<PAGE> 1
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE
-------------------------------------------------------------------------
SERIES FUNDS, INC.
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Balanced Fund................ 1
Basic Value Focus Fund................ 12
Capital Focus Fund.................... 25
Developing Capital Markets Focus
Fund................................ 36
Domestic Money Market Fund............ 55
Global Bond Focus Fund................ 64
Global Growth Focus Fund.............. 79
Global Strategy Focus Fund............ 93
Global Utility Focus Fund............. 109
Government Bond Fund.................. 123
High Current Income Fund.............. 134
Index 500 Fund........................ 152
International Equity Focus Fund....... 167
Natural Resources Focus Fund.......... 189
Prime Bond Fund....................... 203
Quality Equity Fund................... 218
Reserve Assets Fund................... 230
Special Value Focus Fund.............. 239
</TABLE>
Semi-Annual Report
June 30, 1998
<PAGE> 2
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
As of June 30, 1998, the Fund's asset allocation was: US stocks, 62% of net
assets; US bonds, 31%; and cash reserves, 7%.
During the first half of 1998, we increased the Fund's allocation to US
equities from 56% of net assets to 62%. Within the US equity portion, we
continued to place emphasis on the shares of companies that we believe can
benefit from a healthy US economy and a high level of consumer confidence. We
also preferred companies that, in our view, have limited exposure to the
economic problems of Asia. The Fund's largest weightings as of June 30, 1998 was
in the consumer-related sectors, both cyclical and staples. Other sectors with
significant representation were financial services and technology. We reduced
the Fund's representation in the largest-capitalization issues through the sales
of positions in American Express Company, Microsoft Corp. and Pfizer, Inc.
While reducing the Fund's allocation to US bonds from 41% of net assets to 31%
during the six months ended June 30, 1998, we also reduced the average duration
from 5.8 years to 5.2 years. Our increasingly cautious view on US bonds
reflected our belief that there was limited potential for a significant further
decline in US interest rates. By June 30, 1998, strength in domestic consumer
demand in the United States seemed to be offsetting the impact that the weakness
in Asian economies was having on US exports. While US inflation remained
subdued, we believed that conditions for a significant further deceleration in
inflation, a prerequisite for a meaningful additional decline in long-term US
interest rates, were absent.
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
August 3, 1998
1
<PAGE> 3
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +21.17% +11.46%
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset
values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset
value on the ex-dividend date. Insurance-related fees and
expenses are not reflected in these returns. Past results
shown should not be considered a representation of future
performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
<S> <C>
Year Ended 6/30/98 +21.17%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +11.53
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +11.41
- --------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 4
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 42,000 GenCorp, Inc. .............. $ 1,226,767 $ 1,060,500 0.5%
12,500 +Orbital Sciences
Corporation............... 343,704 467,188 0.2
------------ ------------ -----
1,570,471 1,527,688 0.7
- -----------------------------------------------------------------------------------------------------------------------
AIRLINES 29,700 +US Airways Group Inc. ..... 1,142,585 2,353,725 1.2
- -----------------------------------------------------------------------------------------------------------------------
AUTO--RELATED 54,000 +Avis Rent-A-Car, Inc. ..... 1,182,704 1,336,500 0.7
41,200 Hertz Corp. (Class A)....... 1,418,456 1,825,675 0.9
------------ ------------ -----
2,601,160 3,162,175 1.6
- -----------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 43,000 Federal-Mogul Corp. ........ 1,768,833 2,902,500 1.5
- -----------------------------------------------------------------------------------------------------------------------
BANKING 53,300 Bank of New York, Co.,
Inc. ..................... 1,415,126 3,234,644 1.6
20,600 BankAmerica Corp. .......... 1,124,984 1,780,613 0.9
------------ ------------ -----
2,540,110 5,015,257 2.5
- -----------------------------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 46,000 First Union Corporation..... 2,270,942 2,679,500 1.3
52,600 +Heller Financial, Inc...... 1,465,227 1,578,000 0.8
34,600 Providian Financial
Corporation............... 2,163,163 2,718,263 1.4
------------ ------------ -----
5,899,332 6,975,763 3.5
- -----------------------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 31,000 +Chancellor Media Corp. .... 1,038,970 1,538,375 0.8
57,076 +Tele-Communications, Inc.
(Class A)................. 1,034,406 2,190,292 1.1
108,948 +Tele-Communications TCI
Ventures Group............ 919,621 2,178,960 1.1
------------ ------------ -----
2,992,997 5,907,627 3.0
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 41,300 Great Lakes Chemical
Corp. .................... 1,725,882 1,628,769 0.8
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 76,100 +Gartner Group, Inc. (Class
A)........................ 2,549,768 2,658,744 1.3
- -----------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 66,400 +WorldCom Inc. ............. 1,943,055 3,207,950 1.6
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 23,300 +Cisco Systems, Inc. ....... 1,395,722 2,145,056 1.1
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 46,700 +BMC Software, Inc. ........ 992,649 2,425,481 1.2
29,100 Computer Associates
International, Inc. ...... 887,919 1,616,869 0.8
------------ ------------ -----
1,880,568 4,042,350 2.0
- -----------------------------------------------------------------------------------------------------------------------
COMPUTERS 87,200 COMPAQ Computer
Corporation............... 2,591,175 2,474,300 1.2
13,500 International Business
Machines Corp. ........... 1,413,232 1,549,969 0.8
------------ ------------ -----
4,004,407 4,024,269 2.0
- -----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 95,800 Dial Corporation (The)...... 1,923,061 2,484,813 1.3
- -----------------------------------------------------------------------------------------------------------------------
CONTAINERS 56,400 +Owens-Illinois, Inc. ...... 1,714,789 2,523,900 1.3
- -----------------------------------------------------------------------------------------------------------------------
COSMETICS 18,200 Gillette Company (The)...... 1,042,026 1,031,712 0.5
- -----------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 23,200 General Electric Company.... 1,694,237 2,111,200 1.1
16,100 Intel Corporation........... 1,191,529 1,192,406 0.6
24,200 Texas Instruments Inc. ..... 1,562,419 1,411,162 0.7
------------ ------------ -----
4,448,185 4,714,768 2.4
- -----------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT 48,700 +Premier Parks Inc. ........ 2,742,473 3,244,638 1.6
- -----------------------------------------------------------------------------------------------------------------------
FOOD 32,000 +Keebler Foods Co. ......... 903,984 880,000 0.4
- -----------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 35,600 Black & Decker Corporation
(The)..................... 1,240,142 2,171,600 1.1
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE 33,300 Allmerica Financial
Corp. .................... 2,047,226 2,164,500 1.1
44,800 Equitable Companies Inc.
(The)..................... 2,363,179 3,357,200 1.7
46,700 Travelers Group, Inc. ...... 1,922,873 2,831,187 1.4
19,400 UNUM Corporation............ 628,714 1,076,700 0.5
------------ ------------ -----
6,961,992 9,429,587 4.7
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MACHINERY 55,400 Ingersoll-Rand Co. ......... $ 1,808,760 $ 2,441,062 1.2%
- -----------------------------------------------------------------------------------------------------------------------
MANUFACTURING 35,600 Tyco International Ltd. .... 1,861,369 2,242,800 1.1
- -----------------------------------------------------------------------------------------------------------------------
MEDICAL EQUIPMENT 34,600 Beckman Coulter Inc. ....... 2,064,668 2,015,450 1.0
- -----------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 45,800 Columbia/HCA Healthcare
Corporation............... 1,441,636 1,333,925 0.7
98,085 +HEALTHSOUTH Corporation.... 2,677,794 2,617,643 1.3
------------ ------------ -----
4,119,430 3,951,568 2.0
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS 39,000 Enron Corp. ................ 1,775,593 2,108,437 1.1
- -----------------------------------------------------------------------------------------------------------------------
OIL SERVICES 16,700 Schlumberger Ltd. .......... 1,223,365 1,140,819 0.6
- -----------------------------------------------------------------------------------------------------------------------
PETROLEUM 50,100 Unocal Corp. ............... 1,820,122 1,791,075 0.9
- -----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 22,000 Bristol-Myers Squibb Co. ... 2,098,735 2,528,625 1.3
42,900 Warner-Lambert Company...... 2,062,969 2,976,187 1.5
------------ ------------ -----
4,161,704 5,504,812 2.8
- -----------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING 57,500 +World Color Press, Inc. ... 1,728,068 2,012,500 1.0
- -----------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 91,900 +Capstar Broadcasting Corp.
(Class A)................. 1,746,100 2,308,988 1.2
- -----------------------------------------------------------------------------------------------------------------------
RAILROADS 19,200 Burlington Northern
Santa Fe Inc. ............ 1,621,607 1,885,200 0.9
- -----------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT 24,000 Starwood Hotels & Resorts
TRUSTS (a)....................... 1,080,000 1,159,500 0.6
- -----------------------------------------------------------------------------------------------------------------------
RETAIL 44,800 Lowe's Companies, Inc. ..... 1,619,537 1,817,200 0.9
59,000 +Safeway Inc. .............. 1,708,417 2,400,562 1.2
42,300 Sears, Roebuck & Co. ....... 2,169,295 2,582,944 1.3
52,500 Wal-Mart Stores, Inc. ...... 2,180,129 3,189,375 1.6
------------ ------------ -----
7,677,378 9,990,081 5.0
- -----------------------------------------------------------------------------------------------------------------------
RETAIL--DRUG STORES 89,220 Rite Aid Corporation........ 1,574,143 3,351,326 1.7
- -----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATION 33,600 +SmarTalk TeleServices,
Inc. ..................... 925,118 474,600 0.2
- -----------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 56,600 Carnival Corp. (Class A).... 919,266 2,242,775 1.1
15,600 Royal Caribbean Cruises
Ltd. ..................... 705,201 1,240,200 0.6
------------ ------------ -----
1,624,467 3,482,975 1.7
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 62,000 El Paso Natural Gas Co. .... 1,651,981 2,371,500 1.2
- -----------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 56,950 +USA Waste Services,
Inc. ..................... 2,382,597 2,811,906 1.4
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 93,838,012 123,077,490 61.7
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES $ 3,000,000 General Electric Capital
Corp., 8.75% due
5/21/2007................. $ 3,431,200 $ 3,555,000 1.8%
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 2,330,630 Federal Home Loan Mortgage
MORTGAGE-BACKED Corp., Pool #10036, 7.50%
OBLIGATIONS** due 6/01/2007............. 2,375,057 2,397,869 1.2
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY 1,300,000 Federal National Mortgage
OBLIGATIONS Association, 5.75% due
2/15/2008................. 1,276,988 1,293,903 0.7
18,210,000 US Treasury Bonds, 6.625%
due 2/15/2027............. 19,323,127 20,563,096 10.3
US Treasury Notes:
7,000,000 6% due 8/15/1999............ 7,019,141 7,036,120 3.5
12,900,000 6.125% due 9/30/2000........ 13,135,828 13,059,186 6.5
13,600,000 6.50% due 5/31/2002......... 13,817,281 14,052,608 7.0
------------ ------------ -----
54,572,365 56,004,913 28.0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS 60,378,622 61,957,782 31.0
- -----------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* 6,770,000 General Motors Acceptance
Corp., 6.50% due
7/01/1998................. 6,768,778 6,768,778 3.4
8,000,000 New Center Asset Trust,
5.75% due 7/07/1998....... 7,991,055 7,991,055 4.0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 14,759,833 14,759,833 7.4
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $168,976,467 199,795,105 100.1
============
LIABILITIES IN EXCESS OF
OTHER ASSETS.............. (211,243) (0.1)
------------ -----
NET ASSETS.................. $199,583,862 100.0%
============ =====
- -----------------------------------------------------------------------------------------------------------------------
</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.
** Mortgage-Backed Obligations are subject to principal paydowns as a result of
prepayments or refinancing of the underlying mortgage instrument. As a
result, the average life may be substantially less than original maturity.
(a) Formerly Starwood Lodging Trust.
+ Non-income producing security.
See Notes to Financial Statements.
5
<PAGE> 7
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$168,976,467) (Note
1a)....................................................... $199,795,105
Cash........................................................ 121
Receivables:
Interest.................................................. $ 948,129
Dividends................................................. 59,044
Capital shares sold....................................... 996 1,008,169
----------
Prepaid expenses and other assets........................... 13,359
------------
Total assets................................................ 200,816,754
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,106,250
Investment adviser (Note 2)............................... 94,319
Capital shares redeemed................................... 13,157 1,213,726
----------
Accrued expenses and other liabilities...................... 19,166
------------
Total liabilities........................................... 1,232,892
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $199,583,862
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 1,214,696
Paid-in capital in excess of par............................ 155,381,665
Undistributed investment income--net........................ 2,215,063
Undistributed realized capital gains on investments--net.... 9,953,800
Unrealized appreciation on investments--net................. 30,818,638
------------
NET ASSETS.................................................. $199,583,862
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $199,583,862 and 12,146,956
shares outstanding........................................ $ 16.43
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
6
<PAGE> 8
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Interest and discount earned................................ $ 2,297,518
Dividends (net of $453 foreign withholding tax)............. 500,067
-----------
Total income................................................ 2,797,585
-----------
- ------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $534,193
Accounting services (Note 2)................................ 16,672
Custodian fees.............................................. 12,486
Professional fees........................................... 8,267
Printing and shareholders reports........................... 5,676
Directors' fees and expenses................................ 2,036
Transfer agent fees (Note 2)................................ 1,737
Pricing services............................................ 308
Other....................................................... 1,138
--------
Total expenses.............................................. 582,513
-----------
Investment income--net...................................... 2,215,072
-----------
- ------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1d
& 3):
Realized gain on investments--net........................... 10,173,186
Change in unrealized appreciation on investments--net....... 8,976,638
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $21,364,896
===========
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE> 9
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 2,215,072 $ 6,345,486
Realized gain on investments--net........................... 10,173,186 15,251,840
Change in unrealized appreciation/depreciation on
investments--net.......................................... 8,976,638 9,866,947
------------ ------------
Net increase in net assets resulting from operations........ 21,364,896 31,464,273
------------ ------------
- -----------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (6,345,486) (3,604,297)
Realized gain on investments--net:
Class A................................................... (15,410,417) (20,656,058)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (21,755,903) (24,260,355)
------------ ------------
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital
share transactions........................................ 5,227,865 (24,503,928)
------------ ------------
- -----------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 4,836,858 (17,300,010)
Beginning of period......................................... 194,747,004 212,047,014
------------ ------------
End of period*.............................................. $199,583,862 $194,747,004
============ ============
- -----------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 2,215,063 $ 6,345,477
============ ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE> 10
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 16.59 $ 16.01 $ 15.17 $ 13.08 $ 14.08
-------- -------- -------- -------- --------
Investment income--net............................... .18 .54 .53 .59 .48
Realized and unrealized gain (loss) on
investments--net................................... 1.51 1.87 .89 2.06 (1.06)
-------- -------- -------- -------- --------
Total from investment operations..................... 1.69 2.41 1.42 2.65 (.58)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................. (.54) (.27) (.56) (.56) (.37)
Realized gain on investments--net.................. (1.31) (1.56) (.02) -- --
In excess of realized gain on investments--net..... -- -- -- -- (.05)
-------- -------- -------- -------- --------
Total dividends and distributions.................... (1.85) (1.83) (.58) (.56) (.42)
-------- -------- -------- -------- --------
Net asset value, end of period....................... $ 16.43 $ 16.59 $ 16.01 $ 15.17 $ 13.08
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 11.46%+ 17.11% 9.73% 20.81% (4.19%)
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .60%* .60% .60% .61% .63%
======== ======== ======== ======== ========
Investment income--net............................... 2.28%* 3.17% 3.39% 4.22% 3.95%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $199,584 $194,747 $212,047 $212,912 $158,951
======== ======== ======== ======== ========
Portfolio turnover................................... 52.45% 136.71% 236.50% 38.40% 35.36%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Aggregate total investment return.
See Notes to Financial Statements.
9
<PAGE> 11
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 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 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) 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.
10
<PAGE> 12
- --------------------------------------------------------------------------------
MLAM is responsible for the management of the Company's funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $5,325 in commissions on the
execution of portfolio security transactions.
For the six months ended June 30, 1998, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $295 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $95,909,271 and $118,375,928, respectively.
Net realized gains(losses) for the six months ended June 30, 1998 and net
unrealized gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $10,173,195 $30,818,638
Short-term investments................ (9) --
----------- -----------
Total................................. $10,173,186 $30,818,638
=========== ===========
- --------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $30,818,638, of which $32,240,280 related to appreciated securities
and $1,421,642 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $168,976,467.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $5,227,865 and $(24,503,928) for the six months ended June 30, 1998 and for
the year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 42,301 $ 646,273
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 1,472,979 21,755,903
---------- ------------
Total issued.......................... 1,515,280 22,402,176
Shares redeemed....................... (1,110,569) (17,174,311)
---------- ------------
Net increase.......................... 404,711 $ 5,227,865
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 62,221 $ 951,862
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,723,037 24,260,354
---------- ------------
Total issued......................... 1,785,258 25,212,216
Shares redeemed...................... (3,285,875) (49,716,144)
---------- ------------
Net decrease......................... (1,500,617) $(24,503,928)
========== ============
- -----------------------------------------------------------------
</TABLE>
11
<PAGE> 13
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 1998, the US stock market gained
17.71% as measured by the Standard and Poor's 500 Index. This was largely
because the economic problems in Asia were widely considered to be improving.
Actions by the International Monetary Fund (IMF) to put together financial
rescue packages for Thailand, Indonesia and South Korea were applauded by
investors. At the same time, economic data confirmed a healthy domestic economy.
During the first half of the six-month period ended June 30, 1998, the domestic
economy grew a robust 4.9%, which was coupled with indicators that portrayed
benign inflation. Federal Reserve Board Chairman Alan Greenspan deemed the US
economy "exceptionally healthy" and signaled that interest rates would be held
steady for the foreseeable future. Investors responded favorably to the notion
that a heated US economy would be tempered by deflationary pressures from Asia.
Concerns about economic dislocations in Asia resurfaced by April. Asian
markets were swept lower by gloomy economic news and reduced credit ratings. The
IMF bailout packages and various government stimulus measures proved to be too
little and too late. Although the US economy continued on its growth path with
no signs of inflation, investors then began to focus on the negative impact that
the Asian currency crisis could have on US corporate earnings.
Despite their rich valuations, large-capitalization growth stocks continued
their ascent, leading to an even wider valuation disparity between growth stocks
and value stocks. This divergence is evidenced by the performance of the
unmanaged Morgan Stanley Consumer Index and the unmanaged Morgan Stanley
Cyclical Index which rose 16% and 9%, respectively, during the six-month period
ended June 30, 1998.
PORTFOLIO MATTERS
Against this backdrop, for the six-month period ended June 30, 1998, Basic
Value Focus Fund's Class A and Class B Shares had total returns of +13.70% and
+13.61%, respectively, outperforming the Lipper Growth and Income Index total
return of +11.62%. The Fund's performance was largely attributable to several
company-specific developments. In particular, five Fund holdings were taken over
at premium prices. These included Digital Equipment Corporation, Dresser
Industries, Inc., Humana, Inc., Stone Container Corporation and Union Texas
Petroleum Holdings Inc. Moreover, strong consumer spending during the period led
to robust performance of the Fund's retail holdings such as Dillard's, Inc.,
Kmart Corporation and Sears, Roebuck & Co. Healthcare stocks also were strong
contributors, with Fund holdings Pharmacia and Upjohn, Inc., Pharmaceutical
Product Development, Inc. and Bristol-Myers Squibb Co. outperforming US stocks
in general. Pockets of weakness were evident in cyclically oriented holdings of
paper, chemical and precious metals stocks.
During the six-month period ended June 30, 1998, we took advantage of low oil
prices by increasing our holdings of energy-related stocks, which traded down to
historically low valuations. We added Atlantic Richfield Company, Diamond
Offshore Drilling, Inc., Royal Dutch Petroleum Company and Sonat Inc. to the
Fund at compelling valuation parameters. The prospect of a disciplined approach
to production by the Organization of Petroleum Exporting Countries gave us
confidence that these stocks could offer ample upside price potential.
Technology stocks were also an area of focus as they suffered from a slowdown in
demand from Asia and from overcapacity. Glenayre Technologies, Inc.,
Hewlett-Packard Company, Motorola, Inc., Silicon Graphics, Inc. and 3Com
Corporation were all new Fund holdings. They were out-of-favor upon purchase,
but showed strong prospects for improvement in business fundamentals and traded
at low valuations.
On the sell side, we locked in profits in several successful investments
during the six months ended June 30, 1998 as they no longer fit our value
criteria. In particular, impressive gains were realized from the sales of Apple
Computer, Inc., Digital Equipment Corporation, Ford Motor Company, Texas
Instruments Inc., Travelers Property Casualty Corp., Viacom, Inc. and Wells
Fargo & Company as well as from LSI Logic Corp. and Lam Research Corp., which we
bought and sold during the period.
12
<PAGE> 14
- --------------------------------------------------------------------------------
IN CONCLUSION
We are confident that our bottom-up approach to selecting undervalued,
out-of-favor equities will continue to reward shareholders, and we remain
committed to our value philosophy of investing. We appreciate your investment in
Basic Value Focus Fund of Merrill Lynch Variable Series Funds, Inc., and we look
forward to sharing our investment outlook and strategy with you in our next
report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Kevin M. Rendino
Kevin M. Rendino
Senior Vice President and Portfolio Manager
August 3, 1998
13
<PAGE> 15
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +21.44% +13.70%
- -----------------------------------------------------------------------------------------
Class B Shares +13.25** +13.61
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns. Past results shown should not
be considered a representation of future performance.
** Total return is for the period from 11/03/97 (commencement of operations) to
6/30/98.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +21.44%
- --------------------------------------------------------------------------------
Inception (7/01/93) to 6/30/98 +18.42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AGGREGATE TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Inception (11/03/97) to 6/30/98 +13.25%
- --------------------------------------------------------------------------------
14
<PAGE> 16
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<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
- ----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 500,000 +3Com Corporation........... $ 14,224,091 $ 15,343,750 1.9%
METALS--NON FERROUS 550,000 ASARCO Inc. ................ 14,844,570 12,237,500 1.5
HMO 275,000 Aetna, Inc. ................ 21,855,625 20,934,375 2.6
RETAIL 375,000 Dillard's, Inc. (Class A)... 13,847,336 15,539,063 1.9
TECHNOLOGY 975,000 +Exabyte Corporation........ 11,084,519 8,104,688 1.0
TELECOMMUNICATIONS 600,000 +Glenayre Technologies,
Inc. ..................... 7,134,589 6,450,000 0.8
SEMICONDUCTORS 1,145,000 +Integrated Device
Technology, Inc. ......... 11,594,547 8,158,125 1.0
RETAIL 700,000 +Kmart Corporation.......... 8,113,220 13,475,000 1.7
SOFTWARE 1,100,000 +Mentor Graphics
Corporation............... 10,834,998 11,618,750 1.5
TELECOMMUNICATIONS 300,000 Motorola, Inc. ............. 16,260,780 15,768,750 2.0
PRECIOUS METALS 550,100 Newmont Mining
Corporation............... 15,446,855 12,996,113 1.6
SOFTWARE 1,900,000 +Novell, Inc. .............. 15,667,932 24,225,000 3.0
FARMING & CONSTRUCTION 150,000 Potash Corp. of Saskatchewan
EQUIPMENT Inc. ..................... 12,300,311 11,334,375 1.4
COMPUTER SERVICES 1,650,000 +Scitex Corporation Ltd. ... 17,195,703 21,553,125 2.7
COMPUTER SERVICES 250,000 +Seagate Technology,
Inc. ..................... 5,249,045 5,953,125 0.7
BEVERAGE & ENTERTAINMENT 500,000 Seagram Company Ltd.
(The)..................... 18,585,382 20,468,750 2.5
INFORMATION PROCESSING 800,000 +Silicon Graphics, Inc. .... 10,797,208 9,700,000 1.2
OIL--DOMESTIC 400,000 Sonat Inc. ................. 17,107,221 15,450,000 1.9
INSURANCE 700,000 TIG Holdings, Inc. ......... 19,481,281 16,100,000 2.0
STEEL 1,150,000 +WHX Corporation (a)........ 11,661,962 14,806,250 1.8
------------ ------------ -----
273,287,175 280,216,739 34.7
- ----------------------------------------------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES 250,000 CINergy Corp. .............. 8,439,593 8,750,000 1.1
FARMING & CONSTRUCTION 200,000 Caterpillar, Inc. .......... 10,915,137 10,575,000 1.3
EQUIPMENT
FARMING & CONSTRUCTION 200,000 Deere & Company............. 10,128,730 10,575,000 1.3
EQUIPMENT
OIL SERVICES 200,000 Diamond Offshore Drilling,
Inc. ..................... 9,148,648 8,000,000 1.0
CHEMICALS 150,000 duPont (E.I.) de Nemours &
Company................... 8,890,820 11,193,750 1.4
AUTOMOTIVE 200,000 General Motors Corporation.. 11,150,314 13,362,500 1.7
CHEMICALS 425,000 Great Lakes Chemical
Corporation............... 16,701,042 16,760,937 2.1
ENTERTAINMENT 400,000 +Harrah's Entertainment,
Inc. ..................... 7,660,466 9,300,000 1.1
CHEMICALS 400,500 Hercules Inc. .............. 19,329,028 16,470,562 2.0
COMPUTER SERVICES 225,000 Hewlett-Packard Company..... 14,378,101 13,471,875 1.7
BANKING & FINANCIALS 600,000 Hibernia Corporation (Class
A)........................ 8,484,542 12,112,500 1.5
INFORMATION PROCESSING 80,000 International Business
Machines Corp. ........... 5,813,750 9,185,000 1.1
RAILROADS 450,000 Union Pacific Corporation... 25,017,867 19,856,250 2.5
RETAIL 600,000 +Venator Group, Inc. ....... 12,592,684 11,475,000 1.4
------------ ------------ -----
168,650,722 171,088,374 21.2
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ABOVE-AVERAGE YIELD
- ----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 250,000 AT&T Corp. ................. $ 11,171,711 $ 14,281,250 1.8%
OIL--DOMESTIC 150,000 Atlantic Richfield
Company .................. 11,302,402 11,718,750 1.5
BANKING & FINANCIALS 100,000 Bankers Trust New York
Corporation............... 9,314,352 11,606,250 1.4
PHARMACEUTICALS 80,000 Bristol-Myers Squibb Co. ... 4,470,369 9,195,000 1.1
PUBLISHING 301,000 Dow Jones & Company,
Inc. ..................... 12,400,296 16,780,750 2.1
OIL SERVICES 300,000 Dresser Industries, Inc. ... 10,495,710 13,218,750 1.6
PHOTOGRAPHY 225,000 Eastman Kodak Company....... 13,890,118 16,439,062 2.0
FOODS 243,200 General Mills, Inc. ........ 16,599,084 16,628,800 2.1
MACHINERY 350,000 ITT Industries Inc. ........ 9,507,453 13,081,250 1.6
PAPER & FOREST PRODUCTS 200,000 International Paper
Company................... 8,820,028 8,600,000 1.1
COSMETICS & TOILETRIES 300,000 Kimberly-Clark
Corporation............... 14,454,100 13,762,500 1.7
PAPER & FOREST PRODUCTS 762,600 Louisiana-Pacific
Corporation............... 17,590,744 13,917,450 1.7
BANKING & FINANCIALS 200,000 National City
Corporation .............. 13,659,428 14,200,000 1.8
PHARMACEUTICALS 450,000 Pharmacia & Upjohn, Inc. ... 15,087,291 20,756,250 2.6
TOBACCO 375,000 Philip Morris Companies,
Inc. ..................... 15,481,983 14,765,625 1.8
OIL--INTERNATIONAL 250,000 Royal Dutch Petroleum
Company (NY Registered
Shares)................... 14,021,805 13,703,125 1.7
RETAIL 200,000 Sears, Roebuck & Co. ....... 9,022,895 12,212,500 1.5
OIL--DOMESTIC 475,000 Unocal Corporation ......... 18,234,351 16,981,250 2.1
------------ ------------ -----
225,524,120 251,848,562 31.2
- ----------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS
- ----------------------------------------------------------------------------------------------------------------------
BANKING & FINANCIALS 200,000 Associates First Capital
Corporation (Class A)..... 14,029,840 15,375,000 1.9
MEDICAL SERVICES 400,000 Columbia/HCA Healthcare
Corp. .................... 12,696,936 11,650,000 1.4
MEDICAL SERVICES 609,400 +Pharmaceutical Product
Development, Inc. ........ 11,580,290 13,406,800 1.7
PAPER & FOREST PRODUCTS 800,000 +Stone Container
Corporation............... 10,461,421 12,500,000 1.6
------------ ------------ -----
48,768,487 52,931,800 6.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS 716,230,504 756,085,475 93.7
- ----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $32,137,000 General Electric Capital
Corp., 6.50% due
7/01/1998................. 32,131,197 32,131,197 4.0
20,000,000 Park Avenue Receivables
Corp., 5.55% due
7/10/1998................. 19,969,167 19,969,167 2.5
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 52,100,364 52,100,364 6.5
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $768,330,868 808,185,839 100.2
============
LIABILITIES IN EXCESS OF
OTHER ASSETS.............. (1,722,977) (0.2)
------------ -----
NET ASSETS.................. $806,462,862 100.0%
============ =====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
(a) Investment in companies 5% or more of whose outstanding securities are held
by the Fund (such companies are defined as "Affiliated Companies" in Section
2(a)(3) of the Investment Company Act of 1940) are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NET SHARE NET DIVIDEND
INDUSTRY AFFILIATE ACTIVITY COST INCOME
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steel WHX Corporation................... 100,000 $1,305,088 +
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
See Notes to Financial Statements.
16
<PAGE> 18
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$768,330,868) (Note
1a)....................................................... $808,185,839
Cash........................................................ 620
Receivables:
Capital shares sold....................................... $1,090,309
Dividends................................................. 877,055 1,967,364
----------
Deferred organization expenses (Note 1e).................... 720
Prepaid expenses and other assets........................... 36,788
------------
Total assets................................................ 810,191,331
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 3,180,060
Investment adviser (Note 2)............................... 420,940
Capital shares redeemed................................... 73,761
Distributor (Note 2)...................................... 583 3,675,344
----------
Accrued expenses and other liabilities...................... 53,125
------------
Total liabilities........................................... 3,728,469
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $806,462,862
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... $ 5,283,188
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... 8,040
Paid-in capital in excess of par............................ 668,666,040
Undistributed investment income--net........................ 4,763,241
Undistributed realized capital gains on investments--net.... 87,887,382
Unrealized appreciation on investments--net................. 39,854,971
------------
NET ASSETS.................................................. $806,462,862
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $805,238,032 and 52,831,884
shares outstanding........................................ $ 15.24
============
Class B--Based on net assets of $1,224,830 and 80,399 shares
outstanding............................................... $ 15.23
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 19
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Dividends (net of $55,009 foreign withholding tax).......... $ 4,697,942
Interest and discount earned................................ 2,482,476
-----------
Total income................................................ 7,180,418
-----------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $2,274,536
Accounting services (Note 2)................................ 53,230
Custodian fees.............................................. 26,989
Registration fees (Note 1e)................................. 18,221
Printing and shareholder reports............................ 17,256
Professional fees........................................... 15,402
Directors' fees and expenses................................ 5,785
Transfer agent fees (Note 2)................................ 1,980
Distribution fees--Class B (Note 2)......................... 539
Amortization of organization expenses (Note 1e)............. 273
Pricing services............................................ 228
Other....................................................... 2,736
----------
Expenses.................................................... 2,417,175
-----------
Investment income--net...................................... 4,763,243
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES
1b, 1d & 3):
Realized gain on investments--net........................... 88,940,523
Change in unrealized appreciation on investments--net....... (2,134,873)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $91,568,893
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 20
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 4,763,243 $ 7,897,496
Realized gain on investments--net........................... 88,940,523 96,532,191
Change in unrealized appreciation on investments--net....... (2,134,873) (914,299)
------------- ------------
Net increase in net assets resulting from operations........ 91,568,893 103,515,388
------------- ------------
- -----------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F):
Investment income--net:
Class A................................................... (7,893,414) (3,224,650)
Class B................................................... (4,056) --
Realized gain on investments--net:
Class A................................................... (96,299,982) (54,136,801)
Class B................................................... (49,914) --
------------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (104,247,366) (57,361,451)
------------- ------------
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 147,468,396 100,588,838
------------- ------------
- -----------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 134,789,923 146,742,775
Beginning of period......................................... 671,672,939 524,930,164
------------- ------------
End of period*.............................................. $806,462,862 $671,672,939
============= ============
- -----------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 4,763,241 $ 7,897,468
============= ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE> 21
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE -------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+ 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 15.84 $ 14.74 $ 13.10 $ 11.10 $ 10.95
-------- -------- -------- -------- --------
Investment income--net.............................. .10 .19 .17 .18 .17
Realized and unrealized gain on investments--net.... 1.76 2.52 2.37 2.49 .08
-------- -------- -------- -------- --------
Total from investment operations.................... 1.86 2.71 2.54 2.67 .25
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.19) (.09) (.18) (.19) (.10)
Realized gain on investments--net................. (2.27) (1.52) (.72) (.48) --
-------- -------- -------- -------- --------
Total dividends and distributions................... (2.46) (1.61) (.90) (.67) (.10)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 15.24 $ 15.84 $ 14.74 $ 13.10 $ 11.10
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 13.70%++ 20.62% 20.69% 25.49% 2.36%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .64%* .65% .66% .66% .72%
======== ======== ======== ======== ========
Investment income--net.............................. 1.26%* 1.36% 1.37% 1.68% 2.08%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $805,238 $671,325 $524,930 $306,463 $164,307
======== ======== ======== ======== ========
Portfolio turnover.................................. 61.97% 95.52% 68.41% 74.10% 60.55%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
20
<PAGE> 22
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE -----------------------------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED NOV. 3, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+++ TO DEC. 31, 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 15.84 $ 15.89
------- -------
Investment income--net...................................... .08 .01
Realized and unrealized gain (loss) on investments--net..... 1.76 (.06)
------- -------
Total from investment operations............................ 1.84 (.05)
------- -------
Less dividends and distributions:
Investment income--net.................................... (.18) --
Realized gain on investments--net......................... (2.27) --
------- -------
Total dividends and distributions........................... (2.45) --
------- -------
Net asset value, end of period.............................. $ 15.23 $ 15.84
======= =======
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 13.61%++ (.31%)++
======= =======
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .79%* .82%*
======= =======
Investment income--net...................................... 1.09%* 1.27%*
======= =======
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $ 1,225 $ 348
======= =======
Portfolio turnover.......................................... 61.97% 95.52%
======= =======
- --------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
+++ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
21
<PAGE> 23
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 period not exceeding five years.
(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.
22
<PAGE> 24
- --------------------------------------------------------------------------------
("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which is the limited
partner. The Company has also entered into a Distribution Agreement and
Distribution Plan with Merrill Lynch Funds Distributor ("MLFD" or
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), which
is a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Company's funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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.
Pursuant to the Distribution Plan adopted by the Company, pursuant to Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor an
ongoing distribution fee each month at the annual rate of 0.15% of the average
daily value of the Fund's Class B net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $11,800 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 Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $496,901,624 and $420,359,943, respectively.
Net realized gains for the six months ended June 30, 1998 and net unrealized
gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $88,940,523 $39,854,971
----------- -----------
Total.................................. $88,940,523 $39,854,971
=========== ===========
- ------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $39,854,971, of which $79,981,325 related to appreciated securities
and $40,126,354 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $768,330,868.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$147,468,396 and $100,588,838 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 4,699,334 $ 70,372,317
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 7,700,917 104,193,399
---------- ------------
Total issued.......................... 12,400,251 174,565,716
Shares redeemed....................... (1,945,473) (27,973,865)
---------- ------------
Net increase.......................... 10,454,778 $146,591,851
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 9,505,073 $141,108,871
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 4,361,868 57,361,452
---------- ------------
Total issued......................... 13,866,941 198,470,323
Shares redeemed...................... (7,112,265) (98,226,048)
---------- ------------
Net increase......................... 6,754,676 $100,244,275
========== ============
- -----------------------------------------------------------------
</TABLE>
23
<PAGE> 25
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class B Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 59,653 $ 902,500
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 3,989 53,970
---------- ------------
Total issued.......................... 63,642 956,470
Shares redeemed....................... (5,208) (79,925)
---------- ------------
Net increase.......................... 58,434 $ 876,545
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Class B Shares for the Period Dollar
November 3, 1997+ to December 31, 1997 Shares Amount
- ------------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 24,431 $ 383,980
Shares redeemed...................... (2,466) (39,417)
---------- ------------
Net increase......................... 21,965 $ 344,563
========== ============
- ------------------------------------------------------------------
+ Commencement of operations.
</TABLE>
24
<PAGE> 26
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide you with the first shareholder report for Capital
Focus Fund of Merrill Lynch Variable Series Funds, Inc. The Fund seeks to
achieve the highest total investment return consistent with prudent risk through
a fully managed investment policy utilizing equity, debt (including money
market) and convertible securities. In this and future reports to shareholders,
we will provide information on the Fund's performance, discuss our investment
strategies and highlight some of the Fund's investments.
THE ENVIRONMENT
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
Capital Focus Fund commenced operations on June 5, 1998. While June appeared
to be a rewarding month for investors with the broad stock market averages
providing attractive returns, these results masked a very disparate performance
between various sectors of the market. Large-capitalization stocks performed
relatively well, while medium-capitalization and small-capitalization companies
performed poorly because investors were willing to pay increasingly large
premiums for liquidity. Companies that serve the consumer segment of the economy
(including pharmaceutical, retail, broadcasting and entertainment companies)
provided positive returns while companies serving the industrial sector of the
economy (including companies in commodities, transportation and selected areas
of technology) provided negative returns for the month. These results closely
mirrored trends in the US economy, where high consumer confidence and rising
consumer incomes have sustained strong auto, housing and other consumer-related
markets. By contrast, the Asian economic turmoil negatively affected
manufacturing, with orders, industrial production and inventories all showing
deteriorating trends and earnings expectations being sharply reduced.
This volatility produced a challenging investment environment. The stock
market, as measured by the unmanaged Standard & Poor's 500 Index (S&P 500),
provided a +4.06% total return in June. The US bond market continued to benefit
from benign inflation, expectations for slowing economic growth and strong
demand from non-US investors seeking the security of US Government securities.
The unmanaged Merrill Lynch Domestic Bond Master Index provided a +0.87% total
return, while money markets earned a +0.42% total return as measured by the
three-month Treasury bill.
