total expenses.................................................................................... 66,252
--------
Investment income--net............................................................................ 534,344
--------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTE 1c):
Realized gain on investments--net................................................................. 1,073
Change in unrealized depreciation on investments--net............................................. (2,250)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................................. $533,167
========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
209
<PAGE> 211
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................................... $ 534,344 $ 1,179,223
Realized gain on investments--net........................................... 1,073 3,049
Change in unrealized appreciation/depreciation on investments--net.......... (2,250) (14,201)
----------- ------------
Net increase in net assets resulting from operations........................ 533,167 1,168,071
----------- ------------
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1d):
Investment income--net...................................................... (534,344) (1,179,223)
Realized gain on investments--net........................................... (1,073) (3,049)
----------- ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders................................................................ (535,417) (1,182,272)
----------- ------------
- ------------------------------------------------------------------------------------------------------------------
BENEFICIAL INTEREST TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares............................................ 3,568,162 6,967,844
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions (Note 1d)....................................... 535,496 1,182,349
----------- ------------
4,103,658 8,150,193
Cost of shares redeemed..................................................... (6,060,996) (10,800,490)
----------- ------------
Net decrease in net assets derived from beneficial interest transactions.... (1,957,338) (2,650,297)
----------- ------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................................ (1,959,588) (2,664,498)
Beginning of period......................................................... 22,885,371 25,549,869
----------- ------------
End of period............................................................... $20,925,783 $22,885,371
=========== ============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
210
<PAGE> 212
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE SIX
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net................................... .0248 .0501 .0543 .0371 .0268
Realized and unrealized gain (loss) on
investments--net......................................... (.0001) (.0005) .0018 (.0009) .0005
-------- -------- -------- -------- --------
Total from investment operations......................... .0247 .0496 .0561 .0362 .0273
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net................................. (.0248) (.0501) (.0543) (.0362) (.0268)
Realized gain on investments--net...................... --+ (.0001) (.0004) --+ (.0005)
-------- -------- -------- -------- --------
Total dividends and distributions........................ (.0248) (.0502) (.0547) (.0362) (.0273)
-------- -------- -------- -------- --------
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....................... 5.01%* 5.13% 5.61% 3.79% 2.77%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. .62%* .61% .61% .65% .70%
======== ======== ======== ======== ========
Investment income and realized gain on investments--net.. 5.00%* 4.96% 5.47% 3.75% 2.73%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $ 20,926 $ 22,885 $ 25,550 $ 32,196 $ 30,168
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.0001 per share.
See Notes to Financial Statements.
211
<PAGE> 213
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 16 separate funds 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. Reserve Assets Fund (the "Fund") is
classified as "diversified" as defined in the Investment Company Act of 1940.
These unaudited 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.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--Investments 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 such 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. For purposes of valuation, the
maturity of a variable rate security is deemed to be the next coupon date on
which the interest rate is to be adjusted. 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) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no Federal
income tax provision is required.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of discount) is recognized on the
accrual basis. Realized gains and losses on security transactions are determined
on the identified cost basis.
(d) Dividends and distributions--The Fund declares dividends daily and
reinvests monthly such dividends (net of non-resident alien tax and back-up
withholding tax) in additional shares of beneficial interest at net asset value.
Dividends and distributions are declared from the total of net investment income
and net realized gain or loss on investments.
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 Fund. For such services, the Fund
pays a monthly fee at the following annual rates: 0.500% of the Fund's average
daily net assets not exceeding $500 million; 0.425% of average daily net assets
in excess of $500 million but not exceeding $750 million; 0.375% of average
daily net assets in excess of $750 million but not exceeding $1 billion; 0.350%
of average daily net assets in excess of $1 billion but not exceeding $1.5
billion; 0.325% of average daily net assets in excess of $1.5 billion but not
exceeding $2 billion; 0.300% of average daily net assets in excess of $2 billion
but not exceeding $2.5 billion and 0.275% of average daily net assets in excess
of $2.5 billion.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the 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.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM,
212
<PAGE> 214
- --------------------------------------------------------------------------------
PSI, MLFDS, Merrill Lynch Funds Distributor, Inc., a wholly-owned subsidiary of
Merrill Lynch Group, Inc., which is the Fund's distributor, and/or ML & Co.
3. CAPITAL SHARE TRANSACTIONS:
The number of shares sold and redeemed during the periods corresponds to the
amounts included in the Statements of Changes in Net Assets with respect to net
proceeds from sale of shares and cost of shares redeemed, respectively, since
shares are recorded at $1.00 per share.
213
<PAGE> 215
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<PAGE> 216
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<PAGE> 217
[This page intentionally left blank.]
<PAGE> 218
- ---------------------------------------------------------
MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.
- ---------------------------------------------------------
PRINCIPAL OFFICE OF THE FUNDS
Box 9011
Princeton, NJ 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
CUSTODIAN
For all Funds except Developing Capital
Markets Focus Fund:
The Bank of New York
110 Washington Street
New York, NY 10286
For Developing Capital Markets Focus Fund:
Chase Manhattan Bank N.A.
Chase Metro Tech Center
Brooklyn, NY 11245
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
DIRECTORS AND OFFICERS
Arthur Zeikel Jay C. Harbeck
President Vice President
Joe Grills Vincent T. Lathbury III
Director Vice President
Walter Mintz Peter A. Lehman
Director Vice President
Robert S. Salomon Jr. Kevin J. McKenna
Director Vice President
Melvin R. Seiden Eric S. Mitofsky
Director Vice President
Stephen B. Swensrud Robert Parish
Director Vice President
Terry K. Glenn Grace Pineda
Executive Vice President Vice President
Norman R. Harvey Kevin M. Rendino
Senior Vice President Vice President
Joseph T. Monagle Jr. Thomas R. Robinson
Senior Vice President Vice President
Andrew Bascand Jacqueline Rogers
Vice President Vice President
Donald C. Burke Walter D. Rogers
Vice President Vice President
Sean J. Casey Aldona A. Schwartz
Vice President Vice President
Daniel V. Szemis
Vice President
Gerald M. Richard
Treasurer
Jennifer L. Sawin
Secretary
- --------------------------------------------------------------------------------
As of December 31, 1996, N. John Hewitt retired as Senior Vice President of the
Company. His colleagues at Merrill Lynch Asset Management join the Company's
Board of Directors in wishing Mr. Hewitt well in his retirement.
- --------------------------------------------------------------------------------
<PAGE> 219
- --------------------------------------------------------------------------------
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Funds unless accompanied or preceded by the Funds'
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of non-money market fund shares will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. For Domestic
Money Market Fund and Reserve Assets Fund, the Funds seek to maintain a
consistent $1.00 net asset value per share, although this cannot be assured. An
investment in the Funds is neither insured nor guaranteed by the US Government.
Statements and other information herein are as dated and are subject to change.
Merrill Lynch Variable Series Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
#16897-6/97