While the stock market's fundamental underpinnings remain sound and the
factors supporting the market's extraordinary advance are unlikely to reverse
course in the near term, we question the potential for significant appreciation
from current levels. Record high valuations combined with a demonstrable and, we
believe, sustained slowdown in corporate earnings growth is not, in our view, a
formula for a substantial stock market advance. Furthermore, the increasingly
narrow universe of stocks propelling the market averages higher represents an
unsound foundation upon which to build further significant gains, in our
opinion. Meanwhile, we believe bonds continue to represent good value, with
inflation-adjusted interest rates at historically above-average levels and
inflationary pressures continuing to moderate. Consequently, we established a
significant bond weighting in Capital Focus Fund. At June 30, 1998, we had 59.0%
of the Fund's net assets
25
<PAGE> 27
- --------------------------------------------------------------------------------
invested in equities, 30.5% in fixed-income securities and 10.5% in cash
equivalents.
Within the equity component of Capital Focus Fund, 17 of our 42 holdings
provided positive returns while 25 stocks declined in price since inception. On
the plus side, shares of Federal-Mogul Corp., the auto parts supplier, rose over
11% as the company's consolidation strategies continued to produce attractive
returns. Shares of Kansas City Southern Industries, Inc., the rail
transportation and financial services firm, rose almost 11% as progress was made
toward the separation of the company into two distinct operating units. Shares
of American International Group, Inc., a large insurer, rose almost 9% in
response to ongoing solid results despite the company's Asian exposure. On the
downside, shares of Varian Associates, Inc., a diversified technology company,
fell approximately 17% as a result of weakness in its semiconductor equipment
business. Shares of the insurance company W.R. Berkeley Corporation fell 15%
because of difficult pricing conditions in several of the company's markets.
Shares of GenCorp, Inc., a diversified industrial and aerospace concern, fell
11% in response to the negative impact of the General Motors Corp. strike on the
company's short-term results.
Capital Focus Fund seeks to invest in above-average companies whose stocks
sell at below-average valuation levels. On average, the stocks in the portfolio
generated comparable returns on shareholder equity and have stronger balance
sheets while offering faster earnings growth than the average company as
measured by the S&P 500. However, as of June 30, 1998, these same stocks sold at
an average price to earnings ratio of 23.9 times estimated 1998 earnings per
share as compared to 25.9 times for the S&P 500, at 3.6 times book value per
share as compared to 6.2 times for the S&P 500 and provide a competitive
dividend yield. We believe this formula will provide superior risk-adjusted
equity returns over time.
IN CONCLUSION
We appreciate your investment in Capital Focus Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Kurt Schansinger
Kurt Schansinger
Senior Vice President and Senior Portfolio Manager
August 3, 1998
26
<PAGE> 28
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
TOTAL RETURN**
- -------------------------------------------------------------------------------
<S> <C>
Class A Shares -0.50%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. Past results shown
should not be considered a representation of future performance.
** The Fund commenced operations on 6/05/98.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
AGGREGATE TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Inception (6/05/98) through 6/30/98 -0.50%
- --------------------------------------------------------------------------------
27
<PAGE> 29
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 3,500 Boeing Co. (The).............. $ 160,269 $ 155,969 1.4%
- -----------------------------------------------------------------------------------------------------------------------
APPAREL 4,500 +Fruit of the Loom, Inc.
(Class A)................... 160,740 149,344 1.4
- -----------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 2,700 Federal-Mogul Corp. .......... 163,448 182,250 1.7
- -----------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 3,200 +American Standard Companies,
Inc. ....................... 143,663 143,000 1.3
2,700 Masco Corporation............. 155,185 163,350 1.5
----------- ----------- -----
298,848 306,350 2.8
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS 4,400 United Dominion Industries,
Ltd. ....................... 143,542 146,850 1.4
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 2,100 duPont (E.I.) de Nemours &
Co. ........................ 168,055 156,713 1.5
2,000 Imperial Chemical Industries
PLC (ADR)* ................. 141,895 129,000 1.2
----------- ----------- -----
309,950 285,713 2.7
- -----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES 4,200 Corning, Inc. ................ 161,622 145,950 1.4
5,100 GenCorp Inc. ................. 146,148 128,775 1.2
3,000 Rockwell International
Corporation................. 159,318 144,188 1.3
1,700 United Technologies Corp. .... 157,289 157,250 1.5
2,800 Varian Associates, Inc. ...... 132,287 109,200 1.0
----------- ----------- -----
756,664 685,363 6.4
- -----------------------------------------------------------------------------------------------------------------------
DRUG STORES 4,500 Rite Aid Corp. ............... 165,034 169,031 1.6
- -----------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 1,800 General Electric Co. ......... 153,124 163,800 1.5
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 2,400 Federal National Mortgage
Association................. 149,717 145,800 1.3
1,300 Transamerica Corporation...... 151,656 149,663 1.4
----------- ----------- -----
301,373 295,463 2.7
- -----------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 3,200 Diageo PLC (ADR)* ............ 158,819 154,200 1.4
- -----------------------------------------------------------------------------------------------------------------------
FOOTWEAR 3,100 Nike, Inc. (Class B).......... 144,270 150,931 1.4
- -----------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 4,600 +Tenet Healthcare Corp. ...... 137,713 143,750 1.3
- -----------------------------------------------------------------------------------------------------------------------
HOTELS & CASINOS 3,500 +Sun International Hotels
Ltd. ....................... 161,256 159,250 1.5
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE 1,600 Allstate Corporation.......... 152,999 146,500 1.4
1,100 American International Group,
Inc. ....................... 147,683 160,600 1.5
3,000 Berkley (W.R.) Corporation.... 142,600 120,187 1.1
4,500 Provident Companies, Inc. .... 160,203 155,250 1.4
2,700 Travelers Group, Inc. ........ 175,016 163,688 1.5
----------- ----------- -----
778,501 746,225 6.9
- -----------------------------------------------------------------------------------------------------------------------
LEISURE/HOTELS 4,800 Carnival Corp. (Class A)...... 169,960 190,200 1.8
6,600 +Harrah's Entertainment,
Inc. ....................... 156,940 153,450 1.4
----------- ----------- -----
326,900 343,650 3.2
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 2,300 Coastal Corp. ................ 164,744 160,569 1.5
3,900 El Paso Natural Gas Co. ...... 144,729 149,175 1.4
5,100 Williams Companies, Inc. ..... 159,661 172,125 1.6
----------- ----------- -----
469,134 481,869 4.5
- -----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 4,600 McCormick & Company, Inc. .... 154,525 164,162 1.5
- -----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 2,300 TOTAL S.A. (ADR)* ............ 149,498 150,362 1.4
4,200 Unocal Corporation............ 156,791 150,150 1.4
4,700 Yacimientos Petroliferos
Fiscales S.A. (YPF)
(ADR)* ..................... 147,937 141,294 1.3
----------- ----------- -----
454,226 441,806 4.1
- -----------------------------------------------------------------------------------------------------------------------
OIL--SERVICE 3,200 Dresser Industries, Inc. ..... 145,030 141,000 1.3
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 30
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAPER & FOREST PRODUCTS 3,100 Kimberly-Clark Corp. ......... $ 154,726 $ 142,212 1.3%
- -----------------------------------------------------------------------------------------------------------------------
RAILROADS 3,700 Kansas City Southern
Industries, Inc. ........... 165,689 183,612 1.7
3,200 Union Pacific Corporation..... 147,127 141,200 1.3
----------- ----------- -----
312,816 324,812 3.0
- -----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 2,500 McDonald's Corporation........ 168,846 172,500 1.6
- -----------------------------------------------------------------------------------------------------------------------
RETAIL TRADE 2,000 Wal-Mart Stores, Inc. ........ 115,299 121,500 1.1
- -----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 2,700 Motorola, Inc. ............... 140,027 141,919 1.3
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 6,435,080 6,369,919 59.0
- -----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT US GOVERNMENT OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------------
$ 750,000 US Treasury Bonds, 6% due
2/15/2026................... 762,890 780,233 7.2
US Treasury Notes:
1,750,000 5.875% due 7/31/1999.......... 1,755,293 1,756,282 16.3
750,000 5.625% due 2/15/2006.......... 749,473 753,045 7.0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT
OBLIGATIONS 3,267,656 3,289,560 30.5
- -----------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 1,066,000 Federal Home Loan
OBLIGATIONS** Mortgage Corp., 5.85%
due 7/01/1998............... 1,065,827 1,065,827 9.9
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS 1,065,827 1,065,827 9.9
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............. $10,768,563 10,725,306 99.4
===========
OTHER ASSETS LESS
LIABILITIES................. 62,861 0.6
----------- -----
NET ASSETS.................... $10,788,167 100.0%
=========== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** 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.
+ Non-income producing security.
See Notes to Financial Statements.
29
<PAGE> 31
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost $10,768,563) (Note
1a)....................................................... $10,725,306
Receivables:
Interest.................................................. $75,116
Capital shares sold....................................... 28,447
Dividends................................................. 2,525 106,088
-------
Deferred organization expenses (Note 1f).................... 7,067
-----------
Total assets................................................ 10,838,461
-----------
- -----------------------------------------------------------------------------------
LIABILITIES:
Payables:
Custodian bank (Note 1h).................................. 24,893
Securities purchased...................................... 13,124
Investment adviser (Note 2)............................... 4,098
Capital shares redeemed................................... 6 42,121
-------
Accrued expenses and other liabilities...................... 8,173
-----------
Total liabilities........................................... 50,294
-----------
- -----------------------------------------------------------------------------------
NET ASSETS.................................................. $10,788,167
===========
- -----------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 108,385
Paid-in capital in excess of par............................ 10,700,352
Undistributed investment income--net........................ 18,108
Undistributed realized capital gains on investments--net.... 4,579
Unrealized depreciation on investments--net................. (43,257)
-----------
NET ASSETS.................................................. $10,788,167
===========
- -----------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $10,788,167 and 1,083,849
shares outstanding........................................ $ 9.95
===========
- -----------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
30
<PAGE> 32
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENT OF OPERATIONS FOR THE PERIOD JUNE 5, 1998+ TO JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned................................ $ 20,787
Dividends................................................... 2,525
--------
Total income................................................ 23,312
--------
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $4,098
Transfer agent fees (Note 2)................................ 258
Pricing services............................................ 231
Registration fees (Note 1f)................................. 227
Custodian fees.............................................. 150
Accounting services (Note 2)................................ 143
Amortization of organization expenses (Note 1f)............. 80
Directors' fees and expenses................................ 5
Professional fees........................................... 3
Other....................................................... 9
------
Total expenses.............................................. 5,204
--------
Investment income--net...................................... 18,108
--------
- -------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES
1b, 1e & 3):
Realized gain on investments--net........................... 4,579
Unrealized depreciation on investments--net................. (43,257)
--------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(20,570)
========
- -------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
\
31
<PAGE> 33
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSETS: TO JUNE 30, 1998
<S> <C>
- --------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 18,108
Realized gain on investments--net........................... 4,579
Unrealized depreciation on investments--net................. (43,257)
-----------
Net decrease in net assets resulting from operations........ (20,570)
-----------
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 1,808,737
-----------
- --------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 1,788,167
Beginning of period......................................... 9,000,000
-----------
End of period*.............................................. $10,788,167
===========
- --------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 18,108
===========
- --------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
32
<PAGE> 34
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE ----------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE PERIOD
FINANCIAL STATEMENTS. JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: TO JUNE 30, 1998
<S> <C>
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.00
-------
Investment income--net...................................... .02
Realized and unrealized loss on investments--net............ (.07)
-------
Total from investment operations............................ (.05)
-------
Net asset value, end of period.............................. $ 9.95
=======
- ------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... (0.50%)++
=======
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .76%*
=======
Investment income--net...................................... 2.65%*
=======
- ------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $10,788
=======
Portfolio turnover.......................................... 4.08%
=======
- ------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
33
<PAGE> 35
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL 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 18 separate funds. Each fund
offers two classes of shares to the Merrill Lynch Life Insurance Company
("MLLIC"), ML Life Insurance Company of New York (indirect wholly-owned
subsidiaries of Merrill Lynch & Co., Inc. ("ML & Co.")), and other insurance
companies that are not affiliated with ML & Co., for their separate accounts to
fund benefits under certain variable annuity and variable life insurance
contracts. Prior to commencement of operations on June 5, 1998, the Fund had no
operations other than those relating to organizational matters and the issuance
of 900,000 Class A Shares of the Fund to MLLIC for $9,000,000. Class A and Class
B Shares have equal voting, dividend, liquidation and other rights, except that
only shares of the respective classes are entitled to vote on matters concerning
only that class and Class B Shares bear certain expenses related to the
distribution of such shares. Capital 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. Futures contracts are valued
at the 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.
- - 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
premiums 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 gain or loss to the extent the cost of the closing transaction
exceeds the premium received).
Written options are non-income producing investments.
- - 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.
(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 or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated invest-
34
<PAGE> 36
- --------------------------------------------------------------------------------
ment 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
period not exceeding five years. Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions to shareholders--Dividends and distributions
paid by the Fund are recorded on the ex-dividend dates.
(h) Custodian bank-- The Fund recorded an amount payable to the Custodian Bank
resulting from an overdraft, which was replenished on July 2, 1998.
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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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 period June 5, 1998 to June 30, 1998, Merrill Lynch, Pierce, Fenner &
Smith Inc., a subsidiary of ML & Co., earned $66 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
period June 5, 1998 to June 30, 1998 were $9,957,033 and $258,867, respectively.
Net realized gains for the period June 5, 1998 to June 30, 1998 and net
unrealized losses as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains Losses
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments....................... $4,571 $(43,257)
Short-term investments...................... 8 --
------ --------
Total....................................... $4,579 $(43,257)
====== ========
- --------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized depreciation for Federal income tax purposes
aggregated $43,257, of which $169,789 related to appreciated securities and
$213,046 related to depreciated securities. At June 30, 1998, the aggregate cost
of investments for Federal income tax purposes was $10,768,563.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$1,808,737 for the period June 5, 1998 to June 30, 1998.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Period Dollar
June 5, 1998+ to June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................... 183,852 $1,808,763
Shares redeemed........................... (3) (26)
------- ----------
Net increase.............................. 183,849 $1,808,737
======= ==========
- -----------------------------------------------------------------
</TABLE>
+ Prior to June 5, 1998 (commencement of operations), the Fund issued 900,000
shares to MLLIC for $9,000,000.
35
<PAGE> 37
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 1998, the Fund's Class A and Class
B Shares had total returns of -17.31% and -17.32%, respectively. The unmanaged
Morgan Stanley Capital International Emerging Markets Free Index declined 18.87%
during the same period. Beneficial to performance were the Fund's overweighted
positions in Greece and Portugal, whose markets rose 44.89% and 29.50%,
respectively. Detrimental to the Fund's performance were its underweighted
position in Brady Bonds, which rose 1.05%, and its overweighted position in
Russia, whose market declined 59.34%. Also hurting the Fund's performance was
its exposure to the Asian markets whose declines were very steep over the
six-month period ended June 30, 1998. (References to securities markets of all
countries in this letter to shareholders correspond to those countries' market
weightings in the MSCI Emerging Markets Free Index and are for the six-month
period ended June 30, 1998.)
The six months ended June 30, 1998 saw declines in many of the emerging
markets. The steepest declines were in Asia, Latin America and Russia. Only in
some of the European and Middle East/African countries did equity markets
appreciate. Numerous powerful forces drove the declines. One was the recession
in Japan and the weakness of its currency. This triggered concerns of another
round of devaluations, which would start in China and South Korea and spread
throughout Asia and the developing countries in other regions. Another force was
the view, which became widely accepted, that Asia's economic problems would take
more time and capital to solve than previously expected. In addition, there was
growing concern that while wage pressures in the United States might necessitate
raising interest rates, deflationary pressures from Asia constrained application
of the appropriate US monetary policy. However, the continuous withdrawal of US
investors from emerging markets mutual funds was possibly the most dominant
force. Emerging markets fund managers, including ourselves, had to sell
investments that might not otherwise have been sold. The resultant capital
outflows worsened liquidity problems in some markets and spread the damage to
remote and fundamentally unrelated markets. Indiscriminate selling of emerging
markets stocks worldwide continues and is, in our view, creating many bargains
in the markets in which we invest.
Asian markets enjoyed a liquidity-driven rally in the first two months of
1998, but the gains were largely reversed in the weeks that followed. After the
calm brought by the infusion of assets from the International Monetary Fund
(IMF), foreign portfolio investors and other sources, the depth of political and
economic strains soon became evident. Riots in Indonesia (whose market fell
57.85%) resulted in President Suharto stepping down and the Indonesian rupiah
approaching new lows against the dollar. Vice President Habibie was sworn in as
interim president, and expressed his intention to follow through with the IMF
austerity program. Subsequent calls for Habibie's immediate replacement raised
the question of whether the populace in Indonesia and elsewhere would accept a
long period of austerity under any leadership. For example, in South Korea
(whose market rose 5.60%) a democratically elected president impressed investors
with his will to implement IMF-mandated reforms, but his ability to do so is
being hampered by the powerful chaebols and belligerent unions.
Reports of full-blown recessions and deflation throughout the
region--including Hong Kong and China (whose markets fell 26.15% and 35.27%,
respectively), once considered relatively "safe havens"--confirmed the
complexity and interrelated nature of the problems in these economies. It also
became clear that as asset prices had just started to decline, the worst of the
banks' non-performing loan ratios had yet to be seen and capital requirements
would only grow. Even in Thailand (whose market was down 32.04%), where the
first efforts at recapitalization by two of the largest banks were successful,
it was acknowledged that the amount of capital raised would not be enough.
Coincident with these problems in north and southeast Asia, nuclear tests were
set off in India (whose market fell 15.82%) to appease the domestic constituents
of the new leadership, and subsequently reciprocated by Pakistan despite the
threat of sanctions by the United States to both countries.
South Africa, the dominant market in the Middle East/African regions, declined
14.18%. The South African rand became vulnerable to currency speculation in
light of weak commodity prices, a deteriorating trade balance and dwindling
foreign currency reserves. The market's strong performance mid-period had been
attributed to steady progress in reducing inflation and a consolidation process
underway among South African companies. The latter was most evident in the
financial services sector, one of the best-performing sectors in the market,
which also benefited from declining interest rates. Among
36
<PAGE> 38
- --------------------------------------------------------------------------------
our holdings in South Africa, First National Bank Holdings, Ltd., one of the
largest banks in South Africa, merged with Rand Merchant Bank to form FirstRand
Limited. In addition to banking, the combined entity provides life insurance,
pension management and asset management services.
In Turkey, the stock market posted a loss of 14.28%. Despite improvement on
the inflationary front, progress in privatizations and strong economic growth,
political events are still the major forces on the stock market. The decision of
Prime Minister Yilmaz to step down and allow the forming of an interim
government triggered a rally in the market. The expectation of an orderly
transition was seen to enable continuing efforts to pass legislation on tax and
social security issues.
The Israeli market remained resilient during the six months ended June 30,
1998 and appreciated 8.18%. With the economy slowing and real interest rates
still high, a sharp decline in the consumer price index rate has enabled an
easing of nominal interest rates which has been favorable for stocks,
particularly the banks such as our holdings, Bank Leumi Le-Israel and Bank
Hapoalim Ltd.
Emerging Europe, where the portfolio has had overweighted investments for many
years, enjoyed strong returns and again outperformed other emerging market
regions during the six-month period. Companies in the region have benefited from
their proximity and access to the more mature and growing markets of Western
Europe. In addition, Greece (whose market was up 44.89%) is likely to benefit
from reforms in the form of lower fiscal deficits and lower inflation, which
would enable economic convergence with the European Union. Early this year, the
Greek government devalued the drachma and announced various measures including
privatizations, banking reforms and lower inflation targets. The reform agenda
has raised expectations that Greece will meet the convergence criteria, much as
have other Mediterranean countries such as Portugal, whose stock market
continues to perform well (up 29.50%).
However, the region was not immune to contagion afflicting other emerging
markets around the world. The Hungarian market (which fell 0.12%) and the Polish
market (which was up 15.44%) started to decline in May as liquidity problems in
Russia mounted and speculation on the ruble rose. In general, Hungarian and
Polish business fundamentals should not be affected by Russia's problems.
However, in the short term, sentiment and capital flows often override stock and
economic fundamentals. The Polish industrial group, Elektrim Spolka Akeyjna
S.A., is one of the portfolio's larger holdings. Management of the company has
demonstrated its value-added ability by streamlining the company's focus in
those sectors that will have a more significant participation in Polish economic
expansion. With activities in power construction and engineering and in
telecommunications through its stake in a local cellular and telecommunications
licensee, the company is well-positioned to benefit from increased
infrastructure investment and sound economic growth in Poland.
The problems in Russia during the last six months were numerous, although not
extraordinary by Russian standards. Among the issues were: the bickering between
President Yeltsin and the Duma over the appointment of a Prime Minister; the
sharp decline in the reserve position; an inadequate tax collection system; the
prospect of default on external debt; and delays in the disbursal of IMF funds.
What was different this time was the unfavorable external environment, rooted in
Asia's currency volatility, and deflationary pressures, which heightened
nervousness about the ruble and led to a sell-off of domestic securities,
particularly treasury bills. Thus, the Russian stock market declined 59.34%, and
interest rates rose sharply.
In Latin America, Brazil was affected in a fundamentally unwarranted way by
Russia's problems and declined 15.94%. Investors focused on the similarities
between Brazil and Russia (their large size, the importance of commodity
exports, the growing trade deficits and the high level of debt). However, we
believe there are important differences that favor Brazil. These include a
longer tradition of capitalism and more highly developed capital markets; a more
broad-based economy; a larger reserve position; and a more diversified debt
exposure. We believe that some of the best bargains are in Brazilian stocks.
Aside from the general nervousness prevailing in emerging markets, the
weakness of the price of crude oil was a predominant driver of the Mexican
market, which declined 22.23%. Concerns arose that lower oil export revenues and
a growing current account deficit would trigger further budget cutting by a
government known for its fiscal restraint. Adding to these concerns was a
banking scandal involving several Mexican banks being investigated by the US
Customs Service for drug money laundering.
IN CONCLUSION
We once again would caution our investors that the volatility that our markets
exhibited during the past six months is not uncommon. We have seen that each
market may be affected as much by external developments as by the
37
<PAGE> 39
- --------------------------------------------------------------------------------
events that occur within any particular country.
In some instances, the reform process has made remarkable strides, while in
others it is just beginning. The challenges many of the Asian countries and
Russia face are not insurmountable; as we have seen, countries such as Mexico
and Hungary emerged from their economic crises. Thus, while we caution our
shareholders to expect further volatility, we also urge them to maintain a
longer-term perspective since the reforms being undertaken in these countries
will take time. Additionally, there are presently many new opportunities and a
large number of attractive investments to be found in emerging markets.
We appreciate 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 next report to
shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Grace Pineda
Grace Pineda
Senior Vice President and Portfolio Manager
August 3, 1998
38
<PAGE> 40
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -34.10% -17.31%
- -----------------------------------------------------------------------------------------
Class B Shares -18.03** -17.32
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. Past results shown
should not be considered a representation of future performance.
** Total return is for the period from 11/03/97 (commencement of operations) to
6/30/98.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 -34.10%
- --------------------------------------------------------------------------------
Inception (5/02/94) through 6/30/98 - 5.10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AGGREGATE TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Inception (11/03/97) through 6/30/98 -18.03%
- --------------------------------------------------------------------------------
39
<PAGE> 41
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES HELD/ VALUE PERCENT OF
AFRICA INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH AFRICA BANKING 14,465 Nedcor Ltd. (Ordinary)...... $ 318,795 $ 314,884 0.3%
-----------------------------------------------------------------------------------------------------
BEVERAGE & 46,203 South African Breweries
TOBACCO Ltd. ..................... 1,205,531 958,634 0.8
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 5,700 Billiton PLC(f)............. 20,604 11,555 0.0
67,478 Rembrandt Controlling
Investments Ltd. ......... 412,066 263,945 0.2
171,708 Sasol Limited............... 1,820,116 1,003,090 0.9
------------ ------------ -----
2,252,786 1,278,590 1.1
-----------------------------------------------------------------------------------------------------
FOREIGN Republic of South Africa
GOVERNMENT Bond:
OBLIGATIONS
ZAR 3,300,000 12% due 2/28/2005........... 560,008 489,272 0.4
2,800,000 13% due 8/31/2010........... 478,475 420,348 0.4
------------ ------------ -----
1,038,483 909,620 0.8
-----------------------------------------------------------------------------------------------------
INSURANCE 1,409,454 FirstRand Limited........... 1,956,195 2,181,298 1.9
13,640 Liberty Life Association of
Africa Limited............ 441,751 268,161 0.2
------------ ------------ -----
2,397,946 2,449,459 2.1
-----------------------------------------------------------------------------------------------------
MACHINERY 223,171 Gencor Ltd. ................ 528,739 347,281 0.3
-----------------------------------------------------------------------------------------------------
MERCHANDISING 591,780 Pick'n Pay Stores Ltd. ..... 796,521 724,629 0.6
26,097 Pick'n Pay Stores
Ltd. (N Shares)........... 41,952 27,961 0.0
------------ ------------ -----
838,473 752,590 0.6
-----------------------------------------------------------------------------------------------------
NEWSPAPER/PUBLISHING 47,230 Nasionale Pers Beperk (Class
N)........................ 466,725 313,260 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA 9,047,478 7,324,318 6.3
- ----------------------------------------------------------------------------------------------------------------------------
EUROPE
- ----------------------------------------------------------------------------------------------------------------------------
GREECE BANKING 14,996 Alpha Credit Bank S.A. ..... 1,153,739 1,215,979 1.0
16,549 Alpha Credit Bank S.A.
(Rights)(d)............... 0 29,379 0.0
22,548 National Bank of Greece
S.A. ..................... 2,502,771 2,890,218 2.5
------------ ------------ -----
3,656,510 4,135,576 3.5
-----------------------------------------------------------------------------------------------------
BEVERAGE 111,224 Hellenic Bottling Co.
S.A. ..................... 2,769,823 3,437,128 3.0
-----------------------------------------------------------------------------------------------------
METAL FABRICATING 41,888 Elval S.A. ................. 539,412 647,227 0.6
-----------------------------------------------------------------------------------------------------
OIL--INTEGRATED 145,219 +Hellenic Petroleum S.A. ... 909,803 1,186,367 1.0
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 24,109 Hellenic Telecommunication
Organization (GDR)(b)..... 279,362 309,799 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GREECE 8,154,910 9,716,097 8.4
- ----------------------------------------------------------------------------------------------------------------------------
HUNGARY BANKING 41,668 OTP Bank.................... 1,142,504 2,045,899 1.8
-----------------------------------------------------------------------------------------------------
HEALTH/PERSONAL 30,180 +Richter Gedeon Vegyeszeti
CARE Gyar Reszvenytarsasag
(GDR)(b).................. 2,549,419 2,414,400 2.1
-----------------------------------------------------------------------------------------------------
OIL & GAS 72,291 Mol Magyar Olay-es Gazipari
PRODUCERS Reszvenytarsasag
(GDR)(b).................. 1,999,283 1,951,857 1.7
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 491,183 Magyar TavKozlesi
Reszvenytarsasag, Ltd.
(Matav)(Ordinary)......... 2,395,320 2,852,581 2.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY 8,086,526 9,264,737 8.1
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 42
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPE SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POLAND AUTOMOTIVE 30,419 Debica S.A. ................ $ 696,143 $ 611,086 0.5%
-----------------------------------------------------------------------------------------------------
BANKING 69,897 BIG Bank Gdanski S.A.
(GDR)(b).................. 1,655,764 1,359,497 1.2
210,788 Wielkopolsky Bank Kredytowy
S.A. ..................... 1,656,665 1,633,312 1.4
------------ ------------ -----
3,312,429 2,992,809 2.6
-----------------------------------------------------------------------------------------------------
COMPUTERS 47,559 +Computerland Poland
S.A. ..................... 1,060,463 853,046 0.7
-----------------------------------------------------------------------------------------------------
ELECTRICAL & 316,002 Elektrim Spolka Akeyjna
ELECTRONICS S.A. ..................... 3,145,821 3,854,236 3.3
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 135,828 +NFI Piast S.A. Fund........ 397,138 222,190 0.2
125,438 +NFI Progress S.A. Fund..... 386,025 232,193 0.2
------------ ------------ -----
783,163 454,383 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND 8,998,019 8,765,560 7.5
- ----------------------------------------------------------------------------------------------------------------------------
PORTUGAL TELECOMMUNICATIONS 15,757 Portugal Telecom S.A. ...... 640,315 835,514 0.7
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGAL 640,315 835,514 0.7
- ----------------------------------------------------------------------------------------------------------------------------
RUSSIA ELECTRICAL 32,000 +Lenenergo.................. 31,680 12,640 0.0
COMPONENTS &
DISTRIBUTION
-----------------------------------------------------------------------------------------------------
ENERGY SOURCES 275,000 Irkutskenergo............... 34,732 26,125 0.0
-----------------------------------------------------------------------------------------------------
NATURAL GAS 13,480 RAO Gazprom
(ADR)(a)(e)............... 212,310 149,291 0.1
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 82,300 +Bashinformsvyaz............ 220,980 57,610 0.1
31,142 Nizhnovsvyazinform.......... 164,974 38,928 0.0
6,000 Tyumentlecom................ 40,770 7,200 0.0
------------ ------------ -----
426,724 103,738 0.1
-----------------------------------------------------------------------------------------------------
UTILITIES-- 199,692 Bashkirenergo............... 117,784 15,177 0.0
ELECTRIC & GAS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN RUSSIA 823,230 306,971 0.2
- ----------------------------------------------------------------------------------------------------------------------------
TURKEY BANKING 83,139,150 Akbank T.A.S. (Ordinary).... 2,731,829 2,685,736 2.3
45,303,110 Yapi ve Kredi Bankasi
A.S. ..................... 753,230 1,157,168 1.0
------------ ------------ -----
3,485,059 3,842,904 3.3
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 7,406,643 Adana Cimento Sanayii T.A.S.
(Class A)................. 306,866 275,433 0.2
48,889,588 Akcansa Cimento A.S. ....... 1,458,927 1,505,877 1.3
------------ ------------ -----
1,765,793 1,781,310 1.5
-----------------------------------------------------------------------------------------------------
HOUSEHOLD 13,600,000 Arcelik A.S. ............... 645,466 638,570 0.6
DURABLES
-----------------------------------------------------------------------------------------------------
RETAIL STORES 1,226,000 Migros Turk T.A.S. ......... 1,094,572 1,197,356 1.0
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 946,900 +Northern Electric
& EQUIPMENT Telekomunikasyon A.S.
NETAS..................... 315,404 252,535 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TURKEY 7,306,294 7,712,675 6.6
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EUROPE 34,009,294 36,601,554 31.5
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 43
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN SHARES HELD/ VALUE PERCENT OF
AMERICA INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARGENTINA BANKING 33,041 Banco de Galicia y Buenos
Aires S.A. (ADR)(a)....... $ 886,393 $ 598,868 0.5%
-----------------------------------------------------------------------------------------------------
OIL & RELATED 126,275 Compania Naviera Perez
Companc S.A.C.F.I.M.F.A.
(Class B)................. 624,614 633,996 0.5
-----------------------------------------------------------------------------------------------------
REAL ESTATE 1,807 IRSA Inversiones y
Representaciones S.A.
(GDR)(b).................. 61,438 52,629 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ARGENTINA 1,572,445 1,285,493 1.1
- ----------------------------------------------------------------------------------------------------------------------------
BRAZIL BANKING 76,743,523 Banco Bradesco S.A.
(Preferred)............... 650,407 640,359 0.6
2,221,095 Banco Itau S.A.
(Preferred)............... 1,295,227 1,267,551 1.1
36,481 Uniao de Bancos Brasileiros
S.A. (Unibanco)
(GDR)(b).................. 1,031,469 1,076,190 0.9
------------ ------------ -----
2,977,103 2,984,100 2.6
-----------------------------------------------------------------------------------------------------
BEVERAGE 1,108,942 Companhia Cervejaria Brahma
S.A. PN (Preferred)....... 803,405 690,392 0.6
-----------------------------------------------------------------------------------------------------
FOREIGN Republic of Brazil:
GOVERNMENT
BONDS
US$ 1,179,934 Floating Rate 'C' Brady
Bonds, 7.25% due
4/15/2014(c)(h)........... 907,445 868,726 0.7
1,231,000 Floating Rate 'L' Brady
Bonds, 5.50% due
4/15/2024(c).............. 888,399 864,778 0.7
981,000 Global Bonds, 10.125% due
5/15/2027................. 883,530 844,641 0.7
------------ ------------ -----
2,679,374 2,578,145 2.1
-----------------------------------------------------------------------------------------------------
METALS--STEEL 39,243 Companhia de Vale do Rio
Doce S.A. (Preferred)..... 840,029 780,449 0.7
Brl 10,296 Companhia de Vale do Rio
Doce S.A., 0.0% due
12/31/2049(g)............. 0 0 0.0
------------ ------------ -----
840,029 780,449 0.7
-----------------------------------------------------------------------------------------------------
OIL & RELATED 6,061,230 Petroleo Brasileiro S.A.--
Petrobras (Preferred)..... 1,379,313 1,126,818 1.0
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 47,126 Telecomunicacoes Brasileiras
S.A.--Telebras PN
(ADR)(a).................. 5,806,806 5,145,570 4.4
915,000 +Telerj Celular S.A. (B
Shares)(Preferred)........ 75,785 54,425 0.1
------------ ------------ -----
5,882,591 5,199,995 4.5
-----------------------------------------------------------------------------------------------------
UTILITIES-- 63,996,353 Companhia Energetica de
ELECTRICAL & GAS Minas Gerais S.A.(CEMIG)
(Preferred)............... 2,416,204 1,992,104 1.7
28,830 Companhia Paranaense de
Energia S.A.--Copel
(ADR)(a).................. 482,804 266,677 0.2
------------ ------------ -----
2,899,008 2,258,781 1.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 17,460,823 15,618,680 13.4
- ----------------------------------------------------------------------------------------------------------------------------
MEXICO BANKING 85,900 +Grupo Financiero
Banamex--Accival, S.A.
de C.V. (BANACCI)
(Class B)................. 256,949 167,325 0.1
72,266 +Grupo Financiero Banorte,
S.A. de C.V.(Class B)..... 116,075 80,439 0.1
------------ ------------ -----
373,024 247,764 0.2
-----------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 44
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA SHARES HELD/ VALUE PERCENT OF
(CONCLUDED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MEXICO BEVERAGE 27,900 Panamerican Beverages, Inc.
(CONCLUDED)
(Class A) (US Registered
Shares)................... $ 897,022 $ 877,106 0.8%
-----------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 73,253 +Grupo Televisa, S.A. de
C.V. (GDR)(b)............. 2,646,122 2,756,144 2.4
-----------------------------------------------------------------------------------------------------
BUILDING & 80,546 Apasco, S.A. de C.V. ....... 319,984 425,413 0.4
CONSTRUCTION
-----------------------------------------------------------------------------------------------------
BUILDING 3,717 Cementos Mexicanos, S.A. de
MATERIALS C.V. (Cemex).............. 13,959 13,943 0.0
123,925 Cementos Mexicanos, S.A. de
C.V. (Cemex) (Class B).... 556,802 546,241 0.5
3,578 Cementos Mexicanos, S.A. de
C.V. (Cemex) (Class B)
(ADR)(a).................. 37,569 31,535 0.0
------------ ------------ -----
608,330 591,719 0.5
-----------------------------------------------------------------------------------------------------
FOREIGN United Mexican States:
GOVERNMENT
OBLIGATIONS
US$ 1,043,000 Brady Par Bonds, 6.25% due
12/31/2019(c)............. 881,505 857,881 0.7
753,000 Global Bonds, 11.50% due
5/15/2026................... 888,491 854,655 0.7
------------ ------------ -----
1,769,996 1,712,536 1.4
-----------------------------------------------------------------------------------------------------
HEALTH/PERSONAL 445,281 Kimberly-Clark de Mexico,
CARE S.A. de C.V. (Series A)... 1,653,480 1,573,650 1.4
-----------------------------------------------------------------------------------------------------
LEISURE 44,510 Grupo Carso, S.A. de C.V.
(ADR)(a).................. 559,157 359,196 0.3
548,829 Grupo Carso, S.A. de C.V.
'A1'...................... 3,080,684 2,266,424 1.9
------------ ------------ -----
3,639,841 2,625,620 2.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 49,984 Telefonos de Mexico, S.A. de
C.V. (ADR)(a)............. 2,437,569 2,402,356 2.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 14,345,368 13,212,308 11.4
- ----------------------------------------------------------------------------------------------------------------------------
VENEZUELA TELECOMMUNICATIONS 35,434 Compania Anonima Nacional
Telefonos de Venezuela
S.A.(CANTV) (ADR)(a)...... 1,410,317 885,850 0.8
-----------------------------------------------------------------------------------------------------
TEXTILES 56,406 Sudamtex de Venezuela
S.A.C.A. (ADR)(a)(e)...... 754,724 154,084 0.1
-----------------------------------------------------------------------------------------------------
UTILITIES 40,112 C.A. La Electricidad de
Caracas, S.A.I.C.A.-
S.A.C.A. ................. 33,162 18,149 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
VENEZUELA 2,198,203 1,058,083 0.9
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
LATIN AMERICA 35,576,839 31,174,564 26.8
- ----------------------------------------------------------------------------------------------------------------------------
MIDDLE
EAST
- ----------------------------------------------------------------------------------------------------------------------------
EGYPT BANKING 9,517 Commercial International
Bank (Egypt) S.A.E........ 86,732 105,173 0.1
50,826 Commercial International
Bank (Egypt) S.A.E.
(GDR)(b).................. 890,405 551,463 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EGYPT 977,137 656,636 0.6
- ----------------------------------------------------------------------------------------------------------------------------
ISRAEL BANKING 846,680 Bank Hapoalim Ltd. ......... 2,069,938 2,563,248 2.2
543,140 Bank Leumi Le-Israel........ 1,022,079 1,084,354 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ISRAEL 3,092,017 3,647,602 3.1
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
MIDDLE EAST 4,069,154 4,304,238 3.7
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 45
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC SHARES VALUE PERCENT OF
BASIN/ASIA INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHINA AUTOMOBILES 1,026,000 Qingling Motor Company...... $ 527,245 $ 284,702 0.2%
-----------------------------------------------------------------------------------------------------
CHEMICALS 36,991 Beijing Yanhua Petrochemical
Company Ltd. (ADR)(a)..... 372,053 221,946 0.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 394,000 +Eastern Communications Co.,
Ltd. (Class B)............ 335,060 231,672 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHINA 1,234,358 738,320 0.6
- ----------------------------------------------------------------------------------------------------------------------------
HONG KONG CELLULAR 253,625 Smartone
TELEPHONES Telecommunications........ 670,543 618,669 0.5
-----------------------------------------------------------------------------------------------------
CEMENT 8,832,000 Anhui Conch Cement Co.
Ltd. ..................... 2,294,608 1,231,084 1.1
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 7,483,927 Sinocan Holdings Ltd. ...... 2,362,810 299,430 0.3
-----------------------------------------------------------------------------------------------------
REAL ESTATE 529,297 Henderson China Holding
Ltd. ..................... 541,163 206,647 0.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 1,947,000 City Telecom (H.K.) Ltd. ... 324,622 128,157 0.1
& EQUIPMENT
-----------------------------------------------------------------------------------------------------
TRANSPORTATION 3,937,000 Sichuan Expressway Co. ..... 422,247 376,012 0.3
-----------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 799,000 Beijing Datang Power
Generation Company Limited
(Class H)................. 364,737 224,290 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG
KONG 6,980,730 3,084,289 2.7
- ----------------------------------------------------------------------------------------------------------------------------
INDIA BUILDING 24,202 Gujarat Ambujaya Cements
MATERIALS & Ltd. (GDR)(b)............. 177,885 114,354 0.1
COMPONENTS
-----------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 19,400 Pentafour Software & Exports
Ltd. ..................... 369,754 290,197 0.2
-----------------------------------------------------------------------------------------------------
FINANCIAL 102,000 Industrial Credit &
SERVICES Investment Corporation of
India Ltd. (ICICI)........ 254,082 186,638 0.1
78,064 Industrial Credit &
Investment Corporation of
India Ltd. (ICICI)
(GDR)(b).................. 768,720 798,204 0.7
------------ ------------ -----
1,022,802 984,842 0.8
-----------------------------------------------------------------------------------------------------
LEISURE 13,000 EIH Ltd. ................... 131,532 67,397 0.1
65,822 EIH Ltd. (GDR)(b)(e)........ 893,147 350,502 0.3
------------ ------------ -----
1,024,679 417,899 0.4
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 42,000 Mahanagar Telephone Nigam
Ltd....................... 314,461 177,135 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDIA 2,909,581 1,984,427 1.7
- ----------------------------------------------------------------------------------------------------------------------------
INDONESIA CEMENT 355,000 P.T. Semen Gresik........... 269,082 204,247 0.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 67,800 P.T. Indonesian Satellite
Corp. (Indosat) (ADR)(a).. 1,486,922 754,275 0.6
53,025 P.T. Telekomunikasi
Indonesia (ADR)(a)........ 498,197 308,208 0.3
------------ ------------ -----
1,985,119 1,062,483 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDONESIA 2,254,201 1,266,730 1.1
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<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>
MALAYSIA BANKING 44,000 Malayan Banking BHD......... $ 81,453 $ 44,398 0.0%
384,000 +Malayan Banking BHD (New
Shares)................... 721,242 378,206 0.3
------------ ------------ -----
802,695 422,604 0.3
-----------------------------------------------------------------------------------------------------
FOOD 133,000 Nestle (Malaysia) BHD....... 943,291 603,597 0.5
-----------------------------------------------------------------------------------------------------
METAL 343,000 Magnum Corporation BHD...... 435,567 127,512 0.1
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 16,000 Hicom Holdings BHD.......... 9,920 4,056 0.0
-----------------------------------------------------------------------------------------------------
NATURAL GAS 179,000 Petronas Gas BHD............ 659,588 332,722 0.3
-----------------------------------------------------------------------------------------------------
OIL & RELATED 298,700 Petronas Dagangan BHD....... 644,680 236,508 0.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 734,000 Telekom Malaysia BHD........ 2,159,477 1,240,314 1.1
-----------------------------------------------------------------------------------------------------
TOBACCO 61,000 Rothmans of Pall Mall
(Malaysia) BHD............ 579,337 423,355 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIA 6,234,555 3,390,668 2.9
- ----------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA ELECTRONIC 17,983 Samsung Display Devices..... 786,146 492,235 0.4
COMPONENT
-----------------------------------------------------------------------------------------------------
ELECTRONIC 41,300 Samsung Electronics Co.,
INSTRUMENTS Ltd. ..................... 1,868,900 1,281,204 1.1
-----------------------------------------------------------------------------------------------------
STEEL 45,910 Pohang Iron & Steel
Co., Ltd. ................ 2,277,272 1,508,261 1.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH
KOREA 4,932,318 3,281,700 2.8
- ----------------------------------------------------------------------------------------------------------------------------
TAIWAN BANKING 1,585,000 +E. Sun Commercial Bank..... 1,191,175 853,614 0.7
-----------------------------------------------------------------------------------------------------
ELECTRONIC 100,000 +Mosel Vitelic Inc. ........ 137,798 91,700 0.1
COMPONENT
-----------------------------------------------------------------------------------------------------
PLASTICS 362,520 Formosa Plastics
Corporation............... 673,578 496,010 0.4
-----------------------------------------------------------------------------------------------------
STEEL 595,000 China Steel Corporation..... 392,690 363,745 0.3
-----------------------------------------------------------------------------------------------------
TRANSPORT 869,400 +Yang Ming Marine
SERVICES Transport................. 743,061 544,150 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TAIWAN 3,138,302 2,349,219 2.0
- ----------------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 391,800 Bangkok Bank Public Company,
Ltd. (Registered
Shares)................... 1,533,072 482,787 0.4
251,000 Thai Farmers Bank Co.
Ltd. ..................... 966,570 221,558 0.2
------------ ------------ -----
2,499,642 704,345 0.6
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 281,802 +Siam City Cement Public
Company Limited........... 980,763 200,333 0.2
-----------------------------------------------------------------------------------------------------
TELEVISION 97,200 BEC World Public Company
Limited................... 870,587 375,441 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THAILAND 4,350,992 1,280,119 1.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN/ASIA 32,035,037 17,375,472 14.9
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE VALUE PERCENT OF
SECURITIES AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* US$ 2,000,000 Clipper Receivables Corp.,
5.53% due 7/07/1998....... $ 1,997,849 $ 1,997,849 1.7%
4,621,000 General Motors Acceptance
Corp., 6.50% due
7/01/1998................. 4,620,166 4,620,166 4.0
Park Avenue Receivables
Corp.:
2,634,000 5.55% due 7/02/1998......... 2,633,188 2,633,188 2.3
2,000,000 5.58% due 7/17/1998......... 1,994,730 1,994,730 1.7
3,374,000 Three Rivers Funding Corp.,
5.63% due 7/14/1998....... 3,366,613 3,366,613 2.9
------------ ------------ -----
14,612,546 14,612,546 12.6
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY OBLIGATIONS* 4,000,000 Federal Home Loan Mortgage
Corp., 5.44% due
7/09/1998................. 3,994,560 3,994,560 3.4
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 18,607,106 18,607,106 16.0
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $133,344,908 115,387,252 99.2
============
OTHER ASSETS LESS
LIABILITIES............... 936,305 0.8
------------ -----
NET ASSETS.................. $116,323,557 100.0%
============ =====
- ----------------------------------------------------------------------------------------------------------------------------
</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) Brady Bonds are securities which have been issued to refinance commercial
bank loans and other debt. The risk associated with these instruments is the
amount of any uncollateralized principal or interest payments since there is
a high default rate of commercial bank loans by countries issuing these
securities.
(d) The rights may be exercised until 7/09/1998.
(e) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(f) Consistent with the general policy of the Securities and Exchange
Commission, the nationality or domicile of an issuer for determination of
foreign issuer status may be (i) the country under whose laws the issue is
organized, (ii) the country in which the issuer's securities are principally
traded, or (iii) the country in which the issuer derives a significant
proportion (at least 50%) of its revenue or profits from goods produced or
sold, investments made, or services performed in the country, or in which at
least 50% of the assets of the issuer are situated.
(g) Received through a bonus issue from Companhia de Vale do Rio Doce S.A. As of
June 30, 1998, the bonds have not commenced trading and the coupon rate has
not been determined.
(h) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
See Notes to Financial Statements.
46
<PAGE> 48
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$133,344,908) (Note
1a)....................................................... $115,387,252
Cash........................................................ 483
Foreign cash (Note 1c)...................................... 915,679
Receivables:
Securities sold........................................... $1,515,095
Dividends................................................. 339,952
Interest.................................................. 114,808
Capital shares sold....................................... 6,225 1,976,080
----------
Prepaid expenses and other assets........................... 17,443
------------
Total assets................................................ 118,296,937
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,734,441
Investment adviser (Note 2)............................... 105,942
Capital shares redeemed................................... 85,608 1,925,991
----------
Accrued expenses and other liabilities...................... 47,389
------------
Total liabilities........................................... 1,973,380
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $116,323,557
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... $ 1,542,238
Class B Shares Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... 2,575
Paid-in capital in excess of par............................ 153,664,556
Undistributed investment income--net........................ 680,389
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 5)............... (21,611,702)
Unrealized depreciation on investments and foreign currency
transactions--net......................................... (17,954,499)
------------
NET ASSETS.................................................. $116,323,557
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $116,129,695 and 15,422,377
shares outstanding........................................ $ 7.53
============
Class B--Based on net assets of $193,862 and 25,750 shares
outstanding............................................... $ 7.53
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
47
<PAGE> 49
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $69,511 withholding tax on foreign
dividends)................................................ $ 1,894,580
Interest and discount earned................................ 405,132
Other income................................................ 2,627
------------
Total income................................................ 2,302,339
------------
- -----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 676,706
Custodian fees.............................................. 150,951
Accounting services (Note 2)................................ 10,968
Professional fees........................................... 5,601
Printing and shareholder reports............................ 5,083
Pricing services............................................ 4,965
Transfer agent fees (Note 2)................................ 2,392
Directors' fees and expenses................................ 1,483
Registration fees........................................... 163
Distribution fees--Class B (Note 2)......................... 50
Other....................................................... 17,413
------------
Total expenses before reimbursement......................... 875,775
Reimbursement of expenses (Note 2).......................... (29,843)
------------
Total expenses after reimbursement.......................... 845,932
------------
Investment income--net...................................... 1,456,407
------------
- -----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized loss from:
Investments--net.......................................... (16,743,212)
Foreign currency transactions--net........................ (296,177) (17,039,389)
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (8,909,324)
Foreign currency transactions--net........................ 7,622 (8,901,702)
------------ ------------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (25,941,091)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(24,484,684)
============
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
48
<PAGE> 50
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,456,407 $ 1,501,958
Realized loss on investments and foreign currency
transactions--net......................................... (17,039,389) (1,024,097)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (8,901,702) (13,340,095)
------------ ------------
Net decrease in net assets resulting from operations........ (24,484,684) (12,862,234)
------------ ------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (1,752,375) (1,771,806)
Class B................................................... (388) --
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (1,752,763) (1,771,806)
------------ ------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 1,078,255 60,517,887
------------ ------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (25,159,192) 45,883,847
Beginning of period......................................... 141,482,749 95,598,902
------------ ------------
End of period*.............................................. $116,323,557 $141,482,749
============ ============
- ------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 680,389 $ 973,652
============ ============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
49
<PAGE> 51
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------------
FINANCIAL STATEMENTS. FOR THE YEAR ENDED
FOR THE SIX DECEMBER 31, FOR THE PERIOD
MONTHS ENDED ------------------------------ MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+++ 1997 1996 1995 DEC. 31, 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 9.22 $ 10.05 $ 9.32 $ 9.51 $ 10.00
-------- -------- ------- ------- -------
Investment income--net............................ .09 .11 .20 .20 .09
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net.......... (1.67) (.75) .76 (.30) (.58)
-------- -------- ------- ------- -------
Total from investment operations.................. (1.58) (.64) .96 (.10) (.49)
-------- -------- ------- ------- -------
Less dividends from investment income--net........ (.11) (.19) (.23) (.09) --
-------- -------- ------- ------- -------
Net asset value, end of period.................... $ 7.53 $ 9.22 $ 10.05 $ 9.32 $ 9.51
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................ (17.31%)++ (6.53%) 10.59% (1.08%) (4.90%)++
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................... 1.25%* 1.25% 1.25% 1.25% 1.29%*
======== ======== ======= ======= =======
Expenses.......................................... 1.29%* 1.42% 1.31% 1.36% 1.35%*
======== ======== ======= ======= =======
Investment income--net............................ 2.15%* 1.15% 2.42% 2.73% 2.18%*
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $116,130 $141,451 $95,599 $55,209 $36,676
======== ======== ======= ======= =======
Portfolio turnover................................ 62.35% 93.62% 87.33% 62.53% 29.79%
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
+++ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
50
<PAGE> 52
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE -----------------------------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED NOV. 3, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+++ TO DEC. 31, 1997
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 9.22 $ 9.30
------- -------
Investment income--net...................................... .08 .01
Realized and unrealized loss on investments and foreign
currency transactions--net................................ (1.66) (.09)
------- -------
Total from investment operations............................ (1.58) (.08)
------- -------
Less dividends from investment income--net.................. (.11) --
------- -------
Net asset value, end of period.............................. $ 7.53 $ 9.22
======= =======
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... (17.32%)++ (0.86%)++
======= =======
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............................. 1.40%* 1.39%*
======= =======
Expenses.................................................... 1.46%* 1.58%*
======= =======
Investment income--net...................................... 2.03%* 1.16%*
======= =======
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $ 194 $ 32
======= =======
Portfolio turnover.......................................... 62.35% 93.62%
======= =======
- -------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of operations.
+++Based on average shares outstanding.
++Aggregate total investment return.
* Annualized.
** Total investment return excludes insurance-related fees and expenses.
See Notes to Financial Statements.
51
<PAGE> 53
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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, that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 the 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
Funds' 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 financial 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
52
<PAGE> 54
- --------------------------------------------------------------------------------
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-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--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. The Company has also entered into a Distribution
Agreement and Distribution Plan with Merrill Lynch Funds Distributor ("MLFD" or
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), which
is a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Company's funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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.
Pursuant to the Distribution Plan adopted by the Company in accordance with
Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the
Distributor an ongoing distribution fee each month at the annual rate of 0.15%
of the average daily value of the Fund's Class B net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, MLAM earned fees of $676,706, of which
$29,843 was voluntarily waived.
For the six months ended June 30, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $27,899 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 Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
53
<PAGE> 55
- --------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $75,974,767 and $78,384,516, respectively.
Net realized losses for the six months ended June 30, 1998 and net unrealized
gains (losses) as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $(16,743,089) $(17,957,656)
Short-term investments............... (123) --
Foreign currency transactions........ (296,177) 3,157
------------ ------------
Total................................ $(17,039,389) $(17,954,499)
============ ============
- --------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized depreciation for Federal income tax purposes
aggregated $17,957,656, of which $5,477,294 related to appreciated securities
and $23,434,950 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $133,344,908.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$1,078,255 and $60,517,887 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 1,237,450 $ 10,958,441
Shares issued to shareholders in
reinvestment of dividends............ 192,357 1,752,375
---------- ------------
Total issued.......................... 1,429,807 12,710,816
Shares redeemed....................... (1,347,653) (11,813,407)
---------- ------------
Net increase.......................... 82,154 $ 897,409
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 7,394,743 $ 77,069,163
Shares issued to shareholders in
reinvestment of dividends........... 176,082 1,736,172
---------- ------------
Total issued......................... 7,570,825 78,805,335
Shares redeemed...................... (1,738,665) (18,318,396)
---------- ------------
Net increase......................... 5,832,160 $ 60,486,939
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class B Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 22,315 $ 180,917
Shares issued to shareholders in
reinvestment of dividends............ 43 388
---------- ------------
Total issued.......................... 22,358 181,305
Shares redeemed....................... (56) (459)
---------- ------------
Net increase.......................... 22,302 $ 180,846
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Class B Shares for the Period Dollar
November 3, 1997+ to December 31, 1997 Shares Amount
- ------------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 5,548 $ 50,330
Shares redeemed...................... (2,100) (19,382)
---------- ------------
Net increase......................... 3,448 $ 30,948
========== ============
- ------------------------------------------------------------------
+ Commencement of operations.
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1997, the Fund had net capital loss carryforward of
approximately $2,114,000, of which $2,024,000 expires in 2003 and $90,000
expires in 2004. This amount will be available to offset like amounts of any
future taxable gains.
6. COMMITMENTS:
At June 30, 1998, the Fund had entered into foreign exchange contracts, under
which it agreed to purchase and sell various foreign currencies with a values of
approximately $22,000 and $216,000, respectively.
54
<PAGE> 56
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 1998, Domestic Money Market Fund's net
annualized yield for Class A Shares was 5.17%*. The Fund's 7-day yield as of
June 30, 1998 was 5.12%. The average portfolio maturity was 75 days at June 30,
1998, compared to 72 days at December 31, 1997.
THE ENVIRONMENT
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on the US
capital markets.
During the six-month period ended June 30, 1998, we maintained a constructive
average life for the Fund in order to take advantage of a trend toward lower
interest rates.
The Fund's composition at the end of June and as of our last report is
detailed below:
<TABLE>
<CAPTION>
- ------------------------------------------------------
Issue 6/30/98 12/31/97
- ------------------------------------------------------
<S> <C> <C>
Bank Notes...................... 17.2% 11.1%
Certificates of Deposit......... 2.0 3.4
Commercial Paper................ 44.3 55.5
Corporate Notes................. 14.1 10.2
Funding Agreements.............. 3.0 1.6
Master Notes.................... 2.4 2.5
US Government Agency &
Instrumentality
Obligations--Discount......... 0.8 3.5
US Government Agency &
Instrumentality
Obligations--Non-Discount..... 16.6 15.3
Liabilities in Excess of Other
Assets........................ (0.4) (3.1)
----- -----
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Jacqueline Rogers
Jacqueline Rogers
Vice President and Portfolio Manager
August 3, 1998
- ---------------
* Based on a constant investment throughout the period, with dividends
compounded daily, and reflecting a net return to the investor after all
expenses.
55
<PAGE> 57
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--17.2% $ 4,000,000 American Express Centurion Bank+...... 5.616% 2/12/99 $ 4,000,000
1,000,000 American Express Centurion Bank+...... 5.598 3/19/99 1,000,000
1,900,000 Bank of New York (The)................ 5.85 8/20/98 1,901,235
1,900,000 Comerica Bank, Detroit+............... 5.566 2/02/99 1,899,566
1,400,000 Comerica Bank, Detroit+............... 5.556 2/09/99 1,399,587
4,000,000 FCC National Bank+.................... 5.55 2/23/99 3,998,234
1,900,000 FCC National Bank..................... 5.65 3/03/99 1,897,408
2,000,000 FNB of Chicago........................ 5.89 8/26/98 2,001,973
2,000,000 FNB of Chicago........................ 5.52 2/16/99 1,995,666
1,000,000 FNB of Chicago+....................... 5.55 2/23/99 999,558
1,800,000 First Tennessee Bank N.A., Memphis.... 5.82 4/30/99 1,800,033
3,000,000 Huntington National Bank+............. 5.546 1/20/99 2,999,182
2,300,000 KeyBank National Association+......... 5.52 8/20/98 2,299,769
4,000,000 KeyBank National Association+......... 5.52 8/28/98 3,999,570
1,400,000 LaSalle National Bank, Chicago........ 5.75 10/08/98 1,399,272
1,900,000 LaSalle National Bank, Chicago........ 5.55 2/05/99 1,896,321
4,600,000 LaSalle National Bank, Chicago........ 5.55 2/08/99 4,591,000
1,000,000 LaSalle National Bank, Chicago........ 5.55 2/16/99 998,014
1,000,000 LaSalle National Bank, Chicago........ 5.55 2/22/99 998,003
5,800,000 PNC Bank N.A.+........................ 5.60 10/01/98 5,799,010
8,000,000 PNC Bank N.A.+........................ 5.57 1/29/99 7,996,758
2,000,000 US Bank N.A.+......................... 5.547 8/28/98 1,999,828
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$57,884,116) 57,869,987
- ---------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF
DEPOSIT--2.0%
2,750,000 Chase Manhattan Bank USA N.A.......... 5.87 7/21/98 2,750,573
4,000,000 Chase Manhattan Bank USA N.A.......... 5.75 10/06/98 3,997,830
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$6,750,000) 6,748,403
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--44.3% 5,166,000 Aesop Funding Corp. .................. 5.54 7/08/98 5,160,435
3,809,000 Aesop Funding Corp. .................. 5.54 7/14/98 3,801,380
3,500,000 Aesop Funding Corp. .................. 5.54 7/23/98 3,488,151
1,328,000 Aesop Funding Corp. .................. 5.54 7/29/98 1,322,278
6,000,000 Apreco, Inc. ......................... 5.55 8/06/98 5,966,700
10,000,000 Apreco, Inc. ......................... 5.52 8/21/98 9,920,667
5,019,000 Atlantic Asset Securitization
Corp. .............................. 5.60 7/20/98 5,004,166
7,196,000 Block Financial Corp. ................ 5.52 9/03/98 7,124,360
4,440,000 Carnival (UK) PLC..................... 5.52 8/19/98 4,406,157
6,750,000 Carnival (UK) PLC..................... 5.53 8/19/98 6,698,550
7,103,000 Concord Minutemen Capital Co. LLC..... 6.50 7/01/98 7,103,000
510,000 Countrywide Home Loans, Inc. ......... 5.53 7/21/98 508,428
311,000 Countrywide Home Loans, Inc. ......... 5.53 8/03/98 309,418
2,500,000 Countrywide Home Loans, Inc. ......... 5.60 8/18/98 2,481,333
4,110,000 Countrywide Home Loans, Inc. ......... 5.54 8/28/98 4,072,919
2,643,000 Countrywide Home Loans, Inc. ......... 5.53 8/31/98 2,617,697
2,722,000 Countrywide Home Loans, Inc. ......... 5.535 9/02/98 2,695,324
861,000 Countrywide Home Loans, Inc. ......... 5.53 9/03/98 852,428
613,000 Finova Capital Corp. ................. 5.55 7/29/98 610,354
9,002,000 Finova Capital Corp. ................. 5.50 7/31/98 8,960,366
5,000,000 Finova Capital Corp. ................. 5.50 8/04/98 4,973,792
4,000,000 General Electric Capital Corp......... 5.47 2/18/99 3,857,191
11,191,000 Lehman Brothers Holdings Inc. ........ 5.54 9/23/98 11,044,771
5,262,000 Lehman Brothers Holdings Inc. ........ 5.54 12/22/98 5,120,593
3,500,000 Lexington Parker Capital Co., LLC..... 5.57 7/10/98 3,495,126
10,147,000 Lexington Parker Capital Co., LLC..... 5.53 7/17/98 10,122,061
1,000,000 Morgan Stanley, Dean Witter & Co.+.... 5.647 12/24/98 1,000,000
2,200,000 Morgan Stanley, Dean Witter & Co.+.... 5.616 1/22/99 2,200,000
1,000,000 Morgan Stanley, Dean Witter & Co.+.... 5.616 2/08/99 1,000,000
1,263,000 Republic Industries Funding Corp...... 5.53 7/02/98 1,262,806
6,000,000 Riverwoods Funding Corp. ............. 5.49 7/24/98 5,978,725
1,520,000 Riverwoods Funding Corp. ............. 5.53 8/31/98 1,505,448
</TABLE>
56
<PAGE> 58
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER--
(CONCLUDED)
$ 8,000,000 Salomon, Smith Barney Holdings,
Inc. ............................... 5.48% 7/16/98 $ 7,981,500
6,537,000 Salomon, Smith Barney Holdings,
Inc. ............................... 5.51 8/14/98 6,492,657
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$149,149,009) 149,138,781
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--14.1% 4,000,000 Asset-Backed Securities Investment
Trust (ABSIT) 1997-F+............... 5.616 9/15/98 4,000,000
1,040,000 Associates Corp. of North America..... 6.75 6/28/99 1,048,216
3,000,000 CIT Group Holdings, Inc. (The)........ 6.50 7/13/98 3,002,361
500,000 CIT Group Holdings, Inc. (The)+....... 5.58 8/17/98 499,944
1,300,000 CIT Group Holdings, Inc. (The)+....... 5.64 1/12/99 1,299,662
1,300,000 CIT Group Holdings, Inc. (The)+....... 5.55 5/24/99 1,299,204
2,750,000 CIT Group Holdings, Inc. (The)+....... 5.54 6/28/99 2,747,830
224,148 Chase Manhattan Auto Owner Trust
1998-A, Class A-1++................. 5.549 3/12/99 224,058
689,051 Ford Owner Trust 1998-A+++............ 5.545 2/16/99 687,755
1,400,000 General Electric Capital Corp.+....... 5.57 6/03/99 1,399,366
1,000,000 General Motors Acceptance Corp. ...... 6.375 7/02/98 1,000,031
2,000,000 General Motors Acceptance Corp. ...... 7.15 4/30/99 2,020,540
1,500,000 General Motors Acceptance Corp. ...... 6.55 6/04/99 1,509,600
3,425,000 General Motors Acceptance Corp. ...... 7.375 6/09/99 3,472,608
500,000 General Motors Acceptance Corp. ...... 7.25 6/22/99 507,160
900,000 General Motors Acceptance Corp.+...... 5.721 2/27/01 899,037
3,000,000 Goldman Sachs Group, L.P. ............ 5.679 3/26/99 3,000,660
700,000 Goldman Sachs Group, L.P. ............ 5.656 7/13/99 700,000
3,750,000 IBM Credit Corp. ..................... 5.868 8/13/98 3,753,511
2,000,000 IBM Credit Corp.+..................... 5.635 11/23/98 1,999,655
2,750,000 IBM Credit Corp. ..................... 6.625 4/19/99 2,766,775
600,000 Morgan Stanley, Dean Witter & Co.+.... 5.606 1/15/99 600,090
2,000,000 Morgan Stanley, Dean Witter & Co. .... 5.625 3/01/99 1,992,800
241,367 Newcourt Receivables Asset Trust
1997-1++............................ 5.815 12/21/98 241,483
2,900,000 Norwest Financial, Inc. .............. 6.00 10/13/98 2,901,450
378,946 Premier Auto Trust 1998-1++........... 5.545 11/06/98 378,670
464,895 Premier Auto Trust 1998-2++........... 5.607 12/06/98 464,635
1,363,351 Premier Auto Trust 1998-3++........... 5.62 2/08/99 1,363,351
1,900,000 Student Loan Marketing Association.... 4.50 8/02/99 1,876,820
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$47,661,631) 47,657,272
- ---------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--3.0% 5,000,000 Allstate Life Insurance Co.+.......... 5.69 6/30/99 5,000,000
5,000,000 Jackson National Life Insurance
Co.+................................ 5.672 5/03/99 5,000,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$10,000,000) 10,000,000
- ---------------------------------------------------------------------------------------------------------------------------
MASTER NOTES--2.4% 8,000,000 Goldman Sachs Group L.P.+............. 5.652 1/20/99 8,000,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (COST--$8,000,000) 8,000,000
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY &
INSTRUMENTALITY
OBLIGATIONS--
DISCOUNT--0.8%
40,000 Federal Home Loan Mortgage Corp. ..... 5.45 7/01/98 40,000
73,000 Federal Home Loan Mortgage Corp. ..... 5.49 8/07/98 72,593
40,000 Federal Home Loan Mortgage Corp. ..... 5.50 8/07/98 39,777
2,455,000 Federal National Mortgage
Association......................... 5.46 7/06/98 2,453,145
45,000 Federal National Mortgage
Association......................... 5.49 7/27/98 44,824
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT AGENCY & INSTRUMENTALITY
OBLIGATIONS--DISCOUNT (COST--$2,650,322) 2,650,339
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 59
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US GOVERNMENT, AGENCY &
INSTRUMENTALITY
OBLIGATIONS--
NON-DISCOUNT--16.6%
$ 3,000,000 Federal Home Loan Banks+.............. 5.592% 10/20/98 $ 2,999,734
500,000 Federal Home Loan Banks............... 6.08 6/30/99 502,000
1,850,000 Federal Home Loan Banks............... 5.99 8/11/99 1,849,815
900,000 Federal Home Loan Banks............... 5.855 1/20/00 899,370
1,000,000 Federal Home Loan Banks............... 5.75 1/28/00 998,500
700,000 Federal Home Loan Banks............... 5.865 3/17/00 699,370
1,400,000 Federal Home Loan Banks............... 5.705 3/23/00 1,398,040
1,000,000 Federal Home Loan Banks............... 5.875 5/18/00 1,000,300
2,900,000 Federal Home Loan Mortgage Corp. ..... 5.685 8/21/98 2,902,700
500,000 Federal Home Loan Mortgage Corp. ..... 6.10 9/10/99 500,050
800,000 Federal Home Loan Mortgage Corp. ..... 5.875 5/19/00 800,240
3,000,000 Federal National Mortgage
Association+........................ 5.596 10/20/98 2,999,602
6,000,000 Federal National Mortgage
Association+........................ 5.521 1/21/99 5,998,323
2,000,000 Federal National Mortgage
Association......................... 5.601 2/26/99 1,996,820
11,300,000 Federal National Mortgage
Association+........................ 5.521 3/03/99 11,296,775
2,750,000 Federal National Mortgage
Association+........................ 5.601 4/09/99 2,748,938
520,000 Federal National Mortgage
Association......................... 5.88 8/10/99 519,844
2,300,000 Federal National Mortgage
Association+........................ 5.631 10/27/99 2,298,568
2,000,000 Student Loan Marketing Association+... 5.60 8/11/98 2,000,914
1,900,000 Student Loan Marketing Association+... 5.557 10/06/98 1,899,681
1,100,000 Student Loan Marketing Association+... 5.321 11/10/98 1,097,986
2,000,000 Student Loan Marketing Association.... 5.11 11/25/98 1,999,766
1,000,000 Student Loan Marketing Association.... 5.80 12/18/98 1,000,750
4,000,000 Student Loan Marketing Association+... 5.576 2/04/00 3,998,467
1,200,000 US Treasury Notes..................... 5.625 11/30/98 1,201,500
500,000 US Treasury Notes..................... 5.375 1/31/00 499,062
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$56,097,452) 56,107,115
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$338,192,530)--100.4%........ 338,171,897
LIABILITIES IN EXCESS OF OTHER
ASSETS--(0.4%)...................... (1,206,286)
------------
NET ASSETS--100.0%.................... $336,965,611
============
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1998.
+ Variable Rate Notes.
++ Subject to principal paydowns.
See Notes to Financial Statements.
58
<PAGE> 60
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$338,192,530*) (Note
1a)....................................................... $338,171,897
Receivables:
Interest.................................................. $2,434,870
Securities sold........................................... 703,300
Capital shares sold....................................... 94,826 3,232,996
----------
Prepaid expenses and other assets........................... 4,069
------------
Total assets................................................ 341,408,962
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 2,587,839
Capital shares redeemed................................... 1,680,245
Investment adviser (Note 2)............................... 137,355 4,405,439
----------
Accrued expenses and other liabilities...................... 37,912
------------
Total liabilities........................................... 4,443,351
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $336,965,611
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value,
1,300,000,000 shares authorized+.......................... $ 33,698,624
Paid-in capital in excess of par............................ 303,287,620
Unrealized depreciation on investments--net................. (20,633)
------------
NET ASSETS.................................................. $336,965,611
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $336,965,611 and 336,986,244
shares outstanding........................................ $ 1.00
============
- ---------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. As of June 30, 1998, net unrealized
depreciation for Federal income tax purposes amounted to $20,633, of which
$26,648 related to appreciated securities and $47,281 related to depreciated
securities.
+ The Fund is authorized to issue 1,300,000,000 Class B Shares.
See Notes to Financial Statements.
59
<PAGE> 61
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and discount earned................................ $9,043,853
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $791,783
Accounting services (Note 2)................................ 25,229
Printing and shareholder reports............................ 13,238
Professional fees........................................... 10,869
Custodian fees.............................................. 9,057
Directors' fees and expenses................................ 3,225
Transfer agent fees (Note 2)................................ 2,255
Registration fees........................................... 1,892
Other....................................................... 8,958
--------
Total expenses.............................................. 866,506
----------
Investment income--net...................................... 8,177,347
----------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTE
1c):
Realized gain on investments--net........................... 5,120
Change in unrealized appreciation/depreciation on
investments--net.......................................... (30,017)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $8,152,450
==========
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
60
<PAGE> 62
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 8,177,347 $ 15,851,341
Realized gain on investments--net........................... 5,120 13,669
Change in unrealized appreciation/depreciation on
investments--net.......................................... (30,017) 28,848
------------- -------------
Net increase in net assets resulting from operations........ 8,152,450 15,893,858
------------- -------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1d):
Investment income--net:
Class A................................................... (8,177,347) (15,851,341)
Realized gain on investments--net:
Class A................................................... (5,120) (13,669)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (8,182,467) (15,865,010)
------------- -------------
- ------------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares............................ 125,722,633 242,312,822
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions (Note 1d)..... 8,186,035 15,869,707
------------- -------------
133,908,668 258,182,529
Cost of shares redeemed..................................... (114,964,777) (214,915,654)
------------- -------------
Net increase in net assets derived from Class A capital
share transactions........................................ 18,943,891 43,266,875
------------- -------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 18,913,874 43,295,723
Beginning of period......................................... 318,051,737 274,756,014
------------- -------------
End of period............................................... $336,965,611 $ 318,051,737
============= =============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
61
<PAGE> 63
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN CLASS A
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL ------------------------------------------------------------
STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 1994
<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................................ .0255 .0511 .0504 .0547 .0386
Realized and unrealized gain (loss) on
investments--net.................................... (.0001) .0001 (.0005) .0012 (.0007)
-------- -------- -------- -------- --------
Total from investment operations...................... .0254 .0512 .0499 .0559 .0379
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.............................. (.0255) (.0511) (.0504) (.0547) (.0386)
Realized gain on investments--net................... --+ --+ (.0001) (.0002) --
-------- -------- -------- -------- --------
Total dividends and distributions..................... (.0255) (.0511) (.0505) (.0549) (.0386)
-------- -------- -------- -------- --------
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.................... 5.17%* 5.24% 5.13% 5.64% 3.93%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................ .55%* .54% .54% .55% .50%
======== ======== ======== ======== ========
Expenses.............................................. .55%* .54% .54% .55% .57%
======== ======== ======== ======== ========
Investment income--net, and realized gain on
investments--net.................................... 5.17%* 5.12% 4.97% 5.50% 4.02%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $336,966 $318,052 $274,756 $303,912 $363,199
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Amount is less than $.0001 per share.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
62
<PAGE> 64
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 monthly 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 funds 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFDS, PFD, 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.
63
<PAGE> 65
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
During the six-month period ended June 30, 1998, global Group of Seven
Industrialized Nation (G-7) bond markets maintained relatively narrow trading
ranges, despite experiencing stronger economic growth and bottoming inflation in
the United States and core European economies. As global yields appeared to be
moving higher, instability in emerging markets and weakness in global stock
markets allowed core markets to maintain their demand. In addition, narrowing
interest rate differentials and the advent of a unified Europe propelled
European currencies higher relative to the US dollar. Correspondingly, we
maintained a relatively neutral duration and currency exposure as compared to
our benchmark index.
In an environment characterized by continued turmoil in Southeast Asia and
Russia, a recession in Japan, and an increase in risk premiums in emerging
markets, we upgraded the Fund's fixed-income positions during the June quarter.
We reduced our longer-term corporate holdings in favor of more liquid positions;
at the same time, we retained our longer-maturity positions in markets that
possessed positive inflationary fundamentals. We believe the Asian crisis is
likely to negatively impact G-7 growth and improve inflationary demographics. At
June 30, 1998, we retained a slightly overweighted position in the United States
relative to Europe in terms of duration.
MARKET REVIEW
US bonds remained in a narrow range in recent months. The bond market
continued to fluctuate between strong domestic data and external factors related
to the Asian financial crisis. First calendar quarter of 1998 gross domestic
product (GDP) surged to 4.8%, led by an extremely strong housing sector and
strong consumer demand. In addition, tight labor markets continued to be a
concern, since the employment cost index for the first quarter of 1998 was up
3.3% from the first quarter of 1997, while the unemployment rate in April fell
to a 28-year low of 4.3%. Inflationary reports have been benign, helped by
declining commodity and oil prices. We expect to maintain the Fund's
overweighted duration in the United States, since we expect second-quarter GDP
to have slowed dramatically because of a large inventory build up in the first
quarter and moderating consumer demand. In addition, we believe the markets
should be supported by the reduction of Government debt issuance and by reduced
public spending. We will continue to monitor the US economy closely for any
evidence of reduced growth or an increase in inflation.
In Canada, economic growth appeared to be moderating slightly with first
calendar quarter GDP falling to 3.7% from 3.9% in the fourth quarter of 1997.
The 50 basis point (0.50%) hike in short-term interest rates to support the weak
Canadian dollar, combined with the fallout from the Asian financial crisis, has
helped to moderate economic growth. Retail sales levels fell to a more
sustainable 4%-5% range. Even with inflationary numbers at or below the bottom
of the 1%-3% target band, the Bank of Canada expressed that it would raise
interest rates further if the Canadian dollar experienced additional downward
pressure. Once the currency stabilizes, we expect to add to our Canadian
exposure.
As 1998 has progressed, European economic growth continued relatively
unhindered, with real GDP in the European Union bloc approximating
64
<PAGE> 66
- --------------------------------------------------------------------------------
2.5%. However, the engine of growth shifted to include the domestic demand
sector, along with the export sector, with final demand negligibly affected by
the Asian economic crisis. Consumer confidence continues to rise across Europe,
which has been helped regionwide by a decline in unemployment. Economic growth
has not adversely impacted the favorable inflation scenario, but a trough in
inflation may have been seen. As weak oil prices have played a large role in
reducing European inflation during 1997, stable-to-higher oil prices may result
in a modest inflation increase. Consequently, European bond markets continued to
trade firmly thus far in 1998, with European Monetary Union (EMU) convergence
trades still trending toward the narrow end of respective trading ranges. We
maintained our positions in Italy since we anticipate interest rates to converge
further. Monetary policy in core European markets may rise modestly while
short-term rates in the peripheral economies may continue to be reduced as the
EMU convergence process continues.
The first round entrants in European Union were announced in May. As expected,
11 countries will be included. We added positions in Greece since we anticipate
a Greek entry in the next round of EMU entrants. With growth essential to a
unified Europe, the economic recovery that started in the smaller countries,
especially the Scandinavian countries, now appears to be spilling into the core
countries. In addition, since exchange rates are fixed, we believe short-term
interest rates should converge. The convergence should be in the form of
peripheral European bond markets converging to the core at approximately 3.5% to
4%. Relatively low nominal interest rates, negligible effects from the Asian
crisis, and reduced fiscal constraint should continue to provide growth for
European economies.
As the Asian currency crisis persisted, both the New Zealand and the
Australian currencies remained under pressure. With economic growth in both
countries potentially negatively impacted by the deepening recession in Asia, we
purchased government bonds in New Zealand at a 100 basis point spread to
comparable US Treasury securities, fully hedged to the US dollar. Problems in
Indonesia continued, with social unrest forcing the resignation of President
Suharto. It appeared that the problems in Indonesia stabilized slightly when
Vice President Habibie replaced Suharto. However, we remain very cautious of
Indonesia and Southeast Asia in general.
In Japan, the yen continued to trade weaker against the US dollar as it ended
the period just below the Y140 level. The Japanese government finally announced
the long-awaited details of its latest fiscal stimulus package of 16 trillion
yen spread over two years. The majority of the package focused on public works
spending, which the government believes will add approximately 3% to GDP.
However, investors were disappointed that no permanent tax cuts were announced.
The economic data in Japan are still deteriorating with unemployment rising to a
post World War II record high of 4.1%. Japanese government bond yields hit new
lows with consumer sentiment deteriorated because of a rising level of
bankruptcies and declining employment prospects. We expect to remain exposed to
Japanese bonds, as the recession appears to be deepening.
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Paolo Valle
Paolo Valle
Senior Vice President and Portfolio Manager
August 3, 1998
65
<PAGE> 67
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +10.19% +4.97%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
* Total investment returns are based on changes in net asset
values for the periods shown, and assume reinvestment of all
dividends and capital gains distributions at net asset value on
the payable date. Insurance-related fees and expenses are not
reflected in these returns. Past results shown should not be
considered a representation of future performance.
</TABLE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +10.19%
- --------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/98 + 6.48
- --------------------------------------------------------------------------------
66
<PAGE> 68
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AFRICA INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH BANKING Y 315,000,000 African Development Bank,
AFRICA 6.20% due 6/18/2002.... $ 3,029,061 $ 2,756,051 3.9%
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AFRICA 3,029,061 2,756,051 3.9
- --------------------------------------------------------------------------------------------------------------------------
NORTH
AMERICA
- --------------------------------------------------------------------------------------------------------------------------
CANADA FOREIGN Canadian Government
GOVERNMENT Bonds:
OBLIGATIONS C$ 350,000 7% due 12/01/2006........ 248,559 264,340 0.4
NZ$ 4,200,000 6.625% due 10/03/2007.... 2,542,374 2,133,604 3.0
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN CANADA 2,790,933 2,397,944 3.4
- --------------------------------------------------------------------------------------------------------------------------
UNITED STATES BANKING US$ 4,600,000 Comerica Bank, 7.875% due
9/15/2026.............. 4,972,858 5,265,482 7.4
50,000 Mellon Capital II, 7.995%
due 1/15/2027.......... 49,192 54,317 0.1
----------- ----------- -----
5,022,050 5,319,799 7.5
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 2,000,000 Associates Corp. of North
America, 7.375% due
6/11/2007.............. 2,101,400 2,130,000 3.0
DM 3,700,000 Ford Motor Credit Co.,
5.25% due 6/16/2008.... 2,073,994 2,040,411 2.9
----------- ----------- -----
4,175,394 4,170,411 5.9
------------------------------------------------------------------------------------------------------
GAMING US$ 500,000 ++Harrah's Jazz Company,
14.25% due
11/15/2001............. 482,500 160,000 0.2
------------------------------------------------------------------------------------------------------
INDUSTRIAL 2,500,000 Phelps Dodge Corporation,
7.125% due
11/01/2027............. 2,488,000 2,594,575 3.7
------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS 6,150,000 PNC Institutional Capital
Bank, 8.315% due
5/15/2027(a)........... 6,273,000 6,896,179 9.7
------------------------------------------------------------------------------------------------------
UTILITIES 233,383 +Tucson Electric Power
Co., 10.732% due
1/01/2013.............. 223,464 276,309 0.4
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE UNITED
STATES 18,664,408 19,417,273 27.4
- --------------------------------------------------------------------------------------------------------------------------
SHARES
HELD WARRANTS*
- --------------------------------------------------------------------------------------------------------------------------
UNITED STATES BROADCASTING/CABLE 4,700 American Telecasting
Inc. .................. 11,222 47 0.0
------------------------------------------------------------------------------------------------------
TOTAL WARRANTS IN THE
UNITED STATES 11,222 47 0.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA 21,466,563 21,815,264 30.8
- --------------------------------------------------------------------------------------------------------------------------
PACIFIC FACE
BASIN AMOUNT FIXED-INCOME INVESTMENTS
- --------------------------------------------------------------------------------------------------------------------------
JAPAN BANKING Y 65,000,000 Asian Development Bank,
5.625% due 2/18/2002... 750,697 545,724 0.8
20,000,000 IBRD World Bank, 4.50%
due 6/20/2000.......... 173,986 155,179 0.2
----------- ----------- -----
924,683 700,903 1.0
------------------------------------------------------------------------------------------------------
FOREIGN 390,000,000 Japanese Government Bond,
GOVERNMENT 5% due 9/20/2002....... 3,363,601 3,281,944 4.6
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN JAPAN 4,288,284 3,982,847 5.6
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE> 69
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN FACE VALUE PERCENT OF
(CONCLUDED) INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THAILAND INDUSTRIAL US$ 1,750,000 PTTEP International Ltd.,
7.625% due
10/01/2006(a).......... $ 1,784,755 $ 1,518,270 2.1%
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THAILAND 1,784,755 1,518,270 2.1
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 6,073,039 5,501,117 7.7
- --------------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- --------------------------------------------------------------------------------------------------------------------------
DENMARK BANKING 2,100,000 Den Danske Bank A/S,
7.40% due
6/15/2010 (a).......... 2,172,030 2,236,777 3.2
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES Dkr 10,894,000 Nykredit A/S, 6% due
10/01/2026............. 1,518,914 1,580,288 2.2
------------------------------------------------------------------------------------------------------
FOREIGN Denmark Government Bonds:
GOVERNMENT
OBLIGATIONS 23,000,000 9% due 11/15/1998........ 3,436,384 3,401,979 4.8
3,000,000 7% due 12/15/2004........ 478,193 489,437 0.7
----------- ----------- -----
3,914,577 3,891,416 5.5
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN DENMARK 7,605,521 7,708,481 10.9
- --------------------------------------------------------------------------------------------------------------------------
FINLAND FOREIGN Y 246,000,000 Republic of Finland, 6%
GOVERNMENT due 1/29/2002.......... 2,388,085 2,089,500 2.9
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN FINLAND 2,388,085 2,089,500 2.9
- --------------------------------------------------------------------------------------------------------------------------
FRANCE FOREIGN Frf 2,000,000 French Government B-Tan,
GOVERNMENT 5.50% due 10/12/2001... 335,732 343,377 0.5
OBLIGATIONS
2,300,000 French OAT, 7.25% due
4/25/2006.............. 483,739 443,407 0.6
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN FRANCE 819,471 786,784 1.1
- --------------------------------------------------------------------------------------------------------------------------
GERMANY BANKING DM 2,950,000 Deutsche Ausgleichsbank,
6% due 7/04/2007....... 1,689,123 1,735,813 2.4
3,750,000 Landeskreditbank Baden-
Wuerttemberg Bank,
5.75% due 1/19/2028.... 2,035,079 2,163,334 3.1
----------- ----------- -----
3,724,202 3,899,147 5.5
------------------------------------------------------------------------------------------------------
FOREIGN Bundesrepublic
GOVERNMENT Deutschland:
OBLIGATIONS 450,000 6.75% due 4/22/2003...... 311,821 273,983 0.4
625,000 7.50% due 11/11/2004..... 452,947 400,544 0.6
500,000 6.25% due 4/26/2006...... 337,334 304,205 0.4
2,500,000 6% due 7/04/2007......... 1,508,327 1,507,866 2.1
1,900,000 German Unity Fund, 8% due
1/21/2002.............. 1,416,586 1,178,290 1.7
----------- ----------- -----
4,027,015 3,664,888 5.2
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN GERMANY 7,751,217 7,564,035 10.7
- --------------------------------------------------------------------------------------------------------------------------
GREECE FOREIGN Grd 362,500,000 Hellenic Republic, 13.30%
GOVERNMENT due 12/27/2002......... 1,248,349 1,231,651 1.7
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN GREECE 1,248,349 1,231,651 1.7
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE> 70
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (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>
ITALY FOREIGN Buoni Poliennali del
GOVERNMENT Tesoro (Italian
OBLIGATIONS Government Bonds):
Lit 500,000,000 9.50% due 5/01/2001...... $ 358,425 $ 318,092 0.4%
3,245,000,000 10% due 8/01/2003........ 2,232,703 2,254,760 3.2
2,435,000,000 8.50% due 8/01/2004...... 1,582,753 1,629,956 2.3
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN ITALY 4,173,881 4,202,808 5.9
- --------------------------------------------------------------------------------------------------------------------------
POLAND FOREIGN Pln 6,500,000 Poland Government Bonds,
GOVERNMENT 12% due 6/12/2003...... 1,576,461 1,599,584 2.3
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN POLAND 1,576,461 1,599,584 2.3
- --------------------------------------------------------------------------------------------------------------------------
SWEDEN FOREIGN Skr 8,500,000 Government of Sweden,
GOVERNMENT 10.25% due 5/05/2000..... 1,411,881 1,175,685 1.7
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN SWEDEN 1,411,881 1,175,685 1.7
- --------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM FINANCIAL SERVICES L 1,500,000 Scottish Life Finance, 9%
due 11/29/2049......... 2,528,895 2,726,496 3.9
DM 2,950,000 United Bank of
Switzerland (London),
5.75% due 3/12/2007.... 1,657,468 1,672,081 2.4
----------- ----------- -----
4,186,363 4,398,577 6.3
------------------------------------------------------------------------------------------------------
FOREIGN United Kingdom Treasury
GOVERNMENT Gilt:
OBLIGATIONS
L 800,000 7% due 11/06/2001........ 1,299,561 1,348,215 1.9
300,000 8% due 6/10/2003......... 490,794 535,614 0.8
530,000 8.50% due 12/07/2005..... 945,081 1,012,806 1.4
150,000 9% due 7/12/2011......... 252,237 322,855 0.5
----------- ----------- -----
2,987,673 3,219,490 4.6
------------------------------------------------------------------------------------------------------
INDUSTRIAL 1,000,000 BAA PLC, 7.875% due
2/10/2007.............. 1,758,300 1,783,126 2.5
320,000 BOC Group PLC, 7.25% due
6/07/2002.............. 531,453 532,916 0.8
----------- ----------- -----
2,289,753 2,316,042 3.3
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 400,000 Vodafone Group PLC,
7.875% due
11/06/2001............. 669,126 679,541 1.0
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE
UNITED KINGDOM 10,132,915 10,613,650 15.2
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPE 37,107,781 36,972,178 52.4
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 71
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (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>
COMMERCIAL US$ 706,000 General Motors Acceptance
PAPER** Corp., 6.50% due
7/01/1998.............. $ 706,000 $ 706,000 1.0%
- --------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT 390,000 United States Treasury
OBLIGATIONS** Bills, 4.95% due
9/24/1998(b)........... 385,442 385,542 0.5
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 1,091,442 1,091,542 1.5
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 68,767,886 68,136,152 96.3
- --------------------------------------------------------------------------------------------------------------------------
NOMINAL VALUE
OPTIONS COVERED BY PREMIUMS
WRITTEN WRITTEN OPTIONS RECEIVED
- --------------------------------------------------------------------------------------------------------------------------
CURRENCY CALL 3,500,000 Deutschemark,
OPTIONS WRITTEN expiring July 1998 at
DM 1.795............... (1,400) (2,450) 0.0
3,800,000 Japanese Yen,
expiring July 1998 at
Y 135.................. (3,040) (3,230) 0.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (4,440) (5,680) 0.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, NET OF
OPTIONS WRITTEN........ $68,763,446 68,130,472 96.3
===========
VARIATION MARGIN ON
FINANCIAL FUTURES
CONTRACTS***........... (7,854) 0.0
UNREALIZED APPRECIATION
ON FORWARD FOREIGN
EXCHANGE
CONTRACTS****.......... 45,151 0.1
OTHER ASSETS LESS
LIABILITIES............ 2,563,342 3.6
----------- -----
NET ASSETS............... $70,731,111 100.0%
=========== =====
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) All or portion of securities held as collateral in connection with open
financial futures contracts.
* Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number of
shares are subject to adjustments under certain conditions until the
expiration date.
** 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.
*** Financial futures contracts sold as of June 30, 1998 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTES 1A & 1B)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
UK Gilts.................................. LIFFE September 1998
18 $1,631,993
US Treasury Bonds......................... CBOT September 1998
20 2,471,875
- --------------------------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT PRICE--$4,076,478) $4,103,868
==========
- --------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE> 72
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
**** Forward foreign exchange contracts as of June 30, 1998 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
FOREIGN CURRENCY PURCHASED EXPIRATION DATE (NOTE 1b)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DM 3,698,750 ........................................................... July 1998 $ (595)
NZ$ 3,997,777 ........................................................... July 1998 18,230
Y 536,900,000 ........................................................... July 1998 98,546
- ------------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$7,895,536) 116,181
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- ------------------------------------------------------------------------------------------------------------------------
DM 3,687,803 ........................................................... July 1998 3,857
L 2,037,941 ........................................................... July 1998 4,568
NZ$ 4,029,599 ........................................................... July 1998 (34,695)
Y 536,900,000 ........................................................... July 1998 (44,760)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$11,346,225) (71,030)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET $ 45,151
========
</TABLE>
- --------------------------------------------------------------------------------
+ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $276,000, representing 0.4% 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 $276,309
- -----------------------------------------------------------------------------------------------------------
TOTAL $223,464 $276,309
======== ========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
See Notes to Financial Statements.
71
<PAGE> 73
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$68,767,886) (Note
1a)....................................................... $68,136,152
Unrealized appreciation on forward foreign exchange
contracts (Note 1b)....................................... 45,151
Foreign cash (Note 1c)...................................... 508,909
Cash........................................................ 563
Receivables:
Interest.................................................. $1,662,360
Securities sold........................................... 436,022
Options written (Note 1b)................................. 3,040 2,101,422
----------
Deferred organization expenses (Note 1f).................... 789
Prepaid expenses and other assets........................... 17,260
-----------
Total assets................................................ 70,810,246
-----------
- -------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$4,440) (Notes
1a & 1b).................................................. 5,680
Payables:
Investment adviser (Note 2)............................... 37,592
Capital shares redeemed................................... 28,009
Variation margin (Note 1b)................................ 7,854 73,455
---------- -----------
Total liabilities........................................... 79,135
-----------
- -------------------------------------------------------------------------------------
NET ASSETS.................................................. $70,731,111
===========
- -------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized+........................................ $ 744,929
Paid-in capital in excess of par............................ 72,718,755
Accumulated distributions in excess of investment
income--net (Note 1g)..................................... (439,594)
Accumulated investment loss--net............................ (31,120)
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 5)............... (1,642,702)
Unrealized depreciation on investments and foreign currency
transactions--net......................................... (619,157)
-----------
NET ASSETS.................................................. $70,731,111
===========
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $70,731,111 and 7,449,292
shares outstanding........................................ $ 9.50
===========
- -------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
72
<PAGE> 74
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned................................ $2,383,142
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 218,078
Custodian fees.............................................. 11,677
Professional fees........................................... 8,821
Accounting services (Note 2)................................ 6,600
Transfer agent fees (Note 2)................................ 2,485
Printing and shareholder reports............................ 1,077
Directors' fees and expenses................................ 816
Pricing services............................................ 597
Amortization of organization expenses (Note 1f)............. 392
Other....................................................... 871
---------
Total expenses.............................................. 251,414
----------
Investment income--net...................................... 2,131,728
----------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain from:
Investments--net.......................................... 947,886
Foreign currency transactions--net........................ 732,866 1,680,752
---------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 14,298
Foreign currency transactions--net........................ (254,527) (240,229)
--------- ----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 1,440,523
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $3,572,251
==========
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
73
<PAGE> 75
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 2,131,728 $ 4,925,061
Realized gain (loss) on investments and foreign currency
transactions--net......................................... 1,680,752 (4,766,749)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (240,229) 657,214
------------ ------------
Net increase in net assets resulting from operations........ 3,572,251 815,526
------------ ------------
- ------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (2,162,848) (2,532,863)
Return of capital:
Class A................................................... -- (2,511,049)
In excess of investment income--net:
Class A................................................... -- (276,658)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (2,162,848) (5,320,570)
------------ ------------
- ------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (6,785,496) (13,177,662)
------------ ------------
- ------------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (5,376,093) (17,682,706)
Beginning of period......................................... 76,107,204 93,789,910
------------ ------------
End of period............................................... $ 70,731,111 $ 76,107,204
============ ============
- ------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
74
<PAGE> 76
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------
FINANCIAL STATEMENTS. FOR THE YEAR ENDED
FOR THE SIX DECEMBER 31,
MONTHS ENDED -------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+ 1997+ 1996+ 1995+ 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 9.32 $ 9.76 $ 9.79 $ 9.17 $ 10.38
------- ------- ------- ------- -------
Investment income--net............................. .27 .56 .78 .85 .76
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net........... .19 (.40) (.03) .61 (1.19)
------- ------- ------- ------- -------
Total from investment operations................... .46 .16 .75 1.46 (.43)
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net........................... (.28) (.29) (.78) (.84) (.76)
Return of capital................................ -- (.28) -- -- --
In excess of investment income--net.............. -- (.03) -- -- --
In excess of realized gain on investments--net... -- -- -- -- (.02)
------- ------- ------- ------- -------
Total dividends and distributions.................. (.28) (.60) (.78) (.84) (.78)
------- ------- ------- ------- -------
Net asset value, end of period..................... $ 9.50 $ 9.32 $ 9.76 $ 9.79 $ 9.17
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. 4.97%++ 1.95% 8.02% 16.69% (4.21%)
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... .69%* .73% .69% .68% .75%
======= ======= ======= ======= =======
Investment income--net............................. 5.87%* 6.11% 7.95% 8.99% 8.01%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $70,731 $76,107 $93,790 $81,845 $75,150
======= ======= ======= ======= =======
Portfolio turnover................................. 63.85% 568.76% 267.13% 132.57% 117.58%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
75
<PAGE> 77
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 the 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 financial 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.
76
<PAGE> 78
- --------------------------------------------------------------------------------
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-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
period not exceeding five years. 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. Distributions in excess of net investment income are due
primarily to differing tax treatments for foreign currency transactions. A
portion of the net investment income dividends paid by the Fund during the year
ended December 31, 1997 is characterized as a return of capital.
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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
77
<PAGE> 79
- --------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $42,672,629 and $49,369,914, respectively.
Net realized gains (losses) for the six months ended June 30, 1998 and net
unrealized gains (losses) as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $ 609,522 $(631,834)
Short-term investments.............. 7 100
Financial futures contracts......... 338,357 (27,390)
Foreign currency options written.... (199,856) (1,240)
Foreign currency transactions....... (183,299) (3,944)
Forward foreign exchange contracts.. 1,116,021 45,151
---------- ---------
Total............................... $1,680,752 $(619,157)
========== =========
- ---------------------------------------------------------------------
</TABLE>
Transactions in options written for the six months ended June 30, 1998 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.............. -- --
Options written................... 152,629,999 $ 122,136
Options exercised................. (3,835,000) (2,685)
Options closed.................... (17,050,000) (13,775)
Options expired................... (124,444,999) (101,236)
------------ ---------
Outstanding call options written,
end of period.................... 7,300,000 $ 4,440
============ =========
- ------------------------------------------------------------------
</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................... 103,920,000 $ 67,282
Options exercised................. (32,835,000) (21,893)
Options expired................... (71,085,000) (45,389)
----------- --------
Outstanding put options written,
end of period.................... -- $ --
=========== ========
- -----------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized depreciation for Federal income tax purposes
aggregated $631,734, of which $2,017,901 related to appreciated securities and
$2,649,635 related to depreciated securities. At June 30, 1998, the aggregate
cost of investments for Federal income tax purposes was $68,767,886.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$6,785,496 and $13,177,662 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 122,846 $ 1,157,961
Shares issued to shareholders in
reinvestment of dividends........... 231,055 2,162,843
---------- ------------
Total issued......................... 353,901 3,320,804
Shares redeemed...................... (1,073,856) (10,106,300)
---------- ------------
Net decrease......................... (719,955) $ (6,785,496)
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 493,520 $ 4,682,144
Shares issued to shareholders in
reinvestment of dividends........... 578,466 5,320,557
---------- ------------
Total issued......................... 1,071,986 10,002,701
Shares redeemed...................... (2,511,890) (23,180,363)
---------- ------------
Net decrease......................... (1,439,904) $(13,177,662)
========== ============
- -----------------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1997, the Fund had a net capital loss carryforward of
approximately $2,872,000, of which $513,000 expires in 2002 and $2,359,000
expires in 2005. This amount will be available to offset like amounts of any
future taxable gains.
78
<PAGE> 80
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide you with the first shareholder report for Global
Growth Focus Fund of Merrill Lynch Variable Series Funds, Inc. The Fund seeks
long-term growth of capital by investing in a diversified portfolio of equity
securities of issuers located in various foreign countries and the United
States. In this and future reports to shareholders, we will provide information
on the Fund's performance, discuss our investment strategies and highlight some
of the Fund's holdings.
THE ENVIRONMENT
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
Global Growth Focus Fund commenced operations on June 5, 1998. By June 30,
1998, the Fund had $5.7 million in net assets, more than 92% of which was
invested in a diversified portfolio of equity securities of companies in 13
foreign countries and the United States. We focused on relatively
large-capitalization, high-quality companies where we anticipate above-average
rates of growth in earnings in upcoming years. Since inception through June 30,
1998, the Fund's Class A Shares had a total return of +1.60%.
In addition to the US equity market, we focused on equity markets in developed
countries with particularly significant weightings in the Western European
markets of the United Kingdom, Germany and France. As of June 30, 1998, the Fund
had positions in the equity securities of 140 companies. At 3.5% of net assets,
the largest holding in the Fund was SAP AG, a relatively large German software
company that appears to dominate the market for business application software
operating on networked computer systems. The most important industry sectors in
the Fund were banking and financial, insurance, pharmaceuticals and
telecommunications. We have a positive outlook toward finding attractive
investment opportunities among the companies available on the major stock
exchanges in developed capital markets.
IN CONCLUSION
We appreciate your investment in Global Growth Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Lawrence R. Fuller
Lawrence R. Fuller
Senior Vice President and Portfolio Manager
August 3, 1998
79
<PAGE> 81
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
TOTAL RETURN**
- -------------------------------------------------------------------------------
<S> <C>
Class A Shares +1.60%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. Past results shown
should not be considered a representation of future performance.
** The Fund commenced operations on 6/05/98.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
AGGREGATE TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Inception (6/05/98) through 6/30/98 +1.60%
- --------------------------------------------------------------------------------
80
<PAGE> 82
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH SHARES VALUE PERCENT OF
AMERICA INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CANADA BANKING & 1,026 Bank of Montreal.................... $ 57,054 $ 56,546 1.0%
FINANCIAL 1,553 Canadian Imperial Bank of
Commerce.......................... 50,440 49,981 0.9
1,350 National Bank of Canada............. 25,875 26,408 0.5
810 Royal Bank of Canada................ 48,441 48,775 0.8
---------- ---------- -----
181,810 181,710 3.2
------------------------------------------------------------------------------------------------------
BEVERAGES 135 Seagram Company Ltd. (The).......... 5,709 5,527 0.1
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 945 +Newbridge Networks Corporation..... 23,028 22,601 0.4
EQUIPMENT
189 Northern Telecom Ltd. .............. 11,248 10,725 0.2
---------- ---------- -----
34,276 33,326 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 221,795 220,563 3.9
- --------------------------------------------------------------------------------------------------------------------------
UNITED STATES ADVERTISING 230 Interpublic Group of Companies,
Inc. ............................. 13,649 13,958 0.3
------------------------------------------------------------------------------------------------------
BANKING & 416 Banc One Corp. ..................... 23,572 23,218 0.4
FINANCIAL 135 BankAmerica Corp. .................. 11,305 11,669 0.2
81 Citicorp............................ 12,393 12,089 0.2
392 Mellon Bank Corp. .................. 26,923 27,293 0.5
486 State Street Corp. ................. 33,097 33,777 0.6
---------- ---------- -----
107,290 108,046 1.9
------------------------------------------------------------------------------------------------------
BEVERAGES 1,500 Coca-Cola Company (The)............. 128,605 128,250 2.3
------------------------------------------------------------------------------------------------------
BROADCASTING 324 +Chancellor Media Corp. ............ 14,559 16,079 0.3
------------------------------------------------------------------------------------------------------
BROADCASTING-- 122 +Clear Channel Communications,
RADIO & TELEVISION Inc. ............................. 12,480 13,313 0.2
------------------------------------------------------------------------------------------------------
CHEMICALS 297 duPont (E.I.) de Nemours & Co. ..... 22,903 22,164 0.4
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 1,269 +Cisco Systems, Inc. ............... 102,754 116,827 2.1
EQUIPMENT 1,188 +FORE Systems, Inc. ................ 27,390 31,408 0.5
216 Lucent Technologies, Inc. .......... 16,085 17,968 0.3
---------- ---------- -----
146,229 166,203 2.9
------------------------------------------------------------------------------------------------------
COMPUTERS 1,890 COMPAQ Computer Corporation......... 53,570 53,629 1.0
257 +Dell Computer Corporation.......... 22,170 23,837 0.4
122 Hewlett-Packard Co. ................ 7,473 7,305 0.1
---------- ---------- -----
83,213 84,771 1.5
------------------------------------------------------------------------------------------------------
COSMETICS 297 Gillette Company (The).............. 17,390 16,836 0.3
------------------------------------------------------------------------------------------------------
ELECTRICAL 95 Emerson Electric Co. ............... 5,804 5,736 0.1
EQUIPMENT 1,013 General Electric Co. ............... 86,889 92,183 1.6
---------- ---------- -----
92,693 97,919 1.7
------------------------------------------------------------------------------------------------------
ELECTRONICS 405 Intel Corporation................... 29,202 29,995 0.5
95 Texas Instruments Inc. ............. 5,179 5,540 0.1
---------- ---------- -----
34,381 35,535 0.6
------------------------------------------------------------------------------------------------------
ENERGY 297 El Paso Natural Gas Co. ............ 10,939 11,360 0.2
------------------------------------------------------------------------------------------------------
ENTERTAINMENT 95 +Viacom, Inc. (Class A)............. 5,373 5,558 0.1
405 Walt Disney Company (The)........... 45,592 42,550 0.7
---------- ---------- -----
50,965 48,108 0.8
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 108 American Express Company............ 11,378 12,312 0.2
189 Federal National Mortgage
Association....................... 11,607 11,482 0.2
270 Franklin Resources, Inc. ........... 13,574 14,580 0.3
270 Morgan Stanley, Dean Witter,
Discover & Co. ................... 21,743 24,671 0.4
243 Travelers Group, Inc. .............. 15,381 14,732 0.3
---------- ---------- -----
73,683 77,777 1.4
------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE> 83
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICA SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES FOOD MERCHANDISING 135 Albertson's, Inc. .................. $ 6,891 $ 6,995 0.1%
(CONCLUDED)
284 +Meyer (Fred) Inc. ................. 12,565 12,070 0.2
---------- ---------- -----
19,456 19,065 0.3
------------------------------------------------------------------------------------------------------
FOODS 95 Wrigley (Wm.) Jr. Company (Class
B)................................ 9,381 9,310 0.2
------------------------------------------------------------------------------------------------------
HOME FURNISHINGS 473 Ethan Allen Interiors, Inc. ........ 22,512 23,620 0.4
------------------------------------------------------------------------------------------------------
HOTELS 338 Marriott International, Inc. ....... 11,163 10,943 0.2
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 95 Colgate-Palmolive Co. .............. 8,400 8,360 0.1
54 Kimberly-Clark Corp. ............... 2,604 2,477 0.0
162 Procter & Gamble Company............ 14,244 14,752 0.3
---------- ---------- -----
25,248 25,589 0.4
------------------------------------------------------------------------------------------------------
INFORMATION 419 First Data Corp. ................... 13,637 13,958 0.2
PROCESSING
------------------------------------------------------------------------------------------------------
INSURANCE 405 American International Group,
Inc. ............................. 53,363 59,130 1.0
------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 405 +Boston Scientific Corp. ........... 27,212 29,008 0.5
243 Guidant Corporation................. 15,902 17,329 0.3
68 Johnson & Johnson................... 4,963 5,015 0.1
---------- ---------- -----
48,077 51,352 0.9
------------------------------------------------------------------------------------------------------
OIL SERVICES 513 Baker Hughes, Inc. ................. 18,794 17,731 0.3
473 Diamond Offshore Drilling, Inc. .... 21,179 18,920 0.3
149 Schlumberger Ltd. .................. 11,055 10,179 0.2
---------- ---------- -----
51,028 46,830 0.8
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 500 Bristol-Myers Squibb Co. ........... 56,120 57,469 1.0
378 Merck & Co., Inc. .................. 46,388 50,558 0.9
1,080 Pfizer, Inc. ....................... 118,676 117,382 2.1
---------- ---------- -----
221,184 225,409 4.0
------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 81 Eastman Kodak Co. .................. 5,575 5,918 0.1
------------------------------------------------------------------------------------------------------
PUBLISHING 377 Gannett Co., Inc. .................. 26,484 26,791 0.5
------------------------------------------------------------------------------------------------------
RESTAURANTS 81 McDonald's Corporation.............. 5,469 5,589 0.1
------------------------------------------------------------------------------------------------------
RETAIL STORES 270 +Federated Department Stores,
Inc. ............................. 14,243 14,529 0.3
1,134 Wal-Mart Stores, Inc. .............. 65,658 68,890 1.2
---------- ---------- -----
79,901 83,419 1.5
------------------------------------------------------------------------------------------------------
SEMICONDUCTOR 338 +Applied Materials, Inc. ........... 9,990 9,971 0.2
------------------------------------------------------------------------------------------------------
SOFTWARE-- 1,800 +Microsoft Corporation.............. 183,949 195,075 3.4
COMPUTER 567 +PeopleSoft, Inc. .................. 25,547 26,614 0.5
---------- ---------- -----
209,496 221,689 3.9
------------------------------------------------------------------------------------------------------
SPECIALTY 484 CVS Corporation..................... 17,935 18,846 0.3
RETAILING
270 Gap, Inc. (The)..................... 15,999 16,639 0.3
1,175 +Staples, Inc. ..................... 32,344 34,002 0.6
446 Walgreen Co. ....................... 17,603 18,425 0.3
---------- ---------- -----
83,881 87,912 1.5
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 432 AT&T Corp. ......................... 27,152 24,678 0.4
621 Sprint Corporation.................. 44,796 43,780 0.8
608 +WorldCom Inc. ..................... 28,128 29,374 0.5
---------- ---------- -----
100,076 97,832 1.7
------------------------------------------------------------------------------------------------------
TOYS 540 Mattel, Inc......................... 20,717 22,849 0.4
------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 504 Carnival Corp. (Class A)............ 17,823 19,971 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED
STATES 1,843,440 1,907,466 33.5
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH AMERICA 2,065,235 2,128,029 37.4
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE> 84
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC SHARES VALUE PERCENT OF
BASIN INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN AUTOMOBILES 1,000 Honda Motor Co., Ltd................ $ 33,588 $ 35,650 0.6%
1,000 Toyota Motor Corp. ................. 24,389 25,907 0.5
---------- ---------- -----
57,977 61,557 1.1
------------------------------------------------------------------------------------------------------
COMPUTERS 1,000 Fujitsu Ltd......................... 10,481 10,536 0.2
1,000 NEC Corporation..................... 9,305 9,331 0.2
---------- ---------- -----
19,786 19,867 0.4
------------------------------------------------------------------------------------------------------
ELECTRONICS 200 Sony Corp. ......................... 16,171 17,248 0.3
------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 1,000 Fuji Photo Film Co., Ltd............ 32,946 34,856 0.6
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 5 +Nippon Telegraph & Telephone
Corp. ............................ 41,354 41,496 0.7
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC
BASIN 168,234 175,024 3.1
- --------------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- --------------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 405 Tele-Danmark A/S.................... 38,021 38,891 0.7
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 38,021 38,891 0.7
- --------------------------------------------------------------------------------------------------------------------------
FINLAND COMMUNICATIONS 675 Nokia Oyj (Class A)................. 46,294 49,751 0.9
EQUIPMENT
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 46,294 49,751 0.9
- --------------------------------------------------------------------------------------------------------------------------
FRANCE COMMUNICATIONS 297 Alcatel Alsthom Cie Generale
EQUIPMENT d'Electricite S.A................. 59,156 60,496 1.0
------------------------------------------------------------------------------------------------------
COSMETICS 27 L'OREAL S.A......................... 14,294 15,025 0.3
------------------------------------------------------------------------------------------------------
ELECTRONICS 810 +SGS-Thomson Microelectronics N.V... 57,568 57,431 1.0
------------------------------------------------------------------------------------------------------
FOODS 108 Groupe Danone S.A................... 29,679 29,790 0.5
41 Promodes S.A........................ 20,866 22,727 0.4
---------- ---------- -----
50,545 52,517 0.9
------------------------------------------------------------------------------------------------------
INFORMATION 540 Cap Gemini S.A. .................... 83,142 84,885 1.5
PROCESSING
------------------------------------------------------------------------------------------------------
INSURANCE 446 AXA-UAP S.A. ....................... 50,704 50,183 0.9
------------------------------------------------------------------------------------------------------
RETAIL STORES 54 Carrefour S.A. ..................... 33,654 34,177 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 349,063 354,714 6.2
- --------------------------------------------------------------------------------------------------------------------------
GERMANY APPAREL 270 Adidas-Saloman AG................... 48,196 47,039 0.8
------------------------------------------------------------------------------------------------------
AUTOMOBILES 456 Daimler-Benz AG..................... 44,436 44,837 0.8
------------------------------------------------------------------------------------------------------
BANKING & 1,620 Commerzbank AG...................... 63,028 61,652 1.1
FINANCIAL 945 Deutsche Bank AG.................... 80,166 79,884 1.4
1,418 Dresdner Bank AG.................... 79,633 76,587 1.3
---------- ---------- -----
222,827 218,123 3.8
------------------------------------------------------------------------------------------------------
CHEMICALS 405 BASF AG............................. 18,986 19,238 0.3
405 Bayer AG............................ 19,781 20,954 0.4
378 Hoechst AG.......................... 18,215 19,003 0.3
---------- ---------- -----
56,982 59,195 1.0
------------------------------------------------------------------------------------------------------
ELECTRONICS 540 Siemens AG.......................... 34,277 32,950 0.6
------------------------------------------------------------------------------------------------------
INSURANCE 218 Allianz AG.......................... 69,497 72,638 1.3
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 473 VEBA AG............................. 33,072 31,796 0.6
------------------------------------------------------------------------------------------------------
RETAIL STORES 675 Metro AG............................ 44,866 40,757 0.7
375 Metro AG (Rights)(a)................ 0 15 0.0
---------- ---------- -----
44,866 40,772 0.7
------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE> 85
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<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 SOFTWARE--COMPUTER 297 SAP AG (Systeme, Anwendungen,
(CONCLUDED) Produkte in der Datenverarbeitung)
(Preferred)....................... $ 186,021 $ 201,543 3.5%
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 740,174 748,893 13.1
- --------------------------------------------------------------------------------------------------------------------------
IRELAND BANKING & 3,510 Allied Irish Banks PLC.............. 47,800 50,746 0.9
FINANCIAL
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN IRELAND 47,800 50,746 0.9
- --------------------------------------------------------------------------------------------------------------------------
ITALY INSURANCE 1,350 Assicurazioni Generali S.p.A. ...... 45,058 43,911 0.8
10,125 Istituto Nazionale delle
Assicurazioni S.p.A. (INA)........ 31,347 28,774 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 76,405 72,685 1.3
- --------------------------------------------------------------------------------------------------------------------------
NETHERLANDS FOOD MERCHANDISING 1,620 Koninklijke Ahold N.V. ............. 50,550 52,111 0.9
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 540 Unilever N.V. ...................... 44,071 42,828 0.8
324 Unilever N.V. (NY Registered
Shares)........................... 26,673 25,576 0.4
---------- ---------- -----
70,744 68,404 1.2
------------------------------------------------------------------------------------------------------
INSURANCE 1,080 AEGON N.V. ......................... 86,660 94,167 1.7
635 ING Groep N.V. ..................... 42,828 41,666 0.7
---------- ---------- -----
129,488 135,833 2.4
------------------------------------------------------------------------------------------------------
LEISURE 189 Philips Electronics N.V. ........... 16,936 15,921 0.3
------------------------------------------------------------------------------------------------------
SOFTWARE-- 432 +Baan Company N.V. ................. 18,340 15,556 0.3
COMPUTER
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE NETHERLANDS 286,058 287,825 5.1
- --------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING & 1,080 Banco Bilbao Vizcaya, S.A. ......... 54,876 55,528 1.0
FINANCIAL
1,486 Banco Santander, S.A. .............. 37,651 38,104 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 92,527 93,632 1.6
- --------------------------------------------------------------------------------------------------------------------------
SWEDEN COMMUNICATIONS 675 Telefonaktiebolaget LM Ericsson
EQUIPMENT (Class B)......................... 19,183 19,722 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 19,183 19,722 0.3
- --------------------------------------------------------------------------------------------------------------------------
SWITZERLAND FOODS 27 Nestle S.A. (Registered Shares)..... 58,273 57,819 1.0
------------------------------------------------------------------------------------------------------
INSURANCE 54 Zuerich Versicherungs-Gesellschaft
(Registered Shares)............... 35,082 34,485 0.6
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 47 Novartis AG (Registered Shares)..... 79,001 78,261 1.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWITZERLAND 172,356 170,565 3.0
- --------------------------------------------------------------------------------------------------------------------------
UNITED BANKING & 2,363 Barclays PLC........................ 66,408 68,129 1.2
KINGDOM FINANCIAL 1,350 HSBC Holdings PLC................... 34,198 34,260 0.6
4,860 Lloyds TSB Group PLC................ 69,139 67,993 1.2
4,050 National Westminster Bank PLC
(Ordinary)........................ 73,561 72,372 1.2
---------- ---------- -----
243,306 242,754 4.2
------------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 2,700 British Sky Broadcasting Group PLC.. 19,673 19,394 0.3
------------------------------------------------------------------------------------------------------
CHEMICALS 986 Imperial Chemical Industries PLC.... 17,600 15,826 0.3
------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE> 86
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED KINGDOM ELECTRICAL 2,025 Siebe PLC........................... $ 42,594 $ 40,443 0.7%
(CONCLUDED) EQUIPMENT
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 2,025 Unilever PLC........................ 23,148 21,556 0.4
------------------------------------------------------------------------------------------------------
INFORMATION 2,808 Reuters Group PLC................... 33,408 32,093 0.5
PROCESSING
------------------------------------------------------------------------------------------------------
INSURANCE 2,700 Commercial Union PLC................ 49,366 50,365 0.9
6,750 Guardian Royal Exchange PLC......... 42,278 39,531 0.7
5,400 Royal & Sun Alliance Insurance Group
PLC............................... 59,579 55,816 1.0
---------- ---------- -----
151,223 145,712 2.6
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 716 Glaxo Wellcome PLC.................. 20,581 21,492 0.4
1,553 SmithKline Beecham PLC.............. 18,010 18,954 0.3
1,080 Zeneca Group PLC.................... 46,467 46,347 0.8
---------- ---------- -----
85,058 86,793 1.5
------------------------------------------------------------------------------------------------------
PUBLISHING 2,025 Pearson PLC......................... 36,938 37,098 0.7
------------------------------------------------------------------------------------------------------
RETAIL STORES 2,025 Boots Company PLC (The)............. 34,638 33,551 0.6
5,400 J Sainsbury PLC..................... 46,753 48,113 0.9
2,600 Somerfield PLC...................... 16,663 16,547 0.3
3,780 Tesco PLC........................... 34,581 36,896 0.6
---------- ---------- -----
132,635 135,107 2.4
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 1,890 +COLT Telecom Group PLC............. 67,712 76,629 1.4
5,400 Vodafone Group PLC.................. 67,129 68,520 1.2
---------- ---------- -----
134,841 145,149 2.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED
KINGDOM 920,424 921,925 16.2
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN EUROPE 2,788,305 2,809,349 49.3
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM FACE
SECURITIES AMOUNT ISSUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US GOVERNMENT $779,000 Federal Home Loan Mortgage Corp.,
AGENCY 5.85% due 7/01/1998............. 778,873 778,873 13.7
OBLIGATIONS*
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 778,873 778,873 13.7
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS................. $5,800,647 5,891,275 103.5
==========
LIABILITIES IN EXCESS OF OTHER
ASSETS.......................... (199,240) (3.5)
---------- -----
NET ASSETS........................ $5,692,035 100.0%
========== =====
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
+ Non-income producing security.
(a) The rights may be exercised until 7/09/1998.
See Notes to Financial Statements.
85
<PAGE> 87
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$5,800,647) (Note
1a)....................................................... $5,891,275
Cash........................................................ 21,933
Foreign cash (Note 1c)...................................... 99,317
Receivables:
Capital shares sold....................................... $150,123
Dividends................................................. 1,839 151,962
--------
Deferred organization expenses (Note 1f).................... 9,275
----------
Total assets................................................ 6,173,762
----------
- -----------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 467,265
Investment adviser (Note 2)............................... 2,317 469,582
--------
Accrued expenses and other liabilities...................... 12,145
----------
Total liabilities........................................... 481,727
----------
- -----------------------------------------------------------------------------------
NET ASSETS.................................................. $5,692,035
==========
- -----------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 56,051
Paid-in capital in excess of par............................ 5,540,143
Undistributed investment income--net........................ 6,802
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (1,473)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 90,512
----------
NET ASSETS.................................................. $5,692,035
==========
- -----------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $5,692,035 and 560,514
shares outstanding........................................ $ 10.16
==========
- -----------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
86
<PAGE> 88
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF OPERATIONS FOR THE PERIOD JUNE 5, 1998+ TO JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned................................ $ 8,598
Dividends (net of $159 foreign withholding tax)............. 1,468
-------
Total income................................................ 10,066
-------
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 2,217
Transfer agent fees (Note 2)................................ 349
Custodian fees.............................................. 294
Pricing services............................................ 202
Amortization of organization expenses (Note 1f)............. 142
Accounting services (Note 2)................................ 47
Other....................................................... 13
-------
Total expenses.............................................. 3,264
-------
Investment income--net...................................... 6,802
-------
- -------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY
TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized loss from foreign currency transactions--net....... (1,473)
Unrealized appreciation (depreciation) on:
Investments--net.......................................... 90,628
Foreign currency transactions--net........................ (116) 90,512
------- -------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 89,039
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $95,841
=======
- -------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
87
<PAGE> 89
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSETS: TO JUNE 30, 1998
<S> <C>
- --------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 6,802
Realized loss on foreign currency transactions--net......... (1,473)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 90,512
----------
Net increase in net assets resulting from operations........ 95,841
----------
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 2,596,194
----------
- --------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 2,692,035
Beginning of period......................................... 3,000,000
----------
End of period*.............................................. $5,692,035
==========
- --------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 6,802
==========
- --------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
88
<PAGE> 90
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE ----------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE PERIOD
FINANCIAL STATEMENTS. JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: TO JUNE 30, 1998
<S> <C>
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.00
-------
Investment income--net...................................... .01
Realized and unrealized gain on investments and foreign
currency transactions--net................................ .15
-------
Total from investment operations............................ .16
-------
Net asset value, end of period.............................. $ 10.16
=======
- ------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 1.60%++
=======
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.05%*
=======
Investment income--net...................................... 2.19%*
=======
- ------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $ 5,692
=======
Portfolio turnover.......................................... 0.00%
=======
- ------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
89
<PAGE> 91
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH 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 18 separate funds. Each fund
offers two classes of shares to the Merrill Lynch Life Insurance Company
("MLLIC"), ML Life Insurance Company of New York (indirect wholly-owned
subsidiaries of Merrill Lynch & Co., Inc. ("ML & Co.")), and other insurance
companies, that are not affiliated with ML & Co., for their separate accounts to
fund benefits under certain variable annuity and variable life insurance
contracts. Prior to commencement of operations on June 5, 1998, the Fund had no
operations other than those relating to organizational matters and the issuance
of 300,000 Class A Shares of the Fund to MLLIC for $3,000,000. Class A and Class
B Shares have equal voting, dividend, liquidation and other rights, except that
only shares of the respective classes are entitled to vote on matters concerning
only that class and Class B Shares bear certain expenses related to the
distribution of such shares. Global Growth 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 the 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 financial 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
90
<PAGE> 92
- --------------------------------------------------------------------------------
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-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--Transac-tions 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--Deferred organization expenses are charged
to expense on a straight-line basis over a period not exceeding five years.
(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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases of investments, excluding short-term securities, for the period June
5, 1998 to June 30, 1998 were $5,022,424.
91
<PAGE> 93
- --------------------------------------------------------------------------------
Net realized losses for the period June 5, 1998 to June 30, 1998 and net
unrealized gains (losses) as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... -- $90,628
Foreign currency transactions....... $(1,473) (116)
------- -------
Total............................... $(1,473) $90,512
======= =======
- ---------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $90,628, of which $152,360 related to appreciated securities and
$61,732 related to depreciated securities. At June 30, 1998, the aggregate cost
of investments for Federal income tax purposes was $5,800,647.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$2,596,194 for the period June 5, 1998 to June 30, 1998.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Period Dollar
June 5, 1998+ to June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................... 260,705 $2,598,123
Shares redeemed........................... (191) (1,929)
------- ----------
Net increase.............................. 260,514 $2,596,194
======= ==========
- -----------------------------------------------------------------
</TABLE>
+ Prior to June 5, 1998 (commencement of operations), the Fund issued 300,000
shares to MLLIC for $3,000,000.
5. COMMITMENTS:
At June 30, 1998, the Fund had entered into foreign exchange contracts under
which it agreed to purchase various foreign currencies with values of
approximately $91,000, respectively.
92
<PAGE> 94
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
As of June 30, 1998, the Fund's asset allocation was: foreign stocks, 42% of
net assets; US stocks, 31%; foreign bonds, 14%; US bonds, 11%; and cash
equivalents, 2%.
During the first half of 1998, we increased the Fund's commitment to foreign
stocks while reducing the commitment to bonds and cash reserves. In enlarging
the foreign equity commitment from 30% of net assets to 42% during the six
months ended June 30, 1998, we continued to emphasize European issues, given the
favorable economic fundamentals and prospects for corporate restructuring. On
the other hand, concerns regarding the Japanese economy led us to remain
underweighted in Japanese equities relative to the unmanaged Morgan Stanley
Europe, Australia, Far East Index. In emerging markets, we continued to prefer
Latin American companies, and in particular, those of Mexico, over Asian
companies.
Within the US equity commitment, we continued to place emphasis on the shares
of companies that we believed could benefit from a healthy US economy and a high
level of consumer confidence. We also preferred companies that appear to have
limited exposure to the economic problems of Asia. The Fund's largest weighting
at June 30, 1998 was in the consumer-related sectors, both cyclicals and
staples. Other sectors with significant representation were financial services
and technology. We reduced the Fund's representation to the
largest-capitalization issues through the sales of positions in American Express
Company, Microsoft Corp. and Pfizer, Inc.
Within the foreign bond sector, we took advantage of price strength to
eliminate the commitments to Danish, Spanish, French and Italian bonds.
Portfolio representation in Europe was limited to Germany and the United
Kingdom, which we regarded as attractive safe-haven investments during a time of
instability in Asia and Eastern Europe. We had a position in Swedish bonds,
where yields remained relatively attractive compared to the remainder of Europe.
Given our expectation of renewed strength in the US dollar relative to the
European currencies, we restored the hedges against commitments in European
stocks and bonds. We also retained the hedge against Japanese yen exposure.
While reducing the Fund's allocation to US bonds from 15% of net assets to 11%
during the six months ended June 30, 1998, we also shortened the average
duration from 5.9 years to 5.2 years. Our increasingly cautious view on US bonds
reflected our belief that there was limited potential for a significant further
decline in US interest rates. By June 30, 1998, strength in domestic consumer
demand in the United States seemed to be offsetting the impact that the weakness
in Asian economies was having on US exports. While US inflation remained
subdued, we believed that conditions for a significant further deceleration in
inflation, a prerequisite for a meaningful additional decline in long-term US
interest rates, were absent.
93
<PAGE> 95
- --------------------------------------------------------------------------------
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
August 3, 1998
94
<PAGE> 96
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +8.01% +10.58%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset
values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset
value on the ex-dividend date. Insurance-related fees and
expenses are not reflected in these returns. Past results
shown should not be considered a representation of future
performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 + 8.01%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +10.84
- --------------------------------------------------------------------------------
Inception (2/28/92) to 6/30/98 +10.62
- --------------------------------------------------------------------------------
95
<PAGE> 97
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 100,000 GenCorp, Inc. ............. $ 2,842,382 $ 2,525,000 0.3%
25,500 +Orbital Sciences
Corporation.............. 654,914 953,063 0.1
------------ ------------ -----
3,497,296 3,478,063 0.4
- ------------------------------------------------------------------------------------------------------------------------
AIRLINES 67,000 +US Airways Group, Inc. ... 3,056,312 5,309,750 0.6
- ------------------------------------------------------------------------------------------------------------------------
AUTO--RELATED 131,600 +Avis Rent-A-Car, Inc. .... 3,128,250 3,257,100 0.4
81,900 Hertz Corp. (Class A)...... 3,033,516 3,629,194 0.4
------------ ------------ -----
6,161,766 6,886,294 0.8
- ------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 96,500 Federal Mogul Corp. ....... 3,906,649 6,513,750 0.7
- ------------------------------------------------------------------------------------------------------------------------
BANKING 39,000 Bank of New York Co.,
Inc...................... 1,284,647 2,366,813 0.3
28,000 Bank of New York Co., Inc.
(Warrants)(a)............ 210,562 5,040,000 0.6
45,400 BankAmerica Corp. ......... 3,128,205 3,924,263 0.4
------------ ------------ -----
4,623,414 11,331,076 1.3
- ------------------------------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 97,100 First Union Corporation.... 4,816,029 5,656,075 0.6
119,600 +Heller Financial, Inc. ... 3,327,845 3,588,000 0.4
54,300 Providian Financial
Corp. ................... 3,386,560 4,265,944 0.5
------------ ------------ -----
11,530,434 13,510,019 1.5
- ------------------------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 57,800 +Chancellor Media Corp. ... 1,910,742 2,868,325 0.3
142,583 +Tele-Communications, Inc.
(Class A)................ 2,914,511 5,471,623 0.6
261,834 +Tele-Communications TCI
Ventures Group........... 2,539,257 5,236,680 0.6
------------ ------------ -----
7,364,510 13,576,628 1.5
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 134,300 Great Lakes Chemical
Corp. ................... 5,782,951 5,296,456 0.6
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 99,400 +Gartner Group Inc. (Class
A)....................... 3,372,841 3,472,788 0.4
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 119,700 +WorldCom Inc. ............ 3,436,858 5,783,006 0.7
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 51,000 +Cisco Systems, Inc. ...... 3,034,510 4,695,188 0.5
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 122,400 +BMC Software, Inc. ....... 2,720,906 6,357,150 0.7
68,200 Computer Associates
International, Inc. ..... 2,287,280 3,789,363 0.4
------------ ------------ -----
5,008,186 10,146,513 1.1
- ------------------------------------------------------------------------------------------------------------------------
COMPUTERS 158,000 COMPAQ Computer Corp. ..... 5,554,073 4,483,250 0.5
29,600 International Business
Machines Corp. .......... 2,639,418 3,398,450 0.4
------------ ------------ -----
8,193,491 7,881,700 0.9
- ------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 213,300 Dial Corporation (The)..... 4,269,666 5,532,469 0.6
- ------------------------------------------------------------------------------------------------------------------------
CONTAINERS 103,700 +Owens-Illinois, Inc. ..... 3,182,522 4,640,575 0.5
- ------------------------------------------------------------------------------------------------------------------------
COSMETICS 41,600 Gillette Company (The)..... 2,378,157 2,358,200 0.3
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 49,500 General Electric Company... 3,630,524 4,504,500 0.5
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONICS 45,300 Intel Corporation.......... 3,716,355 3,355,031 0.4
56,900 Texas Instruments Inc. .... 3,696,612 3,317,981 0.4
------------ ------------ -----
7,412,967 6,673,012 0.8
- ------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT 114,800 +Premier Parks Inc. ....... 6,468,613 7,648,550 0.9
- ------------------------------------------------------------------------------------------------------------------------
FOODS 82,000 +Keebler Foods Co. ........ 2,317,038 2,255,000 0.3
- ------------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 80,900 Black & Decker Corporation
(The).................... 2,792,532 4,934,900 0.6
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
96
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INSURANCE 88,900 Allmerica Financial
Corp. ................... $ 5,457,701 $ 5,778,500 0.7%
81,000 Equitable Companies Inc.
(The).................... 4,274,926 6,069,938 0.7
97,750 Travelers Group, Inc. ..... 4,296,272 5,926,094 0.7
55,600 UNUM Corporation........... 1,764,712 3,085,800 0.4
------------ ------------ -----
15,793,611 20,860,332 2.5
- ------------------------------------------------------------------------------------------------------------------------
LEISURE 112,000 +Imax Corporation.......... 1,794,474 2,520,000 0.3
- ------------------------------------------------------------------------------------------------------------------------
MACHINERY 123,000 Ingersoll-Rand Co. ........ 3,928,469 5,419,688 0.6
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING 76,000 Tyco International Ltd. ... 3,930,790 4,788,000 0.5
- ------------------------------------------------------------------------------------------------------------------------
MEDICAL EQUIPMENT 52,200 Beckman Coulter Inc. ...... 3,149,433 3,040,650 0.3
- ------------------------------------------------------------------------------------------------------------------------
MEDICAL SPECIALTIES 68,000 Columbia/HCA Healthcare
Corporation.............. 2,083,283 1,980,500 0.2
194,200 +HEALTHSOUTH Corporation... 5,189,328 5,182,713 0.6
97,200 Warner-Lambert Company..... 4,478,544 6,743,250 0.8
------------ ------------ -----
11,751,155 13,906,463 1.6
- ------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 77,700 Enron Corp. ............... 3,201,653 4,200,656 0.5
- ------------------------------------------------------------------------------------------------------------------------
OIL SERVICES 40,000 Schlumberger Ltd. ......... 2,600,876 2,732,500 0.3
- ------------------------------------------------------------------------------------------------------------------------
PETROLEUM 115,000 Unocal Corp. .............. 4,037,135 4,111,250 0.5
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICAL--DIVERSIFIED 49,200 Bristol-Myers Squibb
Co. ..................... 4,680,631 5,654,925 0.6
- ------------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING 137,300 +World Color Press,
Inc. .................... 4,126,303 4,805,500 0.5
- ------------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 209,000 +Capstar Broadcasting Corp.
(Class A)................ 3,971,000 5,251,125 0.6
- ------------------------------------------------------------------------------------------------------------------------
RAILROADS 39,000 Burlington Northern Santa
Fe Inc. ................. 3,386,514 3,829,313 0.4
- ------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT 44,950 Starwood Hotels &
TRUSTS Resorts(c)............... 1,228,009 2,171,647 0.3
- ------------------------------------------------------------------------------------------------------------------------
RETAIL 105,600 Lowe's Companies, Inc. .... 3,804,807 4,283,400 0.5
138,000 +Safeway Inc. ............. 4,062,428 5,614,875 0.6
86,200 Sears, Roebuck & Co. ...... 4,483,896 5,263,588 0.6
96,300 Wal-Mart Stores, Inc. ..... 3,973,409 5,850,225 0.7
------------ ------------ -----
16,324,540 21,012,088 2.4
- ------------------------------------------------------------------------------------------------------------------------
RETAIL--DRUG STORES 162,210 Rite Aid Corporation....... 2,783,712 6,093,013 0.7
- ------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL 113,000 +ST Microelectronics N.V.
EQUIPMENT (NY Registered Shares)... 6,072,113 7,895,875 0.9
- ------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 80,400 +SmarTalk TeleServices,
Inc. .................... 2,214,480 1,135,650 0.1
- ------------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 110,400 Carnival Corp. (Class A)... 2,122,668 4,374,600 0.5
55,000 Royal Caribbean Cruises
Ltd. .................... 2,677,362 4,372,500 0.5
------------ ------------ -----
4,800,030 8,747,100 1.0
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 168,000 El Paso Natural Gas Co. ... 4,449,109 6,426,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 115,150 +USA Waste Services,
Inc. .................... 4,842,277 5,685,531 0.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS & WARRANTS 210,487,551 276,715,743 31.5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
97
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARGENTINA 238,400 Yacimientos Petroliferos
Fiscales S.A.
(YPF)(ADR)*(24).......... $ 6,796,622 $ 7,166,900 0.8%
- ------------------------------------------------------------------------------------------------------------------------
CANADA 108,000 Magna International Inc.
(Class A)(2)............. 6,056,821 7,411,500 0.8
45,700 Seagram Company Ltd.
(The)(6)................. 1,962,605 1,870,844 0.2
------------ ------------ -----
8,019,426 9,282,344 1.0
- ------------------------------------------------------------------------------------------------------------------------
FINLAND 290,000 +Amer Group Ltd. (9)....... 5,251,766 5,661,066 0.7
132,000 Finnlines OY (32).......... 2,486,828 8,187,839 0.9
198,800 Orion-Yhtymae OY (Class
B)(25)................... 5,494,455 6,129,422 0.7
80,000 Sampo Insurance Co. (16)... 3,698,893 3,794,720 0.4
275,460 +Sponda Oyj (27)........... 1,906,112 1,934,798 0.2
339,900 UPM-Kymmene OY (23)........ 7,086,032 9,363,636 1.1
------------ ------------ -----
25,924,086 35,071,481 4.0
- ------------------------------------------------------------------------------------------------------------------------
FRANCE 83,000 AXA-UAP (16)............... 9,429,644 9,338,959 1.1
211,100 +Alstom (18)............... 7,198,697 6,951,088 0.8
77,900 Elf Aquitaine S.A. (21).... 9,224,083 10,956,399 1.2
153,100 Scor S.A. (16)............. 5,700,758 9,715,206 1.1
226,000 Thomson-CSF S.A. (10)...... 7,686,550 8,600,976 1.0
------------ ------------ -----
39,239,732 45,562,628 5.2
- ------------------------------------------------------------------------------------------------------------------------
GERMANY 118,000 Bayerische Vereinsbank
AG (4)................... 7,738,658 10,001,108 1.1
90,500 Daimler-Benz AG (3)........ 8,882,232 8,898,598 1.0
13,500 Henkel KGaA (8)............ 600,048 1,120,264 0.1
121,500 Henkel KGaA
(Preferred) (8).......... 5,163,053 12,014,043 1.4
142,000 Mannesmann AG (18)......... 5,226,272 14,591,735 1.7
------------ ------------ -----
27,610,263 46,625,748 5.3
- ------------------------------------------------------------------------------------------------------------------------
INDONESIA 344,580 P.T. Indonesian Satellite
Corp. (ADR)* (31)........ 8,061,313 3,833,452 0.4
- ------------------------------------------------------------------------------------------------------------------------
IRELAND 89,400 Bank of Ireland (4)........ 1,863,526 1,841,428 0.2
- ------------------------------------------------------------------------------------------------------------------------
ITALY 750,000 Arnoldo Mondadori Editore
S.p.A. (26).............. 6,327,223 8,863,253 1.0
1,161,800 Danieli & Company (18)..... 4,276,177 5,393,838 0.6
------------ ------------ -----
10,603,400 14,257,091 1.6
- ------------------------------------------------------------------------------------------------------------------------
JAPAN 22,200 Amway Japan Ltd. (29)...... 489,653 233,903 0.0
602,000 Bank of Tokyo-Mitsubishi,
Ltd. (The)(5)............ 8,217,956 6,381,886 0.7
113,000 Ito-Yokado Co., Ltd.
(28)..................... 6,178,913 5,325,034 0.6
743,000 Makino Milling
Machine Co. Ltd. (18).... 5,334,912 5,238,587 0.6
389,000 Matsushita Electric
Industries, Ltd. (11).... 6,160,832 6,260,157 0.7
142,000 Matsushita Electric Works,
Ltd. (11)................ 1,449,122 1,147,723 0.1
54,000 Rohm Company, Ltd. (11).... 4,284,317 5,553,150 0.6
758,000 Sanwa Bank, Ltd. (5)....... 6,606,807 6,788,468 0.8
77,000 Sony Corporation (11)...... 5,677,742 6,640,326 0.8
514,000 Tokio Marine and Fire
Insurance Co., Ltd.
(16)..................... 5,650,973 5,289,485 0.6
100,000 Tokyo Electron Limited
(30)..................... 3,712,237 3,067,042 0.4
------------ ------------ -----
53,763,464 51,925,761 5.9
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
98
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MEXICO 406,700 Grupo Carso, S.A. de C.V.
(ADR)*(20)............... $ 5,242,962 $ 3,282,069 0.4%
178,500 Panamerican Beverages, Inc.
(Class A) (US Registered
Shares)(6)............... 5,374,345 5,611,594 0.6
148,700 Telefonos de Mexico, S.A.
de C.V. (Telmex)
(ADR)*(31)............... 7,311,423 7,146,894 0.8
------------ ------------ -----
17,928,730 16,040,557 1.8
- ------------------------------------------------------------------------------------------------------------------------
NETHERLANDS 169,600 Royal Dutch Petroleum Co.
(ADR)*(22)............... 9,440,559 9,296,200 1.1
- ------------------------------------------------------------------------------------------------------------------------
NORWAY 262,200 Color Line ASA (32)........ 1,033,777 821,139 0.1
- ------------------------------------------------------------------------------------------------------------------------
SINGAPORE 738,000 Overseas Chinese Banking
Corp. Ltd. (4)........... 3,512,200 2,513,177 0.3
- ------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA 141,500 +Hyundai Engineering &
Construction Co.,
Ltd.(GDR)**(b)(12)....... 1,815,963 44,572 0.0
2,763 +Hyundai Engineering &
Construction Co., Ltd.
(New Shares)
(GDR)**(b)(12)........... 35,459 870 0.0
------------ ------------ -----
1,851,422 45,442 0.0
- ------------------------------------------------------------------------------------------------------------------------
SPAIN 172,000 +Dinamia Capital Privado
Sociedad de Capital
Riesgo, S.A. (34)........ 3,233,132 2,977,723 0.3
121,100 Metrovaseca S.A. (27)...... 3,779,287 3,568,047 0.4
86,419 Metrovaseca S.A.
(Rights)(d)(27).......... 0 121,383 0.0
168,800 Repsol, S.A.(ADR)*(24)..... 5,764,803 9,284,000 1.1
273,600 Uralita, S.A. (7).......... 3,839,161 3,905,507 0.5
------------ ------------ -----
16,616,383 19,856,660 2.3
- ------------------------------------------------------------------------------------------------------------------------
SWEDEN 120,000 Autoliv AB (2)............. 3,892,408 3,837,231 0.4
322,200 Bure Investment AB (17).... 2,845,754 5,131,281 0.6
369,600 +Castellum AB (27)......... 3,113,291 4,356,687 0.5
65,500 Custos AB (Class A) (9).... 1,687,016 1,667,377 0.2
65,500 Custos AB (Class B) (9).... 1,726,494 1,650,950 0.2
125,500 Fastighets AB Tornet
(27)..................... 2,066,143 2,014,421 0.2
190,600 Haldex AB (2).............. 3,364,237 3,441,771 0.4
1,059,900 +Nordhanken Holding AB
(4)...................... 6,231,681 7,775,303 0.9
293,000 Perstorp AB (Class B)
(8)...................... 5,488,279 5,474,575 0.6
278,000 Sparbanken Sverige AB
(Class A) (4)............ 3,534,373 8,366,669 1.0
130,000 Spectra-Physics AB (15).... 3,966,604 2,078,500 0.2
------------ ------------ -----
37,916,280 45,794,765 5.2
- ------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 5,000 Schindler Holding AG
(18)..................... 8,637,994 7,619,739 0.8
23,870 +UBS AG (5)................ 7,975,515 8,881,567 1.0
9,000 Valora Holding AG (19)..... 2,432,589 2,374,984 0.3
------------ ------------ -----
19,046,098 18,876,290 2.1
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 1,070,400 British Aerospace PLC
(1)...................... 8,026,524 8,197,567 0.9
420,500 Devro PLC (13)............. 2,810,818 3,522,053 0.4
648,086 Diageo PLC (6)............. 5,394,255 7,677,454 0.9
465,300 Imperial Chemical
Industries PLC (22)...... 6,166,241 7,468,516 0.9
1,833,900 LucasVarity PLC (2)........ 6,298,435 7,282,472 0.8
2,883,000 +Thomson Travel
Group PLC (33)........... 8,706,431 8,995,234 1.0
------------ ------------ -----
37,402,704 43,143,296 4.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 326,629,985 371,954,359 42.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
99
<PAGE> 101
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
FACE VALUE PERCENT OF
COUNTRY AMOUNT FOREIGN BONDS++ COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GERMANY
Bundesrepublik Deutschland
(14):
DM 7,900,000 6.50% due 10/14/2005....... $ 5,092,717 $ 4,860,697 0.5%
33,000,000 6% due 7/04/2007........... 19,300,518 19,903,833 2.3
7,500,000 6% due 6/20/2016........... 4,172,639 4,577,194 0.5
20,800,000 5.625% due 1/04/2028....... 11,699,315 11,964,724 1.4
7,550,000 Treuhandanstalt, 6.875% due
6/11/2003 (14)........... 5,020,900 4,625,692 0.5
------------ ------------ -----
45,286,089 45,932,140 5.2
- ------------------------------------------------------------------------------------------------------------------------
SWEDEN
Government of
Sweden (14):
Skr 242,200,000 5.50% due 4/12/2002........ 30,785,989 31,388,051 3.6
98,200,000 8% due 8/15/2007........... 14,051,805 15,040,134 1.7
------------ ------------ -----
44,837,794 46,428,185 5.3
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM
United Kingdom Treasury
Gilt (14):
L 4,300,000 8% due 12/07/2000.......... 7,266,604 7,344,946 0.8
11,000,000 7.25% due 12/07/2007....... 18,207,288 20,165,908 2.3
------------ ------------ -----
25,473,892 27,510,854 3.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS 115,597,775 119,871,179 13.6
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
US$ 24,760,000 US Treasury Bonds, 6.625%
due 2/15/2007............ 26,829,309 27,959,487 3.2
US Treasury Notes:
29,700,000 6% due 8/15/1999........... 29,781,211 29,853,252 3.4
22,070,000 6.50% due 5/31/2002........ 22,763,136 22,804,490 2.6
6,250,000 6.25% due 2/15/2007........ 6,164,062 6,544,937 0.7
8,450,000 6.625% due 5/15/2007....... 8,555,977 9,075,807 1.0
------------ ------------ -----
67,264,386 68,278,486 7.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT
OBLIGATIONS 94,093,695 96,237,973 10.9
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER*** US$ 9,296,000 General Motors Acceptance
Corp., 6.50% due
7/01/1998................ 9,296,000 9,296,000 1.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 9,296,000 9,296,000 1.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.......... $756,105,006 874,075,254 99.3
============
UNREALIZED APPRECIATION ON
FORWARD FOREIGN EXCHANGE
CONTRACTS+++............. 932,433 0.1
OTHER ASSETS LESS
LIABILITIES.............. 5,456,320 0.6
------------ -----
NET ASSETS................. $880,464,007 100.0%
============ =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper is traded on a discount basis; the interest rate shown is
the discount rate paid at the time of purchase by the Fund.
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. 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.
(c) Formerly Starwood Lodging Trust.
(d) The rights may be exercised until 7/24/1998.
+ Non-income producing security.
100
<PAGE> 102
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
++ Corresponding industry groups for foreign stocks and bonds:
<TABLE>
<CAPTION>
<S> <C> <C>
(1) Aerospace & Defense (12) Engineering & Construction (23) Paper & Forest Products
(2) Auto--Parts (13) Foods (24) Petroleum
(3) Auto & Truck (14) Government (Bonds) (25) Pharmaceutical
(4) Banking (15) Industrial Components (26) Printing & Publishing
(5) Banking & Financial (16) Insurance (27) Real Estate
(6) Beverages (17) Investment Management (28) Retail Stores
(7) Building Materials (18) Machinery & Equipment (29) Retailers
(8) Chemicals (19) Merchandising (30) Semiconductors
(9) Diversified (20) Multi-Indusrty (31) Telecommunications
(10) Electrical (21) Oil & Related (32) Transportation
Equipment (22) Oil--Integrated (33) Travel & Lodging
(11) Electronics (34) Venture Capital
</TABLE>
+++ Forward foreign exchange contracts sold as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION
(DEPRECIATION)
FOREIGN CURRENCY SOLD EXPIRATION DATE (NOTE 1b)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
C$ 15,000,000 ...................................................... July 1998 $ (3,961)
CHF 28,100,000 ...................................................... July 1998 471,810
DM 184,100,000 ...................................................... July 1998 631,890
Fim 173,800,000 ...................................................... September 1998 144,983
Frf 317,700,000 ...................................................... July 1998 161,590
L 41,620,000 ...................................................... July 1998 (148,236)
Lit 23,000,000,000 ...................................................... August 1998 61,883
Pta 2,979,000,000 ...................................................... August 1998 29,093
Skr 674,000,000 ...................................................... September 1998 (713,491)
Y 6,530,000,000 ...................................................... September 1998 296,872
- ----------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET (US$
COMMITMENT--$450,520,220) $ 932,433
=========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
101
<PAGE> 103
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$756,105,006) (Note
1a)....................................................... $874,075,254
Unrealized appreciation on forward foreign exchange
contracts (Note 1b)....................................... 932,433
Cash........................................................ 377,424
Foreign cash (Note 1c)...................................... 2,756,130
Receivables:
Securities sold........................................... $11,033,213
Interest.................................................. 4,822,025
Dividends................................................. 1,343,854
Forward foreign exchange contracts (Note 1b).............. 286,867
Capital shares sold....................................... 6,936 17,492,895
-----------
Prepaid expenses and other assets........................... 52,050
------------
Total assets................................................ 895,686,186
------------
- ------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 14,211,320
Investment adviser (Note 2)............................... 497,890
Capital shares redeemed................................... 315,847
Forward foreign exchange contracts (Note 1b).............. 25,950 15,051,007
-----------
Accrued expenses and other liabilities...................... 171,172
------------
Total liabilities........................................... 15,222,179
------------
- ------------------------------------------------------------------------------------------
NET ASSETS.................................................. $880,464,007
============
- ------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized+........................................ $ 6,463,624
Paid-in capital in excess of par............................ 755,360,459
Undistributed investment income--net........................ 9,866,402
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (10,066,234)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 118,839,756
------------
NET ASSETS.................................................. $880,464,007
============
- ------------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $880,464,007 and 64,636,237
shares outstanding........................................ $ 13.62
============
- ------------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
102
<PAGE> 104
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $774,730 foreign withholding tax)......... $ 8,304,650
Interest and discount earned................................ 7,718,425
Other income................................................ 30,268
-----------
Total income................................................ 16,053,343
-----------
- -----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 2,830,955
Custodian fees.............................................. 114,293
Accounting services (Note 2)................................ 76,752
Professional fees........................................... 31,468
Printing and shareholders report............................ 23,501
Directors' fees and expenses................................ 10,313
Pricing services............................................ 5,022
Registration fees........................................... 4,501
Transfer agent fees (Note 2)................................ 2,734
Other....................................................... 4,994
-----------
Total expenses.............................................. 3,104,533
-----------
Investment income--net...................................... 12,948,810
-----------
- -----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net.......................................... (1,317,311)
Foreign currency transactions--net........................ 1,188,405 (128,906)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 74,373,551
Foreign currency transactions--net........................ 1,113,659 75,487,210
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 75,358,304
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $88,307,114
===========
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
103
<PAGE> 105
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 12,948,810 $ 20,985,143
Realized gain (loss) on investments and foreign currency
transactions--net......................................... (128,906) 106,726,204
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 75,487,210 (27,730,460)
------------- ------------
Net increase in net assets resulting from operations........ 88,307,114 99,980,887
------------- ------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F):
Investment income--net:
Class A................................................... (32,818,349) (18,926,819)
Realized gain on investments--net:
Class A................................................... (109,369,825) (26,410,838)
------------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (142,188,174) (45,337,657)
------------- ------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital
share transactions........................................ 64,698,253 (55,199,234)
------------- ------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 10,817,193 (556,004)
Beginning of period......................................... 869,646,814 870,202,818
------------- ------------
End of period*.............................................. $880,464,007 $869,646,814
============= ============
- ------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 9,866,402 $ 29,735,941
============= ============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
104
<PAGE> 106
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 14.71 $ 13.87 $ 12.55 $ 11.73 $ 12.17
-------- -------- -------- -------- --------
Investment income--net................................. .20 .35 .28 .39 .30
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net................... 1.11 1.21 1.33 .82 (.48)
-------- -------- -------- -------- --------
Total from investment operations....................... 1.31 1.56 1.61 1.21 (.18)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................... (.55) (.30) (.29) (.39) (.21)
Realized gain on investments--net.................... (1.85) (.42) -- --+ (.04)
In excess of realized gain on investments--net....... -- -- -- -- (.01)
-------- -------- -------- -------- --------
Total dividends and distributions...................... (2.40) (.72) (.29) (.39) (.26)
-------- -------- -------- -------- --------
Net asset value, end of period......................... $ 13.62 $ 14.71 $ 13.87 $ 12.55 $ 11.73
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..................... 10.58%++ 11.94% 13.17% 10.60% (1.46%)
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... .71%* .73% .71% .72% .77%
======== ======== ======== ======== ========
Investment income--net................................. 2.97%* 2.33% 2.68% 3.33% 2.85%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $880,464 $869,647 $870,203 $540,242 $515,407
======== ======== ======== ======== ========
Portfolio turnover..................................... 49.51% 108.66% 173.44% 27.23% 21.03%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Amount is less than $.01 per share.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
105
<PAGE> 107
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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, that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 the 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 financial 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
106
<PAGE> 108
- --------------------------------------------------------------------------------
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-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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $88,528 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $435,329,113 and $414,419,899, respectively.
107
<PAGE> 109
- --------------------------------------------------------------------------------
Net realized gains (losses) for the six months ended June 30, 1998 and net
unrealized gains (losses) as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $(1,317,311) $117,970,248
Foreign currency transactions....... (1,289,754) (62,925)
Forward foreign exchange
contracts.......................... 2,478,159 932,433
----------- ------------
Total............................... $ (128,906) $118,839,756
=========== ============
- ---------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $117,970,248, of which $140,555,076 related to appreciated securities
and $22,584,828 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $756,105,006.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $64,698,253 and $(55,199,234) for the six months ended June 30, 1998 and
for the year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 154,496 $ 2,032,419
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 11,480,542 142,188,174
---------- ------------
Total issued......................... 11,635,038 144,220,593
Shares redeemed...................... (6,119,511) (79,522,340)
---------- ------------
Net increase......................... 5,515,527 $ 64,698,253
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold......................... 1,193,286 $ 17,737,325
Shares issued to shareholders in
reinvestment of dividends and
distributions...................... 3,479,483 45,337,657
---------- -------------
Total issued........................ 4,672,769 63,074,982
Shares redeemed..................... (8,275,362) (118,274,216)
---------- -------------
Net decrease........................ (3,602,593) $ (55,199,234)
========== =============
- -----------------------------------------------------------------
</TABLE>
5. COMMITMENTS:
At June 30, 1998, 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 $4,710,000 and $2,448,000, respectively.
6. LOANED SECURITIES:
At June 30, 1998, the Fund held US Treasury notes having an aggregate value of
approximately $7,688,000 as collateral for portfolio securities loaned having a
market value of approximately $7,896,000.
108
<PAGE> 110
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
The Fund finished the six-month period ended June 30, 1998 with 47% of net
assets invested in domestic utility stocks, 48% in foreign utility stocks and 5%
in cash. At June 30, 1998, nearly 37% of net assets was invested in European-
based utility stocks and 6.9% was allocated to South America and Canada. In
addition, 4.2% was invested in the Pacific Basin, which was the subject of
significant stock market volatility as a result of the foreign currency crisis
during the period. In general, as of June 30, 1998, the Fund's portfolio was
geographically diversified across 19 countries and 80 holdings. In our view,
this level of diversification limits the Fund's market, economic and regulatory
risk, an important goal given the characteristics of the utility sector.
For the six-month period ended June 30, 1998, the Fund's Class A Shares
provided a total return of +9.70% as compared to +15.24% for the benchmark
unmanaged Financial Times/ Standard & Poor's--Actuaries World Utility Index.
While the Fund underperformed its benchmark, it outperformed the Lipper Utility
Fund Index total return of +8.22%.
At December 31, 1997, the Fund's top five countries for investments--Italy,
Spain, the United Kingdom, Brazil and Chile--accounted for nearly 25% of net
assets. As of June 30, 1998, the top five countries were Italy, Spain, the
United Kingdom, Portugal and Germany, and accounted for nearly 31% of net
assets. This shift reflects a significant reduction of assets invested in Chile
and Brazil. The Chilean economy relies heavily on exports of copper to Southeast
Asia, a region experiencing an economic downturn. Brazil's outlook will be
determined by the government's ability to secure the appropriate prices for
privatizations at a time when investors are increasing their desired returns
because of emerging markets risk. We do not believe that investors will return
to these markets during the coming six months. Therefore, we reduced our
exposure to emerging markets in favor of more mature markets that better fit our
risk-averse investment philosophy.
A significant portion of the Fund's net assets was invested in Europe, the
best-performing region, during the six-month period ended June 30, 1998. The
Fund was overweighted in US-based electric utility stocks relative to the Fund's
benchmark. This had a negative impact on the overall total return of the Fund,
in spite of the stocks' relatively high dividend yields. This sector had done
very well during the last three quarters of 1997, but has been consolidating so
far this year. Historically, the performance of domestic electric utility stocks
tends to be stronger in the second half of the calendar year than in the first
half. Finally, an underweighted position in emerging markets had a positive
impact on the Fund's total return; however, our relatively high weighting in
Brazil during the earlier part of the year penalized performance.
109
<PAGE> 111
- --------------------------------------------------------------------------------
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Walter D. Rogers
Walter D. Rogers
Senior Vice President and Portfolio Manager
August 3, 1998
110
<PAGE> 112
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +24.77% +9.70%
- -----------------------------------------------------------------------------------------
</TABLE>
[S]
* Total investment returns are based on changes in net
asset values for the periods shown, and assume
reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend
date. Insurance-related fees and expenses are not
reflected in these returns. Past results shown should
not be considered a representation of future
performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +24.77%
- --------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/98 +13.66
- --------------------------------------------------------------------------------
111
<PAGE> 113
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARGENTINA TELECOMMUNICATIONS 37,200 Telecom Argentina STET S.A.
(ADR)*(a).................... $ 925,662 $ 1,109,025 0.8%
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 7,900 Central Costanera S.A.
(ADR)*(a).................... 261,847 229,917 0.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
ARGENTINA 1,187,509 1,338,942 1.0
- -------------------------------------------------------------------------------------------------------------------------
AUSTRALIA TELECOMMUNICATIONS 205,000 Telstra Corporation Limited.... 399,749 525,770 0.4
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 434,496 Australian Gas & Light Co.,
Ltd. ........................ 1,238,060 2,718,620 1.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRALIA 1,637,809 3,244,390 2.3
- -------------------------------------------------------------------------------------------------------------------------
AUSTRIA UTILITIES--GAS 13,560 Energie-Versorgung
Niederoesterreich AG (EVN)... 1,388,213 2,029,834 1.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN AUSTRIA 1,388,213 2,029,834 1.5
- -------------------------------------------------------------------------------------------------------------------------
BRAZIL TELECOMMUNICATIONS 10,300 Telecomunicacoes Brasileiras
S.A.--Telebras (ADR)*........ 560,680 1,124,631 0.8
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 100,000 Companhia Paranaense de Energia
& GAS S.A. (Copel) (ADR)*.......... 1,800,000 925,000 0.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN BRAZIL 2,360,680 2,049,631 1.5
- -------------------------------------------------------------------------------------------------------------------------
CANADA TELECOMMUNICATIONS 42,000 BC Telecom, Inc. .............. 789,852 1,571,749 1.1
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 70,100 TransCanada Pipelines Co.,
Ltd.......................... 1,045,275 1,559,725 1.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN CANADA 1,835,127 3,131,474 2.2
- -------------------------------------------------------------------------------------------------------------------------
CHILE UTILITIES--ELECTRIC 33,300 Enersis S.A. (ADR)*............ 717,575 813,769 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN CHILE 717,575 813,769 0.6
- -------------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 64,000 Tele Danmark A/S (ADR)*........ 1,520,595 3,016,000 2.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN DENMARK 1,520,595 3,016,000 2.2
- -------------------------------------------------------------------------------------------------------------------------
FRANCE UTILITIES--WATER 16,984 Vivendi S.A.(b)................ 1,939,819 3,628,087 2.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN FRANCE 1,939,819 3,628,087 2.6
- -------------------------------------------------------------------------------------------------------------------------
GERMANY TELECOMMUNICATIONS 8,100 Deutsche Telekom AG............ 154,054 221,660 0.2
2,010 Mannesmann AG.................. 179,264 206,545 0.1
----------- ------------ -----
333,318 428,205 0.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 15,000 RWE AG......................... 674,750 887,436 0.6
1,500 VIAG AG........................ 661,615 1,032,019 0.7
20,000 Veba AG........................ 652,699 1,344,449 1.0
----------- ------------ -----
1,989,064 3,263,904 2.3
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN GERMANY 2,322,382 3,692,109 2.6
- -------------------------------------------------------------------------------------------------------------------------
ITALY TELECOMMUNICATIONS 651,600 Telecom Italia Mobile
S.p.A. ...................... 620,263 3,985,871 2.9
405,333 Telecom Italia S.p.A. ......... 950,865 2,984,683 2.1
761,900 Telecom Italia S.p.A.
(Registered
Non-Convertible)............. 1,629,934 3,689,448 2.7
----------- ------------ -----
3,201,062 10,660,002 7.7
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 513,400 Italgas Torino S.p.A. ......... 1,581,576 2,091,737 1.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN ITALY 4,782,638 12,751,739 9.2
- -------------------------------------------------------------------------------------------------------------------------
JAPAN TELECOMMUNICATIONS 110 Nippon Telegraph & Telephone
Corp. ....................... 938,962 912,896 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN JAPAN 938,962 912,896 0.6
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
112
<PAGE> 114
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (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>
MEXICO TELECOMMUNICATIONS 14,500 Telefonos de Mexico, S.A. de
C.V. (Telemex) (ADR)*........ $ 914,790 $ 696,906 0.5%
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN MEXICO 914,790 696,906 0.5
- -------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND TELECOMMUNICATIONS 20,100 Telecom Corporation of New
Zealand Ltd. (ADR)*.......... 477,195 658,275 0.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
NEW ZEALAND 477,195 658,275 0.5
- -------------------------------------------------------------------------------------------------------------------------
PERU TELECOMMUNICATIONS 73,000 Telefonica del Peru S.A.
(ADR)*....................... 1,496,500 1,491,938 1.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN PERU 1,496,500 1,491,938 1.1
- -------------------------------------------------------------------------------------------------------------------------
PHILIPPINES TELECOMMUNICATIONS 43,600 Philippine Long Distance
Telephone Co. (ADR)*......... 1,270,791 986,450 0.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
PHILIPPINES 1,270,791 986,450 0.7
- -------------------------------------------------------------------------------------------------------------------------
PORTUGAL TELECOMMUNICATIONS 65,720 Portugal Telecom, S.A.
(ADR)*....................... 1,417,539 3,479,053 2.5
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 29,940 EDP-Electricidade de Portugal,
S.A. (ADR)*.................. 1,333,900 1,379,111 1.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN PORTUGAL 2,751,439 4,858,164 3.5
- -------------------------------------------------------------------------------------------------------------------------
SPAIN TELECOMMUNICATIONS 42,700 Telefonica, S.A. (ADR)*(f)..... 1,681,059 5,937,969 4.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 145,600 Empresa Nacional de
Electricidad, S.A. (Endesa)
(ADR)*....................... 1,634,684 3,148,600 2.3
7,500 HidroElectrica del Cantabrico,
S.A. ........................ 251,742 342,980 0.2
131,000 Iberdrola I, S.A. ............. 879,896 2,130,986 1.5
----------- ------------ -----
2,766,322 5,622,566 4.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN SPAIN 4,447,381 11,560,535 8.3
- -------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM TELECOMMUNICATIONS 57,000 British Telecommunications
PLC.......................... 406,712 703,773 0.5
10,000 +British Telecommunications PLC
(ADR)*....................... 741,450 1,235,000 0.9
87,000 Cable & Wireless PLC........... 1,108,784 1,056,761 0.8
30,000 Vodafone Group PLC (ADR)*...... 859,933 3,781,875 2.7
----------- ------------ -----
3,116,879 6,777,409 4.9
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 167,500 National Power PLC............. 1,238,839 1,576,232 1.1
95,139 PowerGen PLC................... 705,721 1,314,362 1.0
----------- ------------ -----
1,944,560 2,890,594 2.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED KINGDOM 5,061,439 9,668,003 7.0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
113
<PAGE> 115
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES TELECOMMUNICATIONS 17,000 AT&T Corporation............... $ 683,145 $ 971,125 0.7%
30,000 +AirTouch Communications,
Inc. ........................ 738,952 1,753,125 1.3
51,600 Ameritech Corp. ............... 1,030,404 2,315,550 1.7
47,616 Bell Atlantic Corporation...... 1,184,107 2,172,480 1.6
37,400 BellSouth Corp. ............... 1,138,507 2,510,475 1.8
42,000 Frontier Corp. ................ 969,520 1,323,000 0.9
33,500 GTE Corp. ..................... 1,124,815 1,863,438 1.3
46,600 SBC Communications, Inc. ...... 982,372 1,864,000 1.3
21,000 Sprint Corp. .................. 599,833 1,480,500 1.1
24,900 U S West, Inc.(g) ............. 606,619 1,170,300 0.8
40,000 +WorldCom Inc. ................ 1,323,316 1,932,500 1.4
----------- ------------ -----
10,381,590 19,356,493 13.9
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 65,600 Allegheny Energy, Inc. ........ 1,689,846 1,976,200 1.4
25,000 American Electric Power
Company, Inc. ............... 1,092,125 1,134,375 0.8
55,500 BEC Energy(c).................. 1,472,300 2,303,250 1.7
38,192 CINergy Corp. ................. 885,217 1,336,720 1.0
49,300 Consolidated Edison, Inc. ..... 1,597,050 2,270,881 1.6
31,500 DTE Energy Co. ................ 989,953 1,271,813 0.9
31,000 Duke Energy Corp. ............. 1,172,492 1,836,750 1.3
31,000 Edison International........... 544,360 916,437 0.7
33,800 Energy East Corporation(d)..... 932,936 1,406,925 1.0
54,300 Entergy Corp. ................. 1,905,240 1,561,125 1.1
21,500 FPL Group, Inc. ............... 985,059 1,354,500 1.0
47,200 GPU, Inc. ..................... 1,343,992 1,784,750 1.3
26,200 Houston Industries, Inc. ...... 450,312 808,925 0.6
33,000 MarketSpan Corporation......... 855,855 987,938 0.7
89,100 NIPSCO Industries, Inc. ....... 1,405,792 2,494,800 1.8
44,000 New Century Energies, Inc. .... 1,312,146 1,999,250 1.4
73,800 PECO Energy Co. ............... 2,081,262 2,154,037 1.6
72,800 PacifiCorp. ................... 1,401,416 1,647,100 1.2
50,000 +Sempra Energy(e).............. 1,184,750 1,387,500 1.0
50,200 Southern Co. .................. 1,041,077 1,389,912 1.0
23,000 TECO Energy, Inc. ............. 605,130 616,688 0.4
42,000 Texas Utilities Holding Co. ... 1,438,834 1,748,250 1.3
----------- ------------ -----
26,387,144 34,388,126 24.8
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 17,600 Coastal Corp. (The)............ 549,219 1,228,700 0.9
36,800 El Paso Natural Gas Co. ....... 660,653 1,407,600 1.0
15,000 Enron Corporation.............. 690,790 810,938 0.6
26,100 National Fuel Gas Company...... 788,314 1,136,981 0.8
25,000 New Jersey Resources Corp. .... 656,623 892,187 0.6
41,000 Questar Corp. ................. 668,988 804,625 0.6
16,600 Sonat, Inc. ................... 551,950 641,175 0.5
49,800 Washington Gas Light Co. ...... 1,046,197 1,332,150 1.0
83,800 Williams Co., Inc. ............ 866,744 2,828,250 2.0
----------- ------------ -----
6,479,478 11,082,606 8.0
------------------------------------------------------------------------------------------------------
UTILITIES--WATER 33,300 Philadelphia Suburban
Corporation.................. 722,194 728,437 0.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED STATES 43,970,406 65,555,662 47.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON
STOCKS 81,021,250 132,084,804 95.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
114
<PAGE> 116
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL $4,896,000 General Motors Acceptance
PAPER** Corp., 6.50% due 7/01/1998..... $ 4,895,116 $ 4,895,116 3.5%
3,000,000 Park Avenue Receivables Corp.,
5.55% due 7/02/1998.......... 2,999,075 2,999,075 2.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 7,894,191 7,894,191 5.7
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.............. $88,915,441 139,978,995 100.8
===========
LIABILITIES IN EXCESS OF OTHER
ASSETS....................... (1,097,692) (0.8)
------------ -----
NET ASSETS..................... $138,881,303 100.0%
============ =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) Formerly Generale des Eaux.
(c) Formerly Boston Edison Co.
(d) Formerly New York State Electric Gas Corp.
(e) Acquired through merger of Pacific Enterprises and Enova Corp.
(f) Formerly Telefonica de Espana, S.A.(ADR).
(g) Formerly U S West Communications Group.
+ Non-income producing security.
See Notes to Financial Statements.
115
<PAGE> 117
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$88,915,441) (Note
1a)....................................................... $139,978,995
Cash........................................................ 809
Receivables:
Dividends................................................. $ 333,050
Capital shares sold....................................... 15,236 348,286
----------
Deferred organization expenses (Note 1f).................... 1,551
Prepaid expenses and other assets........................... 7,388
------------
Total assets................................................ 140,337,029
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,257,930
Capital shares redeemed................................... 123,771
Investment adviser (Note 2)............................... 72,926 1,454,627
----------
Accrued expenses............................................ 1,099
------------
Total liabilities........................................... 1,455,726
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $138,881,303
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 905,871
Paid-in capital in excess of par............................ 83,231,462
Undistributed investment income--net........................ 1,138,722
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 2,540,828
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 51,064,420
------------
NET ASSETS.................................................. $138,881,303
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $138,881,303 and 9,058,713
shares outstanding........................................ $ 15.33
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
116
<PAGE> 118
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $167,076 foreign withholding tax)......... $ 2,206,958
Interest and discount earned................................ 90,583
-----------
Total income................................................ 2,297,541
-----------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 417,676
Custodian fees.............................................. 14,150
Printing and shareholder reports............................ 10,746
Accounting services (Note 2)................................ 10,372
Professional fees........................................... 5,562
Transfer agent fees (Note 2)................................ 2,045
Directors' fees and expenses................................ 1,806
Pricing services............................................ 1,161
Amortization of organization expenses (Note 1f)............. 347
Other....................................................... 1,829
----------
Total expenses.............................................. 465,694
-----------
Investment income--net...................................... 1,831,847
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net.......................................... 2,550,562
Foreign currency transactions--net........................ (9,735) 2,540,827
----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 8,583,373
Foreign currency transactions--net........................ 2,716 8,586,089
---------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 11,126,916
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $12,958,763
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
117
<PAGE> 119
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,831,847 $ 4,352,605
Realized gain on investments and foreign currency
transactions--net......................................... 2,540,827 9,206,804
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 8,586,089 17,640,203
------------ ------------
Net increase in net assets resulting from operations........ 12,958,763 31,199,612
------------ ------------
- -----------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (1,545,309) (4,603,931)
Realized gain on investments--net:
Class A................................................... (6,606,938) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (8,152,247) (4,603,931)
------------ ------------
- -----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (4,131,379) (30,827,316)
------------ ------------
- -----------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 675,137 (4,231,635)
Beginning of period......................................... 138,206,166 142,437,801
------------ ------------
End of period*.............................................. $138,881,303 $138,206,166
============ ============
- -----------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,138,722 $ 852,184
============ ============
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
118
<PAGE> 120
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE -------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+ 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 14.84 $ 12.19 $ 11.30 $ 9.45 $ 10.66
-------- -------- -------- -------- --------
Investment income--net............................... .20 .43 .46 .45 .35
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............. 1.17 2.66 .95 1.79 (1.25)
-------- -------- -------- -------- --------
Total from investment operations..................... 1.37 3.09 1.41 2.24 (.90)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................. (.17) (.44) (.52) (.39) (.29)
Realized gain on investments--net.................. (.71) -- -- -- --
In excess of realized gain on investments--net..... -- -- -- -- (.02)
-------- -------- -------- -------- --------
Total dividends and distributions.................... (.88) (.44) (.52) (.39) (.31)
-------- -------- -------- -------- --------
Net asset value, end of period....................... $ 15.33 $ 14.84 $ 12.19 $ 11.30 $ 9.45
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 9.70%++ 25.90% 12.96% 24.33% (8.51%)
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .67%* .67% .66% .66% .73%
======== ======== ======== ======== ========
Investment income--net............................... 2.63%* 3.21% 3.90% 4.44% 3.68%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $138,881 $138,206 $142,438 $148,225 $126,243
======== ======== ======== ======== ========
Portfolio turnover................................... 3.34% 7.70% 11.39% 11.05% 9.52%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
119
<PAGE> 121
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 the 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 call and put options and purchase 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 financial 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
120
<PAGE> 122
- --------------------------------------------------------------------------------
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-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) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a period not exceeding five years.
(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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned $3,276 in commissions on the
execution of portfolio security transactions for the Fund.
For the six months ended June 30, 1998, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $29 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $4,564,092 and $18,075,733, respectively.
121
<PAGE> 123
- --------------------------------------------------------------------------------
Net realized gains (losses) for the six months ended June 30, 1998 and net
unrealized gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $2,550,562 $51,063,554
Foreign currency transactions......... (9,735) 866
---------- -----------
Total................................. $2,540,827 $51,064,420
========== ===========
- --------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $51,063,554, of which $52,899,476 related to appreciated securities
and $1,835,922 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $88,915,441.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$4,131,379 and $30,827,316 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 279,502 $ 4,194,375
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 574,954 8,152,245
---------- ------------
Total issued.......................... 854,456 12,346,620
Shares redeemed....................... (1,110,132) (16,477,999)
---------- ------------
Net decrease.......................... (255,676) $ (4,131,379)
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 926,005 $ 12,113,010
Shares issued to shareholders in
reinvestment of dividends........... 358,250 4,603,931
---------- ------------
Total issued......................... 1,284,255 16,716,941
Shares redeemed...................... (3,656,796) (47,544,257)
---------- ------------
Net decrease......................... (2,372,541) $(30,827,316)
========== ============
- -----------------------------------------------------------------
</TABLE>
5. SUBSEQUENT EVENT:
On July 8, 1998 the Company's Board of Directors declared an ordinary income
dividend in the amount of $.126265 per Class A Share payable on July 17, 1998 to
shareholders of record as of July 9, 1998.
122
<PAGE> 124
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on the US
capital markets.
PORTFOLIO MATTERS
During January, the bond market traded within a very narrow range as investors
tried to assess the impact of the Asian financial crisis on US economic growth.
The yield curve steepened from 24 basis points (0.24%) to 52 basis points as the
yield on long-term Treasury bonds dropped from 5.92% to 5.80%. In February, the
bond market backed up to 6% on long-term bonds, despite some favorable news.
Most significantly, the Federal Government ran a $17 billion budget surplus for
the 12 months ended January 1998. Commodity prices trended down, and there was
no change in the growth of the Consumer Price Index. However, investors were
concerned with rapid money supply growth fueling a continuing record-high stock
market against a background of full employment. In March, long-term bonds traded
within a very narrow range, starting at a yield of 6.01% and finishing the month
at 5.93%. This decline was the result of mounting evidence of a continuing
strong domestic economy. Consumer spending, employment and production data
remained in a growth trend. The Federal Reserve Board reported in its March
"beige book" that many US firms were desperate to find workers and were being
forced to offer large wage increases. Nevertheless, the stock market, as
measured by the Dow Jones Industrial Average (DJIA), soared more than 400 points
during March, and the bond market's reaction to these concerns was clearly
muted.
After a strong first quarter of 1998, in which the economy grew at a rate of
5.4%, there were signs that a slower growth pattern was emerging. Three of the
major factors that fueled first quarter growth slowed down during the spring.
These were consumer spending, inventory accumulation and capital expenditure. In
addition, data on job growth, hours worked and industrial production further
indicated slower growth for the second quarter. In April, the DJIA reached the
9,200 level and left investors concerned about inflated stock prices. Each new
release of economic data was examined under the assumption that the Federal
Reserve Board would raise interest rates at its May meeting, but no such
decision was made. Instead, the combination of low energy prices, a strong
dollar and weak demand in Asia pushed interest rates lower. With inflation
almost nonexistent, the yield on the long-term bond fell below 5.80% in May and
continued its rally to below 5.60% in June.
During the six-month period ended June 30, 1998, we kept the duration of the
Fund in the 5.0-year-5.9-year range, which was consistent with the duration of
the Merrill Lynch Treasury/ Agency Index. Additionally, we reduced the Fund's
cash position and added agency collateralized mortgage obligations to the Fund's
portfolio.
123
<PAGE> 125
- --------------------------------------------------------------------------------
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 strategy with you in our next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Christopher G. Ayoub
Christopher G. Ayoub
Senior Vice President and Co-Portfolio Manager
/s/ Jay C. Harbeck
Jay C. Harbeck
Senior Vice President and Co-Portfolio Manager
August 3, 1998
124
<PAGE> 126
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +10.51% +3.81%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Insurance-related fees
and expenses are not reflected in these returns. Past results shown should not
be considered a representation of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +10.51%
- --------------------------------------------------------------------------------
Inception (5/02/94) through 6/30/98 + 7.65
- --------------------------------------------------------------------------------
125
<PAGE> 127
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT & AGENCY OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL FARM CREDIT Federal Farm Credit Bank:
BANK--10.4%
$13,000,000 6.33% due 11/06/2000..................... $ 13,043,810 $ 13,006,110
2,000,000 6.27% due 7/10/2002...................... 2,013,620 2,040,320
7,000,000 6.40% due 10/09/2007..................... 7,075,390 7,272,370
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL FARM CREDIT BANK 22,132,820 22,318,800
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Federal Home Loan Bank:
BANK--8.6% 13,575,000 6.055% due 7/28/2000..................... 13,634,730 13,683,193
4,635,000 6.175% due 4/17/2008..................... 4,606,031 4,614,004
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN BANK 18,240,761 18,297,197
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME Federal Home Loan Mortgage Corporation:
LOAN MORTGAGE
CORPORATION--13.0%
10,000,000 7.125% due 7/21/1999..................... 10,212,200 10,148,400
5,000,000 8.065% due 1/27/2005..................... 5,540,700 5,616,400
3,000,000 7.14% due 9/13/2006...................... 3,064,440 3,240,480
4,000,000 7.935% due 9/13/2006..................... 4,018,750 4,096,240
5,000,000 5.50% due 2/15/2028...................... 4,775,781 4,693,350
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORPORATION 27,611,871 27,794,870
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Federal National Mortgage Association:
MORTGAGE
ASSOCIATION--12.2%
2,000,000 8.90% due 6/12/2000...................... 2,171,480 2,119,060
1,045,000 7.50% due 2/11/2002...................... 1,088,232 1,104,105
5,000,000 6.00% due 11/04/2002..................... 5,011,960 5,056,250
4,000,000 7.40% due 7/01/2004...................... 4,157,540 4,325,640
500,000 7.85% due 9/10/2004...................... 499,297 511,560
2,000,000 7.65% due 3/10/2005...................... 2,091,140 2,201,240
3,000,000 7.375% due 3/28/2005..................... 3,158,430 3,258,270
5,000,000 7.12% due 7/03/2006...................... 5,331,400 5,410,150
2,000,000 6.96% due 4/02/2007...................... 1,980,560 2,150,320
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 25,490,039 26,136,595
- ----------------------------------------------------------------------------------------------------------------------
PRIVATE EXPORT Private Export Funding Corporation:
FUNDING CORPORATION--9.2%
2,200,000 9.10% due 10/30/1998..................... 2,272,490 2,225,102
3,895,000 5.50% due 3/15/2001...................... 3,847,286 3,873,694
11,000,000 6.31% due 9/30/2004...................... 11,108,350 11,337,810
2,000,000 7.11% due 4/15/2007...................... 2,145,460 2,170,940
- ----------------------------------------------------------------------------------------------------------------------
TOTAL PRIVATE EXPORT FUNDING CORPORATION 19,373,586 19,607,546
- ----------------------------------------------------------------------------------------------------------------------
STUDENT LOAN 8,000,000 Student Loan Marketing Association,
MARKETING ASSOCIATION--3.8% 7.50% due 3/08/2000...................... 8,266,160 8,233,760
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STUDENT LOAN MARKETING ASSOCIATION 8,266,160 8,233,760
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
126
<PAGE> 128
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT & AGENCY OBLIGATIONS (CONCLUDED)
- ----------------------------------------------------------------------------------------------------------------------
US TREASURY BONDS & US Treasury Bonds:
NOTES--38.6%
$ 2,000,000 10.625% due 8/15/2015.................... $ 2,826,250 $ 3,074,380
1,500,000 9.25% due 2/15/2016...................... 1,862,344 2,086,410
2,500,000 7.50% due 11/15/2016..................... 2,999,609 3,001,175
7,500,000 8.875% due 8/15/2017..................... 9,044,297 10,224,600
1,000,000 8.75% due 5/15/2020...................... 1,216,406 1,373,120
1,500,000 8.125% due 5/15/2021..................... 1,892,930 1,953,045
9,500,000 8.125% due 8/15/2021..................... 11,135,078 12,382,680
6,000,000 7.50% due 11/15/2024..................... 6,390,938 7,444,680
3,000,000 6.50% due 11/15/2026..................... 2,861,641 3,331,410
3,000,000 6.375% due 8/15/2027..................... 3,256,406 3,294,360
1,000,000 6.125% due 11/15/2027.................... 1,032,969 1,071,560
US Treasury Notes:
1,000,000 5.875% due 8/31/1999..................... 1,000,937 1,003,910
4,000,000 7.75% due 12/31/1999..................... 4,181,562 4,126,240
3,000,000 5.625% due 2/28/2001..................... 3,022,266 3,007,500
4,500,000 6.375% due 3/31/2001..................... 4,604,766 4,595,625
3,000,000 7.875% due 8/15/2001..................... 3,195,938 3,196,860
3,000,000 6.25% due 10/31/2001..................... 3,044,062 3,062,340
5,000,000 7.50% due 11/15/2001..................... 5,140,469 5,296,100
1,500,000 6.375% due 8/15/2002..................... 1,497,422 1,545,930
5,000,000 5.50% due 2/28/2003...................... 5,002,100 4,996,100
2,500,000 6.50% due 5/15/2005...................... 2,630,273 2,638,675
- ----------------------------------------------------------------------------------------------------------------------
TOTAL US TREASURY BONDS & NOTES 77,838,663 82,706,700
- ----------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--95.8% 198,953,900 205,095,468
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE 5,212,000 Nikko Securities Company,
AGREEMENTS*--2.4% purchased on 6/30/1998 to yield
6.15% to 7/01/1998....................... 5,212,000 5,212,000
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES--2.4% 5,212,000 5,212,000
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.2%................... $204,165,900 210,307,468
============
OTHER ASSETS LESS LIABILITIES--1.8%........ 3,816,950
------------
NET ASSETS--100.0%......................... $214,124,418
============
</TABLE>
- --------------------------------------------------------------------------------
* Repurchase Agreements are fully collateralized by US Government Obligations.
See Notes to Financial Statements.
127
<PAGE> 129
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$204,165,900) (Note
1a)....................................................... $210,307,468
Cash........................................................ 101
Receivables:
Interest.................................................. $3,730,658
Capital shares sold....................................... 209,486 3,940,144
----------
Prepaid expenses and other assets........................... 11,580
------------
Total assets................................................ 214,259,293
------------
- --------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser (Note 2)............................... 91,675
Capital shares redeemed................................... 357 92,032
----------
Accrued expenses and other liabilities...................... 42,843
------------
Total liabilities........................................... 134,875
------------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $214,124,418
============
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 2,003,327
Paid-in capital in excess of par............................ 204,959,574
Undistributed investment income--net........................ 1,061,363
Accumulated distributions in excess of realized capital
gains on investments--net (Note 1e)....................... (24,308)
Accumulated realized capital losses on investments--net..... (17,106)
Unrealized appreciation on investments--net................. 6,141,568
------------
NET ASSETS.................................................. $214,124,418
============
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $214,124,418 and 20,033,269
shares outstanding........................................ $ 10.69
============
- --------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
128
<PAGE> 130
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and discount earned................................ $6,209,468
Other income................................................ 6,048
----------
Total income................................................ 6,215,516
----------
- -----------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $483,865
Accounting services (Note 2)................................ 22,421
Custodian fees.............................................. 11,208
Professional fees........................................... 8,182
Printing and shareholder reports............................ 5,703
Directors' fees and expenses................................ 2,186
Transfer agent fees (Note 2)................................ 1,849
Pricing services............................................ 1,459
Other....................................................... 954
--------
Total expenses.............................................. 537,827
----------
Investment income--net...................................... 5,677,689
----------
- -----------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES
1d & 3):
Realized loss on investments--net........................... (17,106)
Change in unrealized appreciation on investments--net....... 1,733,645
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $7,394,228
==========
- -----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
129
<PAGE> 131
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 5,677,689 $ 8,463,282
Realized gain (loss) on investments--net.................... (17,106) 974,626
Change in unrealized appreciation on investments--net....... 1,733,645 3,456,357
------------ ------------
Net increase in net assets resulting from operations........ 7,394,228 12,894,265
------------ ------------
- -----------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (5,553,153) (8,011,058)
Realized gain on investments--net:
Class A................................................... -- (820,212)
In excess of realized gain on investments--net:
Class A................................................... -- (24,308)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (5,553,153) (8,855,578)
------------ ------------
- -----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 32,462,972 86,200,892
------------ ------------
- -----------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 34,304,047 90,239,579
Beginning of period......................................... 179,820,371 89,580,792
------------ ------------
End of period*.............................................. $214,124,418 $179,820,371
============ ============
- -----------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,061,363 $ 936,827
============ ============
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
130
<PAGE> 132
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS CLASS A
HAVE BEEN DERIVED FROM INFORMATION -----------------------------------------------------------------------
PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED
FOR THE SIX DECEMBER 31, FOR THE PERIOD
MONTHS ENDED ---------------------------------- MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 DECEMBER 31, 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 10.60 $ 10.40 $ 10.79 $ 9.97 $ 10.00
-------- -------- ------- ------- --------
Investment income--net.................... .30 .63 .65 .62 .25
Realized and unrealized gain (loss) on
investments--net........................ .10 .25 (.36) .81 (.07)
-------- -------- ------- ------- --------
Total from investment operations.......... .40 .88 .29 1.43 .18
-------- -------- ------- ------- --------
Less dividends and distributions:
Investment income--net.................. (.31) (.63) (.64) (.61) (.21)
Realized gain on investments--net....... -- (.05) (.04) -- --
In excess of realized gain on
investments--net...................... -- --+++ -- -- --
-------- -------- ------- ------- --------
Total dividends and distributions......... (.31) (.68) (.68) (.61) (.21)
-------- -------- ------- ------- --------
Net asset value, end of period............ $ 10.69 $ 10.60 $ 10.40 $ 10.79 $ 9.97
======== ======== ======= ======= ========
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........ 3.81%++ 8.88% 2.86% 14.83% 1.79%++
======== ======== ======= ======= ========
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............ .56%* .51% .15% .00% .00%*
======== ======== ======= ======= ========
Expenses.................................. .56%* .57% .59% .66% .80%*
======== ======== ======= ======= ========
Investment income--net.................... 5.87%* 6.26% 6.39% 6.28% 4.66%*
======== ======== ======= ======= ========
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $214,124 $179,820 $89,581 $40,996 $ 17,811
======== ======== ======= ======= ========
Portfolio turnover........................ 7.80% 117.65% 21.23% 45.39% 103.03%
======== ======== ======= ======= ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
+++ Amount is less than $.01 per share.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
131
<PAGE> 133
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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, that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements. Under such agreements, the counterparty
agrees to repurchase the security at a mutually agreed upon time and price. The
Fund takes possession of the underlying securities, marks to market such
securities and, if necessary, receives additional securities daily to ensure
that the contract is fully collateralized.
(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).
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 from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post-October losses.
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 funds 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Inc.,
132
<PAGE> 134
- --------------------------------------------------------------------------------
earned $434 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $50,281,474 and $14,338,906, respectively.
Net realized losses for the six months ended June 30, 1998 and net unrealized
gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Realized Unrealized
Losses Gains
- -----------------------------------------------------------------
<S> <C> <C>
Long-term investments.................... $(17,106) $6,141,568
-------- ----------
Total.................................... $(17,106) $6,141,568
======== ==========
- -----------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $6,141,568, of which $6,542,936 related to appreciated securities and
$401,368 related to depreciated securities. At June 30, 1998, the aggregate cost
of investments for Federal income tax purposes was $204,165,900.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$32,462,972 and $86,200,892 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 2,954,375 $31,344,704
Shares issued to shareholders in
reinvestment of dividends............. 525,289 5,553,152
--------- -----------
Total issued........................... 3,479,664 36,897,856
Shares redeemed........................ (417,734) (4,434,884)
--------- -----------
Net increase........................... 3,061,930 $32,462,972
========= ===========
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 7,848,272 $80,971,426
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 854,723 8,855,578
--------- -----------
Total issued........................... 8,702,995 89,827,004
Shares redeemed........................ (348,658) (3,626,112)
--------- -----------
Net increase........................... 8,354,337 $86,200,892
========= ===========
- -----------------------------------------------------------------
</TABLE>
5. LOANED SECURITIES:
At June 30, 1998, the Fund held US Treasury Bonds having an aggregate value of
approximately $1,177,000 as collateral for portfolio securities loaned having a
market value of approximately $1,072,000.
6. SUBSEQUENT EVENT:
On July 1, 1998, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.052980 per Class A Share payable on July 1, 1998 to
shareholders of record as of July 1, 1998.
133
<PAGE> 135
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on the US
capital markets.
PORTFOLIO MATTERS
For the six months ended June 30, 1998, the high-yield market registered a
total return of +4.31% as measured by the unmanaged CS First Boston High Yield
Index, which marginally exceeded a strong ten-year US Treasury return of +4.24%.
Returns in the high-yield market were hampered by a very heavy new-issue
calendar and the poor performance of emerging market issues (particularly
Indonesian credits), while the Treasury market benefited from a flight to
quality and an economy characterized by solid growth and low inflation. As a
result, yield spreads between the Index and US Treasury securities of similar
maturity widened to 417 basis points (4.17%) at June 30, 1998, compared to 386
basis points at year-end 1997.
A record dollar volume of new issues ($94.7 billion) came to the high-yield
market during the first half of 1998, an astounding 67% increase from the
year-ago period. Included in this total was Niagara Mohawk Power Corp.'s
eight-tranche, $3.45 billion public offering, the largest high-yield issue of
the 1990s. We established a position in this electric utility's ten-year
tranche, in a transaction that was well oversubscribed, despite its size. In
addition to high-yield mutual funds, which enjoyed strong inflows during the
first half of 1998, crossover investors (those buyers who generally buy
investment-grade issues but who have chosen to buy below investment-grade
issues), insurance companies, pension funds and collateralized bond obligations
were active investors during the six-month period. As a result, new issues
tended to trade quite well in the secondary market. In that regard, the
unmanaged Bear Stearns New Issues Index, which consists of a rolling basket of
the most recent 25 issues, recorded a total return of +13.6% for the six months
ended June 30, 1998. In addition to the robust funds flows, the high-yield
market has continued to benefit from declining Treasury interest rates, strong
economic growth with low inflation, buoyant equity markets, tenders,
credit-enhancing mergers and acquisitions, and low default rates.
Moody's Investors Service Inc.'s trailing 12-month default rate, which
includes worldwide defaults, equaled 2.58% (on an issuer basis) through June 30,
1998. This figure represents an increase from the year-ago rate of 1.58%, but is
still below the 1971-1997 annual average of 3.36%. The uptick represents
defaults by issuers domiciled in Asian countries and less forbearance on the
part of commercial banks. We expect the default rate to gradually trend upward,
reflecting an increase in high-risk offerings. In that regard, issues rated B-
or lower by any of the major rating agencies (on a senior equivalent basis)
accounted for a growing percentage of noninvestment grade new issuance during
the first half of 1998. This growth in the most default-prone segment of the
market reflects heavy new issuance by telecommunications companies, many of
which are build-out phase enterprises with no cash flow.
Against this backdrop, the Fund's Class A Shares underperformed the CS First
Boston High Yield Index with a total return of +3.19% for the six-month period
ended June 30, 1998. The Fund's results were penalized by our relatively high
exposure to emerging markets issues (12.1% as compared to 7.1% for the Index),
which have been hurt by the Asian economic crisis, and our overweighting in
energy credits, which have suffered from the downdraft in oil prices. In
addition, for much of the six-month period, it was difficult for us to fully
invest the
134
<PAGE> 136
- --------------------------------------------------------------------------------
Fund because of the abundance of new buyers in the high-yield market. On a
brighter note, several of the Fund's holdings benefited from positive event
risk. Among them were two acquisition targets of AT&T Corp., which was rated
Aa3/AA by Moody's Investors Service, Inc. and Standard & Poor's Corp.,
respectively--Teleport Communications Group Inc. and TCI Communications
Inc.--that saw their securities rise sharply after AT&T announced details of the
transactions. The high-yield securities of TCI affiliates--CSC Holdings Inc.,
Century Communications Corp. and Lenfest Communications, Inc. (all of which were
Fund holdings)--also advanced on the news.
During the first half of 1998, we focused most of our purchasing activity in
the new-issue market because we believed there was better relative value there.
We had only limited participation in the media/telecommunications sector,
preferring to focus primarily on established US-based consumer and industrial
firms with leading positions in mature markets. Recent purchases for the Fund
included the bonds of Great Lakes Carbon Corp., the largest producer of calcined
petroleum coke in the world; P & L Coal Holdings Corp., the largest coal
producer in the United States; Thermadyne Holdings Corp., a leading global
manufacturer of cutting and welding products; and Indesco International, the
largest manufacturer of plastic trigger sprayers in the world. All of these
credits have strong cash flow margins, a key criterion in our credit selection
process. We selectively sold bond issues trading at premiums to par or with
limited call protection because of the moderate yields and capital appreciation
potential that these securities have compared to the issues that replaced them.
We are somewhat cautious about the near-term outlook for the high-yield
market, as the technical situation has deteriorated. Inflows into high-yield
mutual funds have slowed from $2.1 billion in January to only $864 million in
June. The forward calendar, while down from its peak in May, is still sizeable.
In addition, continued fundamental problems in the financial systems of Japan,
Russia and Southeast Asia are likely to weigh on the high-yield market. Finally,
in addition to the aforementioned increase in the growth of highly speculative
bonds, we have noted a trend toward weaker covenants in new issues. Hence, we
will continue to be highly selective in this heavy new-issue environment.
Communications and media remained our largest broad industry category,
totaling 28.1% of total long-term investments. Of the more narrowly classified
sectors, the largest industries were: energy, 10.8%; domestic cable, 6.0%;
utilities, 5.3%; and transportation, 4.7%. Non-US bonds totaled 21.4% of the
portfolio, with emerging markets issues (primarily Latin American corporate
bonds) accounting for 12.1% of long-term investments. At June 30, 1998, the
average portfolio maturity was 7 years, 2 months, and cash and cash equivalents
equaled 6.0% of net assets, compared with 10.5% of net assets at year-end 1997.
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Robert Murray
Robert F. Murray
Vice President and Portfolio Manager
August 3, 1998
- ---------------------------------------------------------
We are pleased to announce that effective April 1, 1998 Robert F. Murray became
responsible for the day-to-day management of High Current Income Fund of Merrill
Lynch Variable Series Funds, Inc. Prior thereto, he was Senior High Yield
Analyst with Merrill Lynch Asset Management, L.P. from 1993 to 1998.
- ---------------------------------------------------------
135
<PAGE> 137
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +7.92% +3.19%
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Insurance-related fees
and expenses are not reflected in these returns. Past results shown should not
be considered a representation of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 + 7.92%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 + 8.97
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +11.51
- --------------------------------------------------------------------------------
136
<PAGE> 138
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE--0.5% B B2 $ 3,000,000 L-3 Communications Corp.,
10.375% due 5/01/2007....... $ 3,000,000 $ 3,315,000
- ---------------------------------------------------------------------------------------------------------------------------
AIRLINES--0.7% BB Ba2 4,000,000 USAir, Inc., 10.375% due
3/01/2013................... 3,935,000 4,511,280
- ---------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE--1.7% B+ B3 5,000,000 Breed Technologies, Inc.,
9.25% due 4/15/2008(e)...... 5,000,000 4,887,500
B B2 2,000,000 Collins & Aikman Corp., 11.50%
due 4/15/2006............... 2,000,000 2,220,000
B+ B2 3,000,000 Venture Holdings Trust, 9.50%
due 7/01/2005............... 2,910,107 3,037,500
------------ ------------
9,910,107 10,145,000
- ---------------------------------------------------------------------------------------------------------------------------
BROADCASTING-- CCC+ B3 2,000,000 Cumulus Media Inc., 10.375%
RADIO & TV--2.4% due 7/01/2008............... 2,000,000 2,000,000
B- B3 3,000,000 Paxson Communications, 11.625%
due 10/01/2002.............. 3,223,750 3,217,500
B- B3 1,278,000 SFX Broadcasting Inc., 10.75%
due 5/15/2006............... 1,271,610 1,408,995
B- B3 2,500,000 Salem Communications Corp.,
9.50% due 10/01/2007........ 2,551,250 2,612,500
Sinclair Broadcasting Group
Inc.:
B B2 2,000,000 10% due 9/30/2005............. 1,993,750 2,150,000
B B2 3,000,000 8.75% due 12/15/2007.......... 2,988,240 3,090,000
------------ ------------
14,028,600 14,478,995
- ---------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS--0.3% B+ B1 3,000,000 Nortek Inc., 9.125% due
9/01/2007................... 2,975,760 3,067,500
- ---------------------------------------------------------------------------------------------------------------------------
CABLE-- CCC Ca 3,430,939 American Telecasting, Inc.
DOMESTIC--4.5% 13.646% due 6/15/2004(d).... 3,029,456 857,735
Century Communications Corp.:
BB- Ba3 3,000,000 9.50% due 3/01/2005........... 2,953,750 3,247,500
BB- Ba3 2,500,000 8.375% due 12/15/2007......... 2,454,475 2,550,000
B B2 4,000,000 Intermedia Capital Partners
L.P., 11.25% due
8/01/2006................... 3,997,500 4,540,000
BB+ Ba3 5,000,000 Lenfest Communications, Inc.,
8.375% due 11/01/2005....... 4,627,500 5,312,500
B B1 4,000,000 Olympus Communications L.P.,
10.625% due 11/15/2006...... 4,000,000 4,420,000
BB+ Ba2 2,000,000 TCI Communications Inc., 9.65%
due 3/31/2027............... 2,052,500 2,449,940
B Caa1 4,000,000 TCI Satellite Entertainment,
Inc., 10.875% due
2/15/2007................... 4,110,000 3,980,000
------------ ------------
27,225,181 27,357,675
- ---------------------------------------------------------------------------------------------------------------------------
CABLE-- Australis Media Ltd.(g):
INTERNATIONAL--2.6% D C 136,859 1.75%/15.75% due 5/15/2003.... 75,292 6,843
D C 8,000,000 1.75%/15.75% due
5/15/2003(h)................ 5,575,080 400,000
NTL, Inc.:
B- B3 2,000,000 10% due 2/15/2007............. 1,955,000 2,140,000
B- B3 5,500,000 Series B, 10.98% due
2/01/2006(d)................ 4,220,265 4,537,500
B+ B1 7,000,000 TeleWest Communications PLC,
11.45% due 10/01/2007(d).... 5,334,439 5,775,000
B B3 5,000,000 United International Holdings,
Inc., 10.75% due
2/15/2008(d)................ 3,094,184 3,075,000
------------ ------------
20,254,260 15,934,343
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
137
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (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--3.4% B+ B1 $ 4,000,000 Bucyrus International Inc.,
9.75% due 9/15/2007......... $ 4,000,000 $ 4,030,000
B B2 4,000,000 Columbus McKinnon Corp., 8.50%
due 4/01/2008(e)............ 3,989,360 3,920,000
B- B3 4,500,000 International Wire Group,
Inc., 11.75% due
6/01/2005................... 4,490,625 4,933,125
B B2 4,750,000 Morris Materials Handling,
9.50% due 4/01/2008(e)...... 4,705,000 4,429,375
B- B3 3,000,000 Terex Corporation, 8.875% due
4/01/2008(e)................ 2,947,500 2,947,500
------------ ------------
20,132,485 20,260,000
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS--1.2% BB- Ba3 3,100,000 Agricultural Minerals &
Chemicals Co., L.P., 10.75%
due 9/30/2003............... 3,119,125 3,301,500
BB- Ba3 3,500,000 ISP Holdings Inc., 9.75% due
2/15/2002................... 3,500,000 3,675,000
------------ ------------
6,619,125 6,976,500
- ---------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES-- B Ba3 2,500,000 Advanced Micro Devices, Inc.,
ELECTRONICS--2.3% 11% due 8/01/2003........... 2,700,625 2,637,500
CCC Caa1 3,000,000 Dictaphone Corp., 11.75% due
8/01/2005................... 2,943,750 3,015,000
B B2 4,000,000 Hadco Corp., 9.50% due
6/15/2008(e)................ 3,986,400 3,980,000
B- B3 4,000,000 PSINet Inc., 10% due
2/15/2005................... 4,000,000 4,080,000
------------ ------------
13,630,775 13,712,500
- ---------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES--0.9% B- B3 2,000,000 Eagle-Picher Industries, Inc.,
9.375% due 3/01/2008(e)..... 1,996,720 2,020,000
Sequa Corp.:
BB Ba2 750,000 9.625% due 10/15/1999......... 740,625 772,500
B+ B1 2,500,000 9.375% due 12/15/2003......... 2,512,813 2,587,500
------------ ------------
5,250,158 5,380,000
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--1.6% B+ Ba3 3,500,000 Coty Inc., 10.25% due
5/01/2005................... 3,618,125 3,736,250
B+ B2 7,000,000 International Semi-Tech
Microelectronics, Inc.,
13.13% due 8/15/2003(d)..... 5,078,658 2,100,000
B+ B1 2,500,000 Playtex Products Inc., Series
B, 8.875% due
7/15/2004(e)................ 2,520,625 2,568,750
B- B3 1,500,000 Syratech Corp., 11% due
4/15/2007................... 1,230,000 1,327,500
------------ ------------
12,447,408 9,732,500
- ---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED--1.0% B- B2 2,000,000 Koppers Industries, Inc.,
9.875% due 12/01/2007....... 2,000,000 2,050,000
B+ B2 4,000,000 RBX Corp., 12% due
1/15/2003(e)................ 4,022,500 3,880,000
------------ ------------
6,022,500 5,930,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
138
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ENERGY--9.6% B- B3 $ 2,000,000 Bellwether Exploration Co.,
10.875% due 4/01/2007....... $ 2,000,000 $ 2,110,000
B+ B2 4,500,000 Benton Oil & Gas Co., 11.625%
due 5/01/2003............... 4,500,000 4,792,500
Chesapeake Energy Corporation:
B+ B1 1,500,000 9.625% due 5/01/2005(e)....... 1,500,000 1,503,750
B+ B1 2,000,000 9.125% due 4/15/2006.......... 1,995,100 1,970,000
B+ B3 2,500,000 Clark USA Inc., Series B,
10.875% due 12/01/2005...... 2,738,125 2,750,000
B B2 4,000,000 Energy Corp. of America, 9.50%
due 5/15/2007............... 4,000,000 3,920,000
BB B1 2,000,000 Hvide Marine Inc., 8.375% due
2/15/2008................... 2,000,000 1,910,000
B- B3 2,200,000 KCS Energy Inc., 8.875% due
1/15/2008................... 2,178,000 2,090,000
B B3 5,000,000 Northern Offshore ASA, 10% due
5/15/2005(e)................ 5,000,000 4,775,000
Parker Drilling Co.:
B+ B1 1,750,000 9.75% due 11/15/2006.......... 1,758,750 1,793,750
B+ B1 2,000,000 9.75% due 11/15/2006(e)....... 2,076,660 2,045,000
NR* B1 3,000,000 Petroleo Brasileiro S.A.--
Petrobras, 10% due
10/17/2006(e)............... 3,000,313 3,037,500
B+ B2 1,500,000 Pool Energy Services Co.,
8.625% due 4/01/2008(e)..... 1,500,000 1,462,500
B B2 3,000,000 Queen Sand Resources, Inc.,
12.50% due 7/01/2008........ 3,000,000 3,000,000
B- B3 3,500,000 Southwest Royalties Inc.,
10.50% due 10/15/2004....... 3,368,730 2,852,500
BB- B1 3,000,000 Tesoro Petroleum Corporation,
9% due 7/01/2008(e)......... 2,982,870 2,982,870
B+ B3 14,365,000 TransAmerican Energy Corp.,
Series B, 13.127% due
6/15/2002(d)................ 12,667,906 11,779,300
B- B2 1,500,000 United Refining Co., 10.75%
due 6/15/2007............... 1,507,500 1,451,250
B B2 2,500,000 Universal Compression Inc.,
9.875% due 2/15/2008
(d)(e)...................... 1,600,452 1,575,000
------------ ------------
59,374,406 57,800,920
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--1.2% B B1 1,500,000 Fox/Liberty Networks LLC,
8.875% due 8/15/2007........ 1,526,250 1,522,500
B- B3 5,000,000 Six Flags Theme Parks Corp.,
12.25% due 6/15/2005(d)..... 5,000,000 5,687,500
------------ ------------
6,526,250 7,210,000
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.9% B B2 2,000,000 Amresco, Inc., 9.875% due
3/15/2005................... 2,005,000 2,020,000
NR* Baa2 2,000,000 IBJ Preferred Capital Co. LLC,
8.79% due 12/29/2049(e)..... 1,992,500 1,827,500
BB- Ba2 1,300,000 Reliance Group Holdings Inc.,
9.75% due 11/15/2003........ 1,209,250 1,365,260
------------ ------------
5,206,750 5,212,760
- ---------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--0.8% B+ B1 4,500,000 Chiquita Brands International
Inc., 9.125% due
3/01/2004................... 4,448,750 4,590,000
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BB Ba3 4,000,000 Republic of Argentina, Global
OBLIGATIONS--0.7% Bonds, 11% due
10/09/2006.................. 4,115,000 4,240,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
139
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GAMING--3.2% BB- B1 $ 2,000,000 Boyd Gaming Corp., 9.50% due
7/15/2007................... $ 1,978,000 $ 2,080,000
D Caa1 4,000,000 Greate Bay Properties, Inc.,
10.875% due 1/15/2004(c).... 3,590,000 3,460,000
D NR* 4,500,000 Harrah's Jazz Company, 14.25%
due
11/15/2001(c)............... 4,468,750 1,440,000
B+ B2 3,000,000 Hollywood Casino Corp., 12.75%
due 11/01/2003.............. 3,240,000 3,285,000
BB- B1 6,000,000 Trump Atlantic City
Association, 11.25% due
5/01/2006................... 5,935,000 5,835,000
B- B3 3,000,000 Venetian Casino Resort LLC,
12.25% due 11/15/2004....... 3,015,000 3,097,500
------------ ------------
22,226,750 19,197,500
- ---------------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES--3.8% B+ Ba3 4,000,000 Beverly Enterprises, Inc., 9%
due 2/15/2006............... 3,740,000 4,170,000
BBB Ba2 2,000,000 Columbia/HCA Healthcare Corp.,
7.15% due 3/30/2004......... 1,920,000 1,959,540
B- B2 2,000,000 Extendicare Inc., 9.35% due
12/15/2007.................. 2,000,000 2,015,000
B+ Ba3 3,000,000 Fresnius Medical Capital
Trust I, 7.875% due
2/01/2008(e)................ 3,000,000 2,947,500
B- B3 2,000,000 Magellan Health Services Inc.,
9% due 2/15/2008(e)......... 2,000,000 1,985,000
B- B3 2,500,000 Paragon Health Network, Inc.,
9.50% due 11/01/2007........ 2,488,850 2,543,750
B+ B2 3,000,000 Quest Diagnostic Inc., 10.75%
due 12/15/2006.............. 3,000,000 3,352,500
BB- Ba3 4,000,000 Tenet Healthcare Corp., 8.125%
due 12/01/2008(e)........... 3,984,480 4,025,000
------------ ------------
22,133,330 22,998,290
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS--0.8% BB- Ba3 4,500,000 HMC Acquisition Properties, 9%
due 12/15/2007.............. 4,202,500 4,882,500
- ---------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER B+ Ba1 5,000,000 AES Corporation (The), 10.25%
PRODUCERS--2.1% due 7/15/2006............... 5,400,000 5,437,500
BB- Ba2 4,000,000 Calpine Corporation, 8.75% due
7/15/2007................... 4,005,883 4,110,000
B B2 250,000 Midland Cogeneration Venture
L.P., 11.75% due
7/23/2005................... 250,000 300,735
BB Ba2 3,000,000 Monterrey Power, S.A. de C.V.,
9.625% due 11/15/2009(e).... 2,994,480 2,715,000
------------ ------------
12,650,363 12,563,235
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- B B3 3,000,000 Neff Corporation, 10.25% due
SERVICES--1.2% 6/01/2008(e)................ 3,000,000 3,015,000
CCC+ Caa1 8,000,000 Thermadyne Holdings Corp.,
12.50% due 6/01/2008
(d)(e)...................... 4,406,538 4,360,000
------------ ------------
7,406,538 7,375,000
- ---------------------------------------------------------------------------------------------------------------------------
MACHINERY--0.7% B- B3 4,000,000 Numatics, Inc., 9.625% due
4/01/2008(e)................ 4,000,000 4,040,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
140
<PAGE> 142
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MEDIA & COMMUNICATIONS-- BB- Ba3 $ 3,000,000 Antenna TV S.A., 9% due
INTERNATIONAL--3.7% 8/01/2007................... $ 2,935,415 $ 3,015,000
BB- B1 3,000,000 Comtel Brasileira Ltd., 10.75%
due 9/26/2004(e)............ 3,000,000 2,767,500
NR* NR* 1,000,000 Facilicom International,
10.50% due 1/15/2008(e)..... 1,000,000 985,000
BB- B1 5,000,000 Globo Communicacoes e
Participacoes, Ltd., 10.50%
due 12/20/2006(e)........... 5,101,250 4,500,000
BB Ba2 4,000,000 Grupo Televise, S.A. de C.V.,
11.375% due 5/15/2003....... 4,025,000 4,300,000
B- B3 2,500,000 Satelites Mexicanos S.A.,
10.125% due
11/01/2004(e)............... 2,500,000 2,434,375
BBB- Ba3 4,000,000 Telefonica de Argentina S.A.,
11.875% due 11/01/2004...... 3,917,780 4,300,000
------------ ------------
22,479,445 22,301,875
- ---------------------------------------------------------------------------------------------------------------------------
METALS & MINING--3.0% B- B3 5,000,000 Great Lakes Carbon Corp.,
10.25% due 5/15/2008
(a)(e)...................... 5,000,000 5,100,000
CCC+ B2 4,500,000 Kaiser Aluminum Corp., 12.75%
due 2/01/2003............... 4,770,000 4,781,250
CCC+ B3 3,000,000 Maxxam Group, Inc., 12.25% due
8/01/2003(d)................ 2,968,636 3,075,000
B B2 5,000,000 P & L Coal Holdings Corp.,
9.625% due 5/15/2008(e)..... 4,985,700 5,137,500
------------ ------------
17,724,336 18,093,750
- ---------------------------------------------------------------------------------------------------------------------------
PACKAGING--3.3% B B2 2,000,000 AEP Industries, Inc., 9.875%
due 11/15/2007.............. 1,984,480 2,055,000
B- B3 4,500,000 Indesco International, 9.75%
due 4/15/2008(e)............ 4,490,000 4,455,000
B B2 4,000,000 Portola Packaging Inc., 10.75%
due 10/01/2005.............. 4,000,000 4,220,000
Silgan Holdings, Inc.:
B NR* 2,810,000 13.25% due 7/15/2006(a)....... 3,142,137 2,948,365
B B1 1,000,000 9% due 6/01/2009.............. 1,000,000 1,035,000
B- B3 5,000,000 Tekni-Plex Inc., 9.25% due
3/01/2008................... 5,000,000 5,000,000
------------ ------------
19,616,617 19,713,365
- ---------------------------------------------------------------------------------------------------------------------------
PAPER--0.4% B+ B1 2,000,000 S.D. Warren Co., 12% due
12/15/2004.................. 2,000,000 2,210,000
- ---------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST B B3 4,000,000 Ainsworth Lumber Ltd., 12.50%
PRODUCTS--2.9% due 7/15/2007(a)............ 3,898,916 4,070,718
B B2 3,000,000 Bear Island Paper Co. LLC, 10%
due 12/01/2007.............. 3,000,000 3,075,000
B+ B1 2,000,000 Container Corp. of America,
Series B, 10.75% due
5/01/2002................... 2,190,000 2,180,000
BB- B1 5,000,000 Doman Industries Limited,
9.25% due 11/15/2007........ 5,000,000 5,000,000
CCC+ Caa1 4,000,000 Pindo Deli Finance Mauritius,
10.75% due 10/01/2007....... 3,987,920 2,800,000
------------ ------------
18,076,836 17,125,718
- ---------------------------------------------------------------------------------------------------------------------------
PRINTING & B+ B1 4,000,000 Garden State Newspapers, 8.75%
PUBLISHING--2.0% due 10/01/2009.............. 3,976,600 4,060,000
BB- B1 5,000,000 Hollinger International, Inc.,
9.25% due 2/01/2006......... 4,961,250 5,231,250
BB- Ba3 1,000,000 K-III Communications Corp.,
10.25% due 6/01/2004........ 995,000 1,065,000
BB- Ba3 2,000,000 Primedia Inc., 7.625% due
4/01/2008................... 1,988,500 1,945,000
------------ ------------
11,921,350 12,301,250
- ---------------------------------------------------------------------------------------------------------------------------
PRODUCT B- B3 4,000,000 AmeriServe Food Distribution,
DISTRIBUTION--0.7% Inc., 10.125% due
7/15/2007................... 4,000,000 4,120,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
141
<PAGE> 143
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESTAURANTS--0.3% B- B1 $ 2,000,000 Foodmaker, Inc., 9.75% due
11/01/2003.................. $ 1,972,075 $ 2,115,000
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.3% D Caa 4,500,000 Bradlees, Inc., 11% due
8/01/2002(c)................ 4,466,563 135,000
NR* NR* 1,748,000 Cumberland Farms, Inc., 10.50%
due 10/01/2003.............. 1,710,855 1,713,040
------------ ------------
6,177,418 1,848,040
- ---------------------------------------------------------------------------------------------------------------------------
STEEL--2.2% NR* B1 5,000,000 CSN Iron S.A., 9.125% due
6/01/2007(e)................ 4,850,000 4,000,000
B+ B2 1,000,000 WCI Steel Inc., 10% due
12/01/2004.................. 1,037,500 1,027,500
B B2 3,500,000 Weirton Steel Inc., 10.75% due
6/01/2005................... 3,346,250 3,675,000
BB- B2 4,500,000 Wheeling-Pittsburgh Corp.,
9.25% due 11/15/2007........ 4,469,255 4,590,000
------------ ------------
13,703,005 13,292,500
- ---------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.6% BB Ba3 2,000,000 Disco S.A., 9.875% due
5/15/2008(e)................ 1,986,840 1,890,000
B- B3 2,000,000 Pueblo Xtra International,
9.50% due 8/01/2003......... 1,831,741 1,950,000
------------ ------------
3,818,581 3,840,000
- ---------------------------------------------------------------------------------------------------------------------------
TELEPHONY--COMPETITIVE B+ B2 3,000,000 GCI Inc., 9.75% due
LOCAL EXCHANGE--2.5% 8/01/2007................... 3,000,000 3,135,000
B B2 3,000,000 Intermedia Communications
Inc., 8.60% due
6/01/2008(e)................ 3,000,000 3,037,500
NR* Caa3 5,000,000 Ionica PLC, 13.373% due
5/01/2007(d)................ 3,167,469 1,000,000
B B3 4,000,000 Level 3 Communications, Inc.,
9.125% due 5/01/2008(e)..... 3,877,500 3,895,000
B B3 3,500,000 Metronet Communications, 9.95%
due 6/15/2008 (d)(e)........ 2,162,385 2,165,625
NR* B3 3,000,000 Nextlink Communications Inc.,
9.45% due 4/15/2008
(d)(e)...................... 1,927,215 1,833,750
------------ ------------
17,134,569 15,066,875
- ---------------------------------------------------------------------------------------------------------------------------
TEXTILES--1.6% B+ B3 2,800,000 Anvil Knitwear Inc., Series B,
10.875% due 3/15/2007....... 2,906,625 2,870,000
B B3 2,000,000 Galey & Lord Inc., 9.125% due
3/01/2008................... 2,002,500 1,930,000
CCC- Caa3 4,000,000 P.T. Polysindo International
Finance, 9.375% due
7/30/2007................... 3,601,250 1,360,000
B+ B1 3,500,000 Tultex Corp., 10.625% due
3/15/2005................... 3,500,000 3,631,250
------------ ------------
12,010,375 9,791,250
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--4.5% BB- B1 3,000,000 Alpha Shipping PLC, 9.50% due
2/15/2008(e)................ 2,982,840 2,865,000
BB- NR* 5,000,000 Autopistas Del Sol S.A.,
10.25% due 8/01/2009(e)..... 4,971,250 4,650,000
BB Ba3 6,000,000 GS Superhighway Holdings,
10.25% due 8/15/2007........ 5,956,875 4,267,500
B NR* 4,500,000 MRS Logistica S.A., 10.625%
due 8/15/2005(e)............ 4,449,375 3,757,500
BB- B1 4,000,000 Sea Containers Ltd., 12.50%
due 12/01/2004.............. 4,380,000 4,440,000
B- B3 5,700,000 Transtar Holdings Inc.,
11.067% due 12/15/2003(d)... 5,021,352 5,301,000
BB Ba2 1,659,000 Viking Star Shipping Co.,
9.625% due 7/15/2003........ 1,565,196 1,667,295
------------ ------------
29,326,888 26,948,295
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
142
<PAGE> 144
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UTILITIES--4.5% BB- NR* $ 2,500,000 Companhia de Saneamento Basico
do Estado de Sao-Paulo, 10%
due 7/28/2005(e)............ $ 2,340,000 $ 2,175,000
BB+ Baa3 1,000,000 Empresa Electricidad del
Norte, 10.50% due
6/15/2005(e)................ 1,000,000 1,020,000
BB- B1 5,000,000 Espirito Santo--Escelsa S.A.,
10% due 7/15/2007(e)........ 4,973,750 4,237,500
BB+ NR* 3,000,000 Inversora de Electrica, 9% due
9/16/2004(e)................ 3,000,000 2,842,500
BBB- Ba3 4,000,000 Metrogas S.A., 12% due
8/15/2000................... 3,935,000 4,180,000
Niagara Mohawk Power Corp.:
BB- Ba3 3,000,000 7.75% due 10/01/2008.......... 2,992,380 3,073,530
BB+ Ba3 2,000,000 8.77% due 1/01/2018........... 2,120,625 2,139,960
BBB- Baa3 2,959,331 Trans Gas de Occidente S.A.,
9.79% due 11/01/2010
(e)(f)...................... 2,959,331 3,119,247
Tucson Electric & Power
Co.(f):
NR* NR* 3,400,687 10.21% due 1/01/2009.......... 3,287,974 3,829,207
NR* NR* 500,000 +10.732% due 1/01/2013........ 461,050 591,965
------------ ------------
27,070,110 27,208,909
- ---------------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT--0.8% B+ B2 4,000,000 Les Inc., 9.25% due
6/01/2008(e)................ 4,000,000 4,040,000
D Ca 3,500,000 Mid-American Waste Systems,
Inc., 12.25% due
2/15/2003(c)................ 2,033,810 657,125
------------ ------------
6,033,810 4,697,125
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- CCC+ B2 2,000,000 Cencall Communications Corp.,
8.803% due 1/15/2004(d)..... 1,965,528 1,965,000
DOMESTIC--3.1% BB+ Ba3 3,000,000 Comcast Cellular, 9.50% due
5/01/2007................... 2,995,110 3,127,500
CCC+ B2 10,000,000 Nextel Communications, Inc.,
13.128% due 8/15/2004(d).... 7,899,250 9,725,000
B B2 4,000,000 Paging Network, Inc., 10% due
10/15/2008.................. 4,000,000 4,130,000
------------ ------------
16,859,888 18,947,500
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- CCC+ Caa1 7,505,000 McCaw International Ltd.,
12.484% due 4/15/2007(d).... 4,798,209 4,915,775
INTERNATIONAL--1.9% B- B3 8,000,000 Millicom International
Cellular S.A., 13.31% due
6/01/2006(d)................ 5,506,100 6,240,000
------------ ------------
10,304,309 11,155,775
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE
BONDS--86.4% 537,951,608 521,688,725
- ---------------------------------------------------------------------------------------------------------------------------
SHARES
HELD PREFERRED STOCKS
- ---------------------------------------------------------------------------------------------------------------------------
BROADCASTING-- RADIO & CCC+ Caa 2,000 Cumulus Media Inc. ........... 2,000,000 2,000,000
TV--0.3%
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--DOMESTIC--1.1% BB- B2 58,942 CSC Holdings Inc.
(Series M)(a)............... 4,427,500 6,778,330
- ---------------------------------------------------------------------------------------------------------------------------
CABLE-- B- Caa 3,521 NTL, Inc.(a).................. 3,563,410 4,163,583
INTERNATIONAL--0.7%
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--0.4% B+ Caa1 2,115 Clark USA, Inc.(a)(c)......... 2,119,600 2,231,325
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--1.1% BB+ Ba2 5,945 Time Warner Inc. (Series
M)(a)....................... 6,006,885 6,606,381
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.6% BB Ba2 120,000 California Federal Bank
(Series A).................. 3,030,000 3,277,500
- ---------------------------------------------------------------------------------------------------------------------------
PRINTING & B B2 20,000 Primedia Inc. (Series B)...... 1,988,000 1,945,000
PUBLISHING--0.3%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
143
<PAGE> 145
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S SHARES VALUE
INDUSTRY RATINGS RATINGS HELD PREFERRED STOCKS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STEEL--0.5% BB+ Baa3 120,000 USX Capital Corp. ............ $ 3,000,000 $ 2,992,500
- ---------------------------------------------------------------------------------------------------------------------------
TELEPHONY--COMPETITIVE CCC+ Caa 3,571 Intermedia Communications Inc.
LOCAL EXCHANGE--0.7% (Series B)
(Convertible)(a)(e)......... 3,584,808 4,213,780
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES--0.5% NR* NR* 3,000 American Tower Corp. (Class
A)(a)....................... 2,980,000 3,023,565
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS NR* NR* 2,195 Nextel Communications,
COMMUNICATIONS-- Inc.(a)..................... 2,219,855 2,458,400
DOMESTIC--0.4%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PREFERRED STOCKS--6.6% 34,920,058 39,690,364
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--0.2% 86,526 CHI Energy, Inc.
(Series A)(c)............... 1,257,994 1,124,838
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.2% 93,747 On Command Corporation(c)..... 2,744,654 1,300,740
- ---------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.0% 53,022 Grand Union Co.(c)............ 3,090,000 9,544
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS 9,295 Nextel Communications, Inc.
COMMUNICATIONS-- (Class A)(c)................ 149,988 230,632
DOMESTIC--0.0%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMON STOCKS--0.4% 7,242,636 2,665,754
- ---------------------------------------------------------------------------------------------------------------------------
TRUSTS & WARRANTS
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--DOMESTIC--0.0% 23,350 American Telecasting, Inc.
(Warrants)(b)............... 4,776 234
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.0% 29,830 On Command Corporation
(Warrants)(b)............... 238,640 145,421
- ---------------------------------------------------------------------------------------------------------------------------
GAMING--0.0% 250 +Goldriver Hotel & Casino
Finance Corp. (Liquidating
Trust)(c)................... 6,000 0
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
TRUSTS & WARRANTS--0.0% 249,416 145,655
- ---------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER**--6.0% $25,946,000 General Motors Acceptance
Corp., 6.50% due 7/01/1998.. 25,941,315 25,941,315
10,000,000 Lexington Parker Discount
Capital Co. LLC, 5.62% due
7/08/1998................... 9,987,511 9,987,511
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES--6.0% 35,928,826 35,928,826
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.4%...... $616,292,544 600,119,324
============
OTHER ASSETS LESS
LIABILITIES--0.6%........... 3,703,236
------------
NET ASSETS--100.0%............ $603,822,560
============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Not Rated.
** Commercial Paper is traded on a discount basis; the
interest rates shown are the discount rates paid at the
time of purchase by the Fund.
(a) Represents a pay-in-kind security which may pay
interest/dividend in additional face/shares.
(b) Warrants entitle the portfolio to purchase a
predetermined number of shares of common stock/face
amount of bonds and are non-income producing. The
purchase price and number of shares/face amount are
subject to adjustment under certain conditions until the
expiration date.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate
shown is the effective yield at the time of purchase by
the Fund.
(e) 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.
</TABLE>
144
<PAGE> 146
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
(g) Represents a step bond. Coupon payments are
paid-in-kind, in which the Fund receives additional face
amount at an annual rate of 1.75% until May 15, 2000.
Subsequently, the Fund will receive cash coupon payments
at an annual rate of 15.75% until maturity.
(h) Each $1,000 face amount contains one warrant of
Australis Media Ltd.
+ Restricted securities as to resale. The value of the
Fund's investment in restricted securities was
approximately $592,000, representing 0.10% of net assets.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goldriver Hotel & Casino Finance Corp. (Liquidating
Trust)...................................................... 8/31/1992 $ 6,000 0
Tucson Electric & Power Co., 10.732% due 1/01/2013.......... 3/01/1993 461,050 $591,965
- ---------------------------------------------------------------------------------------------------------
TOTAL $467,050 $591,965
======== ========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
145
<PAGE> 147
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$616,292,544) (Note
1a)....................................................... $600,119,324
Cash........................................................ 1,096
Receivables:
Interest.................................................. $10,775,309
Securities sold........................................... 2,684,139
Capital shares sold....................................... 406,110
Dividends................................................. 216,164 14,081,722
-----------
Prepaid expenses and other assets........................... 51,936
------------
Total assets................................................ 614,254,078
------------
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 9,982,870
Investment adviser (Note 2)............................... 245,237
Capital shares redeemed................................... 96,841 10,324,948
-----------
Accrued expenses and other liabilities...................... 106,570
------------
Total liabilities........................................... 10,431,518
------------
- ----------------------------------------------------------------------------------------
NET ASSETS.................................................. $603,822,560
============
- ----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 5,327,987
Paid-in capital in excess of par............................ 604,026,202
Undistributed investment income--net........................ 4,865,759
Undistributed realized capital gains on investments--net.... 5,775,832
Unrealized depreciation on investments--net................. (16,173,220)
------------
NET ASSETS.................................................. $603,822,560
============
- ----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $603,822,560 and 53,279,865
shares outstanding........................................ $ 11.33
============
- ----------------------------------------------------------------------------------------
</TABLE>
+The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
146
<PAGE> 148
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and discount earned................................ $ 26,061,601
Dividends................................................... 1,500,686
Other income................................................ 215,100
------------
Total income................................................ 27,777,387
------------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $1,356,957
Accounting services (Note 2)................................ 52,284
Custodian fees.............................................. 25,245
Registration fees........................................... 16,179
Printing and shareholder reports............................ 11,983
Professional fees........................................... 10,457
Directors' fees and expenses................................ 6,157
Pricing services............................................ 4,430
Transfer agent fees (Note 2)................................ 2,512
Other....................................................... 2,823
----------
Total expenses.............................................. 1,489,027
------------
Investment income--net...................................... 26,288,360
------------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES
1c & 3):
Realized gain on investments--net........................... 5,905,578
Change in unrealized depreciation on investments--net....... (14,365,793)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 17,828,145
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
147
<PAGE> 149
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 26,288,360 $ 43,711,637
Realized gain on investments--net........................... 5,905,578 8,171,656
Change in unrealized appreciation/depreciation on
investments--net.......................................... (14,365,793) (2,363,743)
------------ ------------
Net increase in net assets resulting from operations........ 17,828,145 49,519,550
------------ ------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1d):
Investment income--net:
Class A................................................... (25,888,882) (42,928,118)
Realized gain on investments--net:
Class A................................................... (1,954,319) (972,470)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (27,843,201) (43,900,588)
------------ ------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 59,891,501 133,712,235
------------ ------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 49,876,445 139,331,197
Beginning of period......................................... 553,946,115 414,614,918
------------ ------------
End of period*.............................................. $603,822,560 $553,946,115
============ ============
- ------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 4,865,759 $ 4,466,281
============ ============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
148
<PAGE> 150
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE -------------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+ 1997+ 1996+ 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 11.52 $ 11.39 $ 11.25 $ 10.61 $ 12.06
-------- -------- -------- -------- --------
Investment income--net.............................. .52 1.05 1.08 1.09 1.05
Realized and unrealized gain (loss) on
investments--net.................................. (.16) .14 .12 .65 (1.47)
-------- -------- -------- -------- --------
Total from investment operations.................... .36 1.19 1.20 1.74 (.42)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.51) (1.04) (1.06) (1.10) (1.03)
Realized gain on investments--net................. (.04) (.02) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions................... (.55) (1.06) (1.06) (1.10) (1.03)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 11.33 $ 11.52 $ 11.39 $ 11.25 $ 10.61
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 3.19%++ 11.00% 11.27% 17.21% (3.59%)
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .51%* .54% .54% .55% .61%
======== ======== ======== ======== ========
Investment income--net.............................. 9.04%* 9.11% 9.50% 9.92% 9.73%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $603,823 $553,946 $414,615 $356,352 $255,719
======== ======== ======== ======== ========
Portfolio turnover.................................. 19.90% 53.63% 48.92% 41.60% 51.88%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
149
<PAGE> 151
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 and variable life insurance contracts. Class A
and Class B Shares have equal voting, dividend, liquidation and other rights,
except that only shares of the respective classes are entitled to vote on
matters concerning only that class and Class B Shares bear certain expenses
related to the distribution of such shares. 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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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 such 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, 1998, the aggregate average daily net assets of the Fund
and Prime Bond Fund was approximately $1,127,365,000.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), a subsidiary of ML & Co., earned
150
<PAGE> 152
- --------------------------------------------------------------------------------
$2,500 in commissions on the execution of portfolio security transactions.
For the six months ended June 30, 1998, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $2,632 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $187,256,002 and $106,099,372, respectively.
Net realized gains (losses) as of June 30, 1998 and net unrealized losses as
of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $5,905,659 $(16,173,220)
Short-term investments.............. (81) --
---------- ------------
Total............................... $5,905,578 $(16,173,220)
========== ============
- ---------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized depreciation for Federal income tax purposes
aggregated $16,173,220, of which $23,282,819 related to appreciated securities
and $39,456,039 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $616,292,544.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$59,891,501 and $133,712,235 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 3,754,112 $ 43,167,178
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 2,256,733 25,888,881
---------- ------------
Total issued.......................... 6,010,845 69,056,059
Shares redeemed....................... (797,178) (9,164,558)
---------- ------------
Net increase.......................... 5,213,667 $ 59,891,501
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 9,559,388 $109,578,509
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 3,761,677 42,928,115
---------- ------------
Total issued......................... 13,321,065 152,506,624
Shares redeemed...................... (1,644,648) (18,794,389)
---------- ------------
Net increase......................... 11,676,417 $133,712,235
========== ============
- -----------------------------------------------------------------
</TABLE>
5. SUBSEQUENT EVENT:
On July 1, 1998, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.095180 per Class A Share, payable on July 1, 1998 to
shareholders of record as of July 1, 1998.
151
<PAGE> 153
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC--INDEX 500 FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 1998, Index 500 Fund's Class A Shares had a
total return of +17.52%. Since its inception on December 13, 1996, the Fund's
Class A Shares produced a total return of +58.71%. The Fund's benchmark, the
unmanaged Standard & Poor's 500 Composite (S&P 500) Index, produced a total
return of +17.71% for the first six months of 1998, and +59.71% since the
inception of the Fund on December 13, 1996 to June 30, 1998.
THE ENVIRONMENT
Concerns regarding the impact of the Asian financial and currency crises
reemerged during the second quarter of 1998, but the unmanaged S&P 500 Index
still managed to provide investors with a respectable total return of +3.30% for
this period. Combined with the explosive rally during the first three months of
the year, in which the Index produced a total return of +13.95%, the S&P 500
produced an extraordinary total return of +17.71% for the first six months of
1998. Uncertainty regarding the ultimate impact on earnings of US corporations
became most significant during the month of May, which was the Index's only
negative month through the first half of 1998, and the first down month for the
Index since October 1997. Such worries subsided again in June, since signs of a
moderating US economy caused long-term bonds to rally into record-breaking
territory, with the yield on the 30-year US Treasury bond approaching the 5.50%
level by the end of June. This catapulted the S&P 500 Index to a new all-time
high of 1138.49, just one day prior to the end of the second quarter. The Index
finished the first half of the year at 1133.84, 163 points above its 1997
year-end close of 970.43.
As has been the case consistently during the past several years, it was once
again the largest stocks within the S&P 500 Index that powered its advance in
the first half of 1998. This occurred despite the potential negative effects
from Asia on the earnings of the huge multinational companies that dominate the
Index. While these concerns led to a nearly 5% decline in the Index between
mid-April and mid-June, the S&P 500 Index substantially outperformed both the
unmanaged S&P MidCap Index and the unmanaged S&P Small Cap Index during the
first half of 1998. In addition, the S&P 500 Index continued to fare better than
the average diversified US stock fund which, according to Lipper Analytical
Services, posted a modest loss during the second quarter of 1998.
PORTFOLIO MATTERS
Cash flow into Index 500 Fund continued at a solid pace throughout the first
half of 1998, with net subscriptions totaling nearly $90 million during this
period. Combined with the continuing gains in the market, the Fund's net assets
grew from $215.23 million on December 31, 1997 to $349.95 million on June 30,
1998. This represented a more than 60% increase in the Fund's net assets during
this period.
The principal investments of the Fund are a fully replicating portfolio of all
500 stocks in the Index, plus a long position in S&P 500 futures contracts,
which are used to equitize most daily cash flows into the Fund. At the end of
June, the Fund's equity portfolio was valued at $340.20 million, which
represented over 97% of the Fund's net assets. In addition, the Fund held a long
position of 35 S&P 500 futures contracts. As always, our goal is to be 100%
invested in the S&P 500 Index at all times.
The first half of 1998 was an active period regarding composition changes
within the S&P 500 Index. In response to this activity, the Fund initiated
positions in the following stocks during the first quarter of 1998: Lehman
Brothers Holdings Inc., Consolidated Stores Corporation, Summit Bancorp,
Northern Trust Corporation, Mercantile Bancorp, Sealed Air Corporation, Nextel
Communications, Inc. and Associates First Capital Corporation. The Fund again
added the following equities to its portfolio during the second quarter of 1998,
in response to Index composition changes: Gateway 2000, Inc., Franklin
Resources, Inc., Ascend Communications, Inc., The Bear Stearns Companies Inc.,
Capital One Financial Corporation, The Dun & Bradstreet Corp., SLM Holding
Corporation and Sempra Energy.
152
<PAGE> 154
- --------------------------------------------------------------------------------
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 and
strategies with you in our next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Eric S. Mitofsky
Eric S. Mitofsky
Senior Vice President and Portfolio Manager
August 3, 1998
153
<PAGE> 155
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +29.76% +17.52%
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. Past results shown
should not be considered a representation of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +29.76%
- --------------------------------------------------------------------------------
Inception (12/13/96) to 6/30/98 +34.84
- --------------------------------------------------------------------------------
154
<PAGE> 156
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
+3Com Corporation.............. 13,413 $ 411,611
ALLTEL Corporation............. 10,348 481,182
+ALZA Corporation.............. 3,268 141,341
AMP Inc. ...................... 8,295 285,141
+AMR Corporation............... 6,877 572,510
ASARCO Inc. ................... 1,526 33,954
AT&T Corp. .................... 61,435 3,509,474
Abbott Laboratories............ 58,370 2,385,874
Adobe Systems Inc. ............ 2,519 106,900
+Advanced Micro Devices,
Inc. ........................ 5,421 92,496
Aeroquip-Vickers Inc. ......... 1,058 61,761
Aetna, Inc. ................... 5,501 418,764
Ahmanson (H.F.) & Company...... 4,139 293,869
Air Products and Chemicals,
Inc. ........................ 8,857 354,280
+Airtouch Communications,
Inc. ........................ 21,646 1,264,938
Alberto-Culver Company (Class
B)........................... 2,115 61,335
Albertson's, Inc. ............. 9,286 481,131
Alcan Aluminium Ltd. .......... 8,601 237,603
Allegheny Teledyne, Inc. ...... 7,411 169,527
Allergan, Inc. ................ 2,467 114,407
AlliedSignal, Inc. ............ 21,346 947,229
Allstate Corporation (The)..... 15,875 1,453,555
Aluminum Company of
America...................... 6,368 419,890
Amerada Hess Corporation....... 3,494 189,768
Ameren Corporation............. 5,180 205,905
American Electric Power
Company, Inc. ............... 7,201 326,745
American Express Company....... 17,438 1,987,932
American General Corporation... 9,601 683,471
American Greetings
Corporation.................. 2,754 140,282
American Home Products
Corporation.................. 49,636 2,568,663
American International Group,
Inc. ........................ 26,456 3,862,576
American Stores Company........ 10,327 249,784
Ameritech Corporation.......... 41,615 1,867,473
+Amgen Inc. ................... 9,608 628,123
Amoco Corporation.............. 36,288 1,510,488
Anadarko Petroleum
Corporation.................. 2,261 151,911
+Andrew Corporation............ 3,347 60,455
Anheuser-Busch Companies,
Inc. ........................ 18,375 867,070
Aon Corporation................ 6,377 447,984
Apache Corporation............. 3,728 117,432
+Apple Computer, Inc. ......... 5,023 144,097
+Applied Materials, Inc. ...... 13,849 408,546
Archer-Daniels-Midland
Company...................... 21,575 418,016
+Armco Inc. ................... 4,085 26,042
Armstrong World Industries,
Inc. ........................ 1,545 104,094
+Ascend Communications,
Inc. ........................ 7,282 360,914
Ashland Inc. .................. 2,873 148,319
Associates First Capital
Corporation (Class A)........ 13,096 1,006,755
Atlantic Richfield Company..... 12,135 948,047
Autodesk, Inc. ................ 1,789 69,100
Automatic Data Processing,
Inc. ........................ 11,383 829,536
+AutoZone, Inc. ............... 5,754 183,768
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Avery Dennison Corporation..... 4,435 $ 238,381
Avon Products, Inc. ........... 5,000 387,500
BB&T Corporation............... 5,339 361,050
Baker Hughes, Inc. ............ 6,382 220,578
Ball Corporation............... 1,146 46,055
Baltimore Gas and Electric
Company...................... 5,575 173,173
Banc One Corporation........... 26,520 1,480,148
Bank of New York Company, Inc.
(The)........................ 14,243 864,372
BankAmerica Corporation........ 25,816 2,231,471
BankBoston Corporation......... 11,106 617,771
Bankers Trust New York
Corporation.................. 3,703 429,779
Barrick Gold Corporation....... 14,097 270,486
Battle Mountain Gold
Company...................... 8,696 51,633
Bausch & Lomb Inc. ............ 2,090 104,761
Baxter International, Inc. .... 10,589 569,821
+Bay Networks, Inc. ........... 8,391 270,610
Bear Stearns Companies Inc.
(The)........................ 4,375 248,828
Becton, Dickinson and Company.. 4,645 360,568
Bell Atlantic Corporation...... 58,762 2,681,016
BellSouth Corporation.......... 37,440 2,513,160
Bemis Company, Inc. ........... 1,988 81,260
Beneficial Corporation......... 2,069 316,945
Bestfoods...................... 10,920 634,043
+Bethlehem Steel Corporation... 4,851 60,334
Biomet, Inc. .................. 4,211 139,226
Black & Decker Corporation
(The)........................ 3,567 217,587
Block (H & R) Inc. ............ 3,971 167,278
Boeing Company (The)........... 38,207 1,702,599
Boise Cascade Corporation...... 2,104 68,906
+Boston Scientific
Corporation.................. 7,334 525,298
Briggs & Stratton
Corporation.................. 948 35,491
Bristol-Myers Squibb Co. ...... 37,637 4,325,903
Brown-Forman Corporation (Class
B)........................... 2,606 167,436
Browning-Ferris Industries,
Inc. ........................ 6,967 242,103
Brunswick Corporation.......... 3,736 92,466
Burlington Northern Santa Fe
Inc. ........................ 5,959 585,099
Burlington Resources Inc. ..... 6,671 287,270
CBS Corporation................ 27,155 862,171
CIGNA Corporation.............. 8,143 561,867
CINergy Corporation............ 5,952 208,320
COMPAQ Computer Corporation.... 62,522 1,774,062
C.R. Bard, Inc. ............... 2,152 81,911
CSX Corporation................ 8,251 375,421
CVS Corporation................ 14,535 565,957
+Cabletron Systems, Inc. ...... 5,963 80,128
Campbell Soup Company.......... 17,173 912,316
Capital One Financial
Corporation.................. 2,489 309,103
Cardinal Health, Inc. ......... 4,179 391,781
Carolina Power & Light
Company...................... 5,701 247,281
Case Corporation............... 2,839 136,982
Caterpillar, Inc. ............. 13,863 733,006
+Cendant Corporation........... 32,189 671,945
</TABLE>
155
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Centex Corporation............. 2,244 $ 84,711
Central and South West
Corporation.................. 8,028 215,753
+Ceridian Corporation.......... 2,738 160,858
Champion International
Corp. ....................... 3,613 177,714
Chase Manhattan Corp. (The).... 32,273 2,436,612
Chevron Corporation............ 24,733 2,054,385
Chrysler Corporation........... 24,409 1,376,057
Chubb Corporation.............. 6,356 510,864
Cincinnati Financial
Corporation.................. 6,306 241,993
Cincinnati Milacron Inc. ...... 1,505 36,590
Circuit City Stores -- Circuit
City Group................... 3,707 173,766
+Cisco Systems, Inc. .......... 38,684 3,561,346
Citicorp....................... 17,074 2,548,295
+Clear Channel Communications,
Inc. ........................ 4,673 509,941
Clorox Company................. 3,901 372,058
Coastal Corporation (The)...... 3,987 278,342
Coca-Cola Company (The)........ 93,377 7,983,734
+Cognizant Corporation......... 6,132 386,316
Colgate-Palmolive Company...... 11,169 982,872
Columbia Energy Group.......... 3,129 174,051
Columbia/HCA Healthcare
Corporation.................. 24,335 708,757
Comcast Corporation
(Class A).................... 13,945 566,080
Comerica Inc. ................. 5,958 394,718
Computer Associates
International, Inc. ......... 20,668 1,148,366
+Computer Sciences
Corporation.................. 5,872 375,808
ConAgra, Inc. ................. 18,166 575,635
Conseco, Inc. ................. 7,106 332,206
Consolidated Edison, Inc. ..... 8,871 408,620
Consolidated Natural Gas
Company...................... 3,588 211,244
+Consolidated Stores
Corporation.................. 4,055 146,994
Cooper Industries, Inc. ....... 4,604 252,932
Cooper Tire and Rubber
Company...................... 2,991 61,689
Coors (Adolph) Company (Class
B)........................... 1,407 47,838
Corning, Inc. ................. 8,739 303,680
+Costco Companies, Inc. ....... 8,155 514,275
Countrywide Credit Industries,
Inc. ........................ 4,106 208,380
Crane Co. ..................... 1,731 84,062
Crown Cork & Seal Company,
Inc. ........................ 4,705 223,488
Cummins Engine Company,
Inc. ........................ 1,464 75,030
Cyprus Amax Minerals Co. ...... 3,525 46,706
+DSC Communications
Corporation.................. 4,491 134,730
DTE Energy Company............. 5,479 221,215
Dana Corporation............... 4,001 214,054
Darden Restaurants, Inc. ...... 5,398 85,693
+Data General Corporation...... 1,858 27,754
Dayton Hudson Corporation...... 16,496 800,056
Deere & Company................ 9,380 495,968
+Dell Computer Corporation..... 24,353 2,260,263
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Delta Air Lines, Inc. ......... 2,864 $ 370,172
Deluxe Corporation............. 3,095 110,840
Dillard's Inc. (Class A)....... 4,071 168,692
Disney (Walt) Company (The).... 25,779 2,708,406
Dominion Resources, Inc. ...... 7,397 301,428
Donnelley (R.R.) & Sons Co. ... 5,366 245,495
Dover Corporation.............. 8,410 288,043
Dow Chemical Company
(The)........................ 8,513 823,101
Dow Jones & Company, Inc. ..... 3,522 196,352
Dresser Industries, Inc. ...... 6,635 292,355
Duke Energy Corporation........ 13,596 805,563
+Dun & Bradstreet Corp.
(The)........................ 6,491 234,487
duPont (E.I.) de Nemours &
Company...................... 42,674 3,184,547
EG & G, Inc. .................. 1,753 52,590
+EMC Corporation............... 18,819 843,326
Eastern Enterprises............ 767 32,885
Eastman Chemical Company....... 2,992 186,252
Eastman Kodak Company.......... 12,202 891,509
Eaton Corporation.............. 2,712 210,858
Echlin Inc. ................... 2,405 117,995
Ecolab Inc. ................... 4,878 151,218
Edison International........... 13,697 404,918
Emerson Electric Co. .......... 16,760 1,011,885
Engelhard Corporation.......... 5,439 110,140
Enron Corp. ................... 12,426 671,781
Entergy Corporation............ 9,318 267,893
Equifax Inc. .................. 5,592 203,060
Exxon Corporation+++........... 92,524 6,598,118
+FDX Corporation............... 5,551 348,325
+FMC Corporation............... 1,317 89,803
FPL Group, Inc. ............... 6,891 434,133
Federal Home Loan Mortgage
Corp......................... 25,661 1,207,671
Federal National Mortgage
Association.................. 39,210 2,382,008
+Federated Department Stores,
Inc. ........................ 7,964 428,563
Fifth Third BanCorp. .......... 9,932 625,716
First Chicago NBD
Corporation.................. 10,860 962,468
First Data Corporation......... 16,883 562,415
First Union Corporation........ 36,644 2,134,513
FirstEnergy Corp. ............. 8,699 267,494
Fleet Financial Group, Inc. ... 10,746 897,291
Fleetwood Enterprises, Inc. ... 1,350 54,000
Fluor Corporation.............. 3,104 158,304
Ford Motor Company............. 45,869 2,706,271
Fort James Corporation......... 8,335 370,908
Fortune Brands Inc. ........... 6,541 251,420
Foster Wheeler Corporation..... 1,533 32,864
Franklin Resources, Inc. ...... 9,556 516,024
Freeport-McMoRan Copper & Gold
Inc. (Class B)............... 6,841 103,898
Frontier Corporation........... 6,474 203,931
+Fruit of the Loom, Inc.
(Class A).................... 2,720 90,270
GPU, Inc. ..................... 4,836 182,861
GTE Corporation................ 36,400 2,024,750
Gannett Co., Inc. ............. 10,728 762,359
Gap, Inc. (The)................ 14,866 916,117
+Gateway 2000, Inc. ........... 5,855 296,409
</TABLE>
156
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
General Dynamics Corporation... 4,745 $ 220,643
General Electric Company+++.... 123,201 11,211,291
+General Instrument
Corporation.................. 5,677 154,343
General Mills, Inc. ........... 5,984 409,156
General Motors Corporation..... 25,275 1,688,686
General Re Corporation......... 2,893 733,376
General Signal Corporation..... 1,651 59,436
Genuine Parts Company.......... 6,792 234,748
Georgia-Pacific Corporation.... 3,504 206,517
Giant Food, Inc. (Class A)..... 2,259 97,278
Gillette Company (The)......... 42,482 2,408,198
Golden West Financial
Corporation.................. 2,158 229,422
Goodrich (B.F.) Company
(The)........................ 2,757 136,816
Goodyear Tire & Rubber Co.
(The)........................ 5,946 383,145
+Grace (W.R.) & Co. ........... 2,870 48,969
Grainger (W.W.), Inc. ......... 3,696 184,107
Great Atlantic & Pacific Tea
Co., Inc. ................... 1,442 47,676
Great Lakes Chemical
Corporation.................. 2,264 89,286
Green Tree Financial
Corporation.................. 5,068 216,974
Guidant Corporation............ 5,706 406,909
HBO & Company.................. 16,247 572,707
+HEALTHSOUTH Corporation....... 15,150 404,316
Halliburton Company............ 9,945 443,174
Harcourt General, Inc. ........ 2,676 159,222
Harnischfeger Industries,
Inc. ........................ 1,808 51,189
+Harrah's Entertainment,
Inc. ........................ 3,816 88,722
Harris Corporation............. 3,018 134,867
Hartford Financial Services
Group Inc. (The)............. 4,442 508,054
Hasbro, Inc. .................. 5,034 197,899
Heinz (H.J.) Company........... 13,826 775,984
Helmerich & Payne, Inc. ....... 1,885 41,941
Hercules Inc. ................. 3,589 147,598
Hershey Foods Corporation...... 5,407 373,083
Hewlett-Packard Company........ 39,170 2,345,304
Hilton Hotels Corporation...... 9,333 265,990
Home Depot, Inc. (The)......... 27,785 2,307,892
Homestake Mining Company....... 7,967 82,658
Honeywell Inc. ................ 4,793 400,515
Household International,
Inc. ........................ 12,176 605,756
Houston Industries Inc. ....... 11,182 345,244
+Humana, Inc. ................. 6,294 196,294
Huntington Bancshares, Inc. ... 7,273 243,645
ITT Industries Inc. ........... 4,464 166,842
Ikon Office Solutions, Inc. ... 5,120 74,560
Illinois Tool Works Inc. ...... 9,427 628,663
Inco Limited................... 6,278 85,538
Ingersoll-Rand Company......... 6,267 276,140
Intel Corporation.............. 64,134 4,753,933
International Business Machines
Corp. ....................... 35,655 4,093,640
International Flavors &
Fragrances Inc............... 4,075 177,008
International Paper Company.... 11,628 500,004
Interpublic Group of Companies,
Inc. ........................ 5,157 312,965
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Jefferson-Pilot Corporation.... 4,018 $ 232,793
Johnson & Johnson.............. 50,858 3,750,777
Johnson Controls, Inc. ........ 3,199 182,943
Jostens, Inc. ................. 1,399 33,751
+KLA-Tencor Corporation........ 3,285 90,953
Kaufman and Broad Home
Corporation.................. 1,468 46,609
Kellogg Company................ 15,474 581,242
Kerr-McGee Corporation......... 1,819 105,275
KeyCorp Limited................ 16,614 591,874
Kimberly-Clark Corporation..... 21,068 966,494
+King World Productions,
Inc. ........................ 2,802 71,451
+Kmart Corporation............. 18,451 355,182
Knight-Ridder, Inc. ........... 2,998 165,077
+Kroger Co. (The).............. 9,683 415,159
+LSI Logic Corporation......... 5,325 122,808
Laidlaw Inc. (Class B)......... 12,420 151,369
Lehman Brothers Holdings
Inc. ........................ 4,482 347,635
Lilly (Eli) & Co. ............. 41,877 2,766,499
Limited, Inc. (The)............ 8,584 284,345
Lincoln National Corporation... 3,799 347,134
Liz Claiborne, Inc. ........... 2,528 132,088
Lockheed Martin Corporation.... 7,394 782,840
Loews Corporation.............. 4,343 378,384
Longs Drug Stores
Corporation.................. 1,470 42,446
Louisiana-Pacific
Corporation.................. 4,119 75,172
Lowe's Companies, Inc. ........ 13,202 535,506
Lucent Technologies Inc. ...... 49,612 4,127,098
MBIA, Inc. .................... 3,702 277,187
MBNA Corporation............... 18,922 624,426
MCI Communications
Corporation.................. 27,392 1,592,160
MGIC Investment Corporation.... 4,313 246,111
Mallinckrodt Inc. ............. 2,774 82,353
Manor Care, Inc. .............. 2,385 91,673
Marriott International,
Inc. ........................ 9,630 311,771
Marsh & McLennan Companies,
Inc. ........................ 9,705 586,546
Masco Corporation.............. 6,428 388,894
Mattel, Inc. .................. 11,099 469,626
May Department Stores Company
(The)........................ 8,730 571,815
Maytag Corporation............. 3,591 177,306
McDermott International,
Inc. ........................ 2,284 78,655
McDonald's Corporation......... 25,995 1,793,655
McGraw-Hill Companies, Inc. ... 3,752 306,022
Mead Corporation (The)......... 3,947 125,317
+MediaOne Group Inc. .......... 23,025 1,011,661
Medtronic, Inc. ............... 17,733 1,130,479
Mellon Bank Corporation........ 9,840 685,110
Mercantile Bancorp............. 5,038 253,789
Mercantile Stores Company,
Inc. ........................ 1,390 109,723
Merck & Co., Inc. ............. 45,198 6,045,232
Meredith Corporation........... 2,012 94,438
Merrill Lynch & Co., Inc. ..... 13,084 1,206,999
+Micron Technology Inc. ....... 8,045 199,617
+Microsoft Corporation+++...... 93,178 10,098,166
Millipore Corporation.......... 1,639 44,663
Minnesota Mining &
Manufacturing Company........ 15,297 1,257,222
</TABLE>
157
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
+Mirage Resorts, Inc. ......... 6,784 $ 144,584
Mobil Corporation.............. 29,548 2,264,115
Monsanto Company............... 22,648 1,265,457
Moore Corporation Limited (NY
Registered Shares)........... 3,331 44,136
Morgan (J.P.) & Co., Inc. ..... 6,747 790,242
Morgan Stanley Group Inc. ..... 22,689 2,073,207
Morton International Inc. ..... 4,931 123,275
Motorola, Inc. ................ 22,576 1,186,651
NICOR Inc. .................... 1,814 72,787
Nacco Industries, Inc.
(Class A).................... 308 39,809
Nalco Chemical Company......... 2,532 88,936
National City Corporation...... 12,435 882,885
+National Semiconductor
Corporation.................. 6,178 81,472
National Service Industries,
Inc. ........................ 1,634 83,130
NationsBank Corporation........ 36,222 2,770,983
+Navistar International
Corporation.................. 2,610 75,364
New York Times Company (The)
(Class A).................... 3,635 288,074
Newell Co...................... 6,002 298,975
Newmont Mining Corporation..... 5,899 139,364
+Nextel Communications,
Inc. ........................ 10,334 257,058
+Niagara Mohawk Power Corp. ... 7,067 105,563
Nike Inc. (Class B)............ 10,880 529,720
Nordstrom, Inc. ............... 2,917 225,338
Norfolk & Southern
Corporation.................. 14,322 426,975
Northern States Power
Company...................... 5,700 163,162
Northern Telecom Limited....... 19,692 1,117,521
Northern Trust Corporation..... 4,232 322,690
Northrop Grumman Corporation... 2,559 263,897
Norwest Corporation............ 28,617 1,069,560
+Novell, Inc. ................. 13,276 169,269
Nucor Corporation.............. 3,316 152,536
ONEOK, Inc. ................... 1,160 46,255
Occidental Petroleum
Corporation.................. 13,890 375,030
Omnicom Group, Inc. ........... 6,437 321,045
+Oracle Corporation............ 36,811 904,170
+Oryx Energy Company........... 4,014 88,810
Owens Corning.................. 2,041 83,298
+Owens-Illinois, Inc. ......... 5,825 260,669
PACCAR Inc. ................... 2,957 154,503
PECO Energy Company............ 8,400 245,175
PG&E Corporation............... 14,400 454,500
PNC Bank Corp. ................ 11,375 612,117
PP&L Resources, Inc. .......... 6,336 143,748
PPG Industries, Inc. .......... 6,734 468,434
PacifiCorp..................... 11,241 254,328
Pall Corporation............... 4,720 96,760
+Parametric Technology
Company...................... 10,231 277,516
Parker Hannifin Corporation.... 4,208 160,430
Penney (J.C.) Company, Inc. ... 9,491 686,318
Pennzoil Company............... 1,770 89,606
Peoples Energy Corporation..... 1,321 51,024
Pep Boys--Manny, Moe & Jack
(The)........................ 2,392 45,298
PepsiCo, Inc. ................. 56,383 2,322,275
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Perkin-Elmer Corporation
(The)........................ 1,857 $ 115,482
Pfizer Inc. ................... 49,372 5,366,119
Pharmacia & Upjohn, Inc. ...... 19,210 886,061
Phelps Dodge Corporation....... 2,224 127,185
Philip Morris Companies,
Inc.+++...................... 91,865 3,617,184
Phillips Petroleum Company..... 9,871 475,659
Pioneer Hi-Bred International,
Inc. ........................ 9,229 381,850
Pitney Bowes Inc. ............. 10,351 498,142
Placer Dome, Inc. ............. 9,454 111,084
Polaroid Corporation........... 1,705 60,634
Potlatch Corporation........... 1,089 45,738
Praxair, Inc. ................. 5,931 277,645
Proctor & Gamble Company
(The)........................ 50,709 4,617,688
Progressive Corporation........ 2,709 381,969
Providian Corporation.......... 3,598 282,668
Public Service Enterprise
Group, Inc. ................. 8,769 301,982
Pulte Corporation.............. 1,642 49,055
Quaker Oats Company (The)...... 5,236 287,653
Ralston Purina Company......... 4,015 469,002
Raychem Corporation............ 3,170 93,713
Raytheon Company (Class B)..... 12,817 757,805
+Reebok International Ltd. .... 2,108 58,365
Republic New York
Corporation.................. 4,084 257,037
Reynolds Metals Company........ 2,723 152,318
Rite Aid Corporation........... 9,753 366,347
Rockwell International
Corporation.................. 7,431 357,152
Rohm & Haas Company............ 2,315 240,615
+Rowan Companies, Inc. ........ 3,285 63,852
Royal Dutch Petroleum Co. (NY
Registered Shares)........... 81,119 4,446,335
Rubbermaid Inc. ............... 5,656 187,708
Russell Corporation............ 1,408 42,504
Ryder System, Inc. ............ 2,810 88,691
SAFECO Corporation............. 5,337 242,166
SBC Communications Inc. ....... 69,535 2,781,400
SLM Holding Corporation........ 6,459 316,491
Sara Lee Corporation........... 17,663 988,024
Schering-Plough Corporation.... 27,743 2,541,952
Schlumberger Limited........... 18,830 1,286,324
Schwab (Charles) Corporation
(The)........................ 10,094 328,055
Scientific-Atlanta, Inc. ...... 2,983 75,694
+Seagate Technology, Inc. ..... 9,165 218,242
Seagram Company Ltd. (The)..... 13,095 536,077
+Sealed Air Corporation........ 3,143 115,505
Sears, Roebuck & Co. .......... 14,788 902,992
+Sempra Energy................. 9,065 251,542
Service Corporation
International................ 9,680 415,030
Shared Medical Systems
Corporation.................. 964 70,794
Sherwin-Williams Company
(The)........................ 6,561 217,333
Sigma-Aldrich Corporation...... 3,803 133,580
+Silicon Graphics, Inc. ....... 7,139 86,560
Snap-On, Inc. ................. 2,238 81,127
Sonat Inc. .................... 4,165 160,873
</TABLE>
158
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Southern Company (The)......... 26,371 $ 730,147
Southwest Airlines Co. ........ 8,438 249,976
Springs Industries, Inc. ...... 721 33,256
Sprint Corporation............. 16,246 1,145,343
+St. Jude Medical, Inc. ....... 3,176 116,916
St. Paul Companies, Inc.
(The)........................ 8,871 373,136
Standard & Poor's Depositary
Receipts..................... 5,300 600,556
Stanley Works (The)............ 3,360 139,650
State Street Corporation....... 6,070 421,865
+Stone Container Corporation... 3,748 58,562
Summit Bancorp................. 6,713 318,867
Sun Company, Inc. ............. 3,547 137,668
+Sun Microsystems, Inc. ....... 14,325 622,242
SunAmerica Inc. ............... 7,372 423,429
SunTrust Banks, Inc. .......... 7,975 648,467
SuperValu Stores Inc. ......... 2,271 100,776
Synovus Financial Corp. ....... 9,947 236,241
Sysco Corporation.............. 12,766 327,129
TJX Companies, Inc. (The)...... 12,078 291,382
TRW Inc. ...................... 4,657 254,389
Tandy Corporation.............. 3,830 203,229
Tektronix, Inc. ............... 1,879 66,470
+Tele-Communications, Inc.
(Class A).................... 19,162 736,539
+Tellabs, Inc. ................ 6,890 493,496
Temple-Inland Inc. ............ 2,110 113,676
+Tenet Healthcare
Corporation.................. 11,656 364,250
Tenneco, Inc. ................. 6,442 245,199
Texaco, Inc. .................. 20,462 1,221,326
Texas Instruments Inc. ........ 14,755 860,401
Texas Utilities Company........ 10,570 439,976
Textron Inc. .................. 6,187 443,531
+Thermo Electron Corporation... 5,986 204,646
Thomas & Betts Corporation..... 2,077 102,292
Time Warner Inc. .............. 22,341 1,908,759
Times Mirror Company (The)..... 3,342 210,128
Timken Company (The)........... 2,367 72,933
Torchmark Corporation.......... 5,293 242,155
+Toys 'R' Us, Inc. ............ 10,552 248,631
Transamerica Corporation....... 2,386 274,688
Travelers Group, Inc. ......... 43,489 2,636,521
Tribune Company................ 4,643 319,496
+Tricon Global Restaurants,
Inc.......................... 5,773 182,932
Tupperware Corporation......... 2,329 65,503
Tyco International Ltd. ....... 22,050 1,389,150
U S West, Inc. ................ 18,946 890,462
UNUM Corporation............... 5,228 290,154
US Bancorp..................... 28,092 1,207,956
+USAir Group, Inc. ............ 3,815 302,339
UST Inc. ...................... 6,984 188,568
USX-Marathon Group, Inc. ...... 10,911 374,384
USX-US Steel Group, Inc. ...... 3,258 107,514
Unicom Corporation............. 8,202 287,583
Unilever N.V. (NY Registered
Shares)...................... 24,206 1,910,761
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Union Camp Corporation......... 2,624 $ 130,216
Union Carbide Corporation...... 5,150 274,881
Union Pacific Corporation...... 9,338 412,039
Union Pacific Resources Group
Inc. ........................ 9,494 166,738
+Unisys Corporation............ 9,507 268,573
United Healthcare
Corporation.................. 7,287 462,724
United States Surgical
Corporation.................. 2,863 130,624
United Technologies Corp. ..... 8,679 802,807
Unocal Corporation............. 9,127 326,290
V.F. Corporation............... 4,618 237,827
+Venator Group, Inc. .......... 5,067 96,906
+Viacom, Inc. (Class A)........ 144 8,424
+Viacom, Inc. (Class B)........ 13,341 777,113
Wachovia Corporation........... 7,790 658,255
Wal-Mart Stores, Inc. ......... 84,964 5,161,563
Walgreen Co. .................. 18,781 775,890
Warner-Lambert Company......... 30,989 2,149,862
Washington Mutual Savings
Bank......................... 14,638 635,860
Waste Management Inc. ......... 17,985 629,475
Wells Fargo & Company.......... 3,228 1,191,132
Wendy's International, Inc. ... 4,977 116,959
+Western Atlas, Inc. .......... 2,035 172,721
Westvaco Corporation........... 3,849 108,734
Weyerhaeuser Company........... 7,548 348,623
Whirlpool Corporation.......... 2,857 196,419
Willamette Industries, Inc. ... 4,196 134,272
Williams Companies, Inc.
(The)........................ 16,032 541,080
Winn-Dixie Stores, Inc. ....... 5,656 289,516
+WorldCom Inc. ................ 39,028 1,890,419
Worthington Industries,
Inc. ........................ 3,656 54,840
Wrigley (Wm.) Jr. Company
(Class B).................... 4,384 429,632
Xerox Corporation.............. 12,412 1,261,369
- ------------------------------------------------------
TOTAL COMMON STOCKS
(COST--$280,241,648)--97.3% 340,204,236
- ------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
SHORT-TERM OBLIGATIONS-- FACE
COMMERCIAL PAPER* AMOUNT
- ------------------------------------------------------
General Motors Acceptance
Corp., 6.50% due
7/01/1998................ $10,317,000 10,317,000
- ------------------------------------------------------
TOTAL SHORT-TERM
OBLIGATIONS
(COST--$10,317,000)--2.9% 10,317,000
- ------------------------------------------------------
TOTAL INVESTMENTS
(COST--$290,558,648)--100.2% 350,521,236
VARIATION MARGIN ON
FINANCIAL
FUTURES
CONTRACTS**--0.0%........ (76,681)
LIABILITIES IN EXCESS OF
OTHER ASSETS--(0.2%)..... (491,978)
------------
NET ASSETS--100.0%......... $349,952,577
============
</TABLE>
- --------------------------------------------------------------------------------
+ Non-income producing security.
+++ Portion of holdings pledged as collateral for financial futures contracts.
* 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.
159
<PAGE> 161
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
** Financial futures contracts purchased as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE DATE (Notes 1a & 1b)
- ----------------------------------------------------------------
<S> <C> <C> <C>
35 S&P 500 Stock Index September 1998 $10,001,200
- ----------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED
(CONTRACT PRICE--$9,844,825) $10,001,200
===========
- ----------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
160
<PAGE> 162
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$290,558,648) (Note
1a)....................................................... $350,521,236
Cash........................................................ 10,995
Receivables:
Capital shares sold....................................... $ 514,421
Dividends................................................. 336,842
Securities sold........................................... 205,760 1,057,023
----------
Deferred organization expenses (Note 1e).................... 8,169
Prepaid expenses and other assets........................... 10,568
------------
Total assets................................................ 351,607,991
------------
- --------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,415,273
Investment adviser (Note 2)............................... 87,370
Variation margin (Note 1b)................................ 76,681
Capital shares redeemed................................... 125 1,579,449
----------
Accrued expenses and other liabilities...................... 75,965
------------
Total liabilities........................................... 1,655,414
------------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $349,952,577
============
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 2,353,753
Paid-in capital in excess of par............................ 284,144,138
Undistributed investment income--net........................ 2,066,225
Undistributed realized capital gains on investments--net.... 1,269,498
Unrealized appreciation on investments--net................. 60,118,963
------------
NET ASSETS.................................................. $349,952,577
============
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $349,952,577 and 23,537,529
shares outstanding........................................ $ 14.87
============
- --------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
161
<PAGE> 163
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Dividends (net of $12,380 foreign withholding tax).......... $ 1,967,955
Interest and discount earned................................ 585,130
Other income................................................ 1,462
-----------
Total income................................................ 2,554,547
-----------
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $424,649
Accounting services (Note 2)................................ 22,472
Registration fees........................................... 10,163
Printing and shareholder reports............................ 9,765
Custodian fees.............................................. 9,349
Professional fees........................................... 6,132
Transfer agent fees (Note 2)................................ 1,946
Directors' fees and expenses................................ 1,937
Amortization of organization expenses (Note 1e)............. 811
Pricing services............................................ 274
Other....................................................... 818
--------
Total expenses.............................................. 488,316
-----------
Investment income--net...................................... 2,066,231
-----------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1d
& 3):
Realized gain on investments--net........................... 1,848,844
Change in unrealized appreciation on investments--net....... 40,455,887
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $44,370,962
===========
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
162
<PAGE> 164
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 2,066,231 $ 2,775,837
Realized gain on investments--net........................... 1,848,844 9,912,879
Change in unrealized appreciation on investments--net....... 40,455,887 19,509,942
------------ ------------
Net increase in net assets resulting from operations........ 44,370,962 32,198,658
------------ ------------
- -----------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (2,775,834) (16,872)
Realized gain on investments--net:
Class A................................................... (10,487,182) (4,850)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (13,263,016) (21,722)
------------ ------------
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 103,610,211 172,305,644
------------ ------------
- -----------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 134,718,157 204,482,580
Beginning of period......................................... 215,234,420 10,751,840
------------ ------------
End of period*.............................................. $349,952,577 $215,234,420
============ ============
- -----------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 2,066,225 $ 2,775,828
============ ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
163
<PAGE> 165
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC--INDEX 500 FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE -------------------------------------------------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE YEAR FOR THE PERIOD
FINANCIAL STATEMENTS MONTHS ENDED ENDED DEC. 13, 1996+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 DECEMBER 31, 1997 DEC. 31, 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 13.48 $ 10.17 $ 10.00
-------- -------- -------
Investment income--net..................................... .09 .17 .02
Realized and unrealized gain on investments--net........... 2.13 3.16 .15
-------- -------- -------
Total from investment operations........................... 2.22 3.33 .17
-------- -------- -------
Less dividends and distributions:
Investment income--net................................... (.17) (.02) --
Realized gain on investments--net........................ (.66) --++ --
-------- -------- -------
Total dividends and distributions.......................... (.83) (.02) --
-------- -------- -------
Net asset value, end of period............................. $ 14.87 $ 13.48 $ 10.17
======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......................... 17.52%++++ 32.81% 1.68%++++
======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................. .34%* .34% .00%*
======== ======== =======
Expenses................................................... .34%* .40% .60%*
======== ======== =======
Investment income--net..................................... 1.46%* 2.01% 3.08%*
======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................... $349,953 $215,234 $10,752
======== ======== =======
Portfolio turnover......................................... 1.20% 36.85% .04%
======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
++ Amount is less than $.01 per share.
++++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
164
<PAGE> 166
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. Index 500 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
sale 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. 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 the 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 financial 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
165
<PAGE> 167
- --------------------------------------------------------------------------------
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 period not exceeding five years.
(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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $93,293,215 and $3,205,358, respectively.
Net realized gains for the six months ended June 30, 1998 and net unrealized
gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments................... $ 172,035 $59,962,588
Financial futures contracts............. 1,676,809 156,375
---------- -----------
Total................................... $1,848,844 $60,118,963
========== ===========
- ------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $59,962,588, of which $66,238,256 related to appreciated securities
and $6,275,668 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $290,558,648.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$103,610,211 and $172,305,644 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 7,644,385 $105,425,374
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,043,298 13,263,016
---------- ------------
Total issued......................... 8,687,683 118,688,390
Shares redeemed...................... (1,119,379) (15,078,179)
---------- ------------
Net increase......................... 7,568,304 $103,610,211
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 19,361,582 $225,105,550
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 2,149 21,722
---------- ------------
Total issued......................... 19,363,731 225,127,272
Shares redeemed...................... (4,451,853) (52,821,628)
---------- ------------
Net increase......................... 14,911,878 $172,305,644
========== ============
- -----------------------------------------------------------------
</TABLE>
166
<PAGE> 168
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
It has been a volatile six months in the international equity markets, given
the extreme contrast between strong returns in North America and Europe and weak
performance in Asia/Pacific Basin and Latin America. By reducing global
inflationary pressures, economic weakness in Asia has boosted equity returns in
North America and Europe, although there were signs that the sustainability of
corporate earnings growth was becoming a bigger focus, particularly in North
America, as the six-month period drew to a close.
The crisis in Asia that started just over a year ago, initially affecting the
currencies of Thailand, Malaysia and the Philippines, continued in the first
half of 1998. During the first three months of the period, confidence in banking
sector stability and the pace of structural reform in Asia seemed to recover
somewhat. However, the positive effect on Asian equity markets was soon
outweighed by the poor prospects for corporate earnings across the region
against the backdrop of weaker-than-expected growth in exports and other
components of demand, stubbornly high interest rates, renewed concern about the
Japanese economy and yen weakness.
The turmoil in Asia generally undermined confidence in the emerging markets
universe. Latin American growth prospects were revised downward in light of
pressure to tighten fiscal and monetary policies. The weakening of commodity
prices in anticipation of a slowdown in global industrial output growth affected
many markets, notably Mexico, Chile, Russia and South Africa.
In Japan, the equity market and the yen tended to move in tandem. Both
strengthened in January on hopes that the Japanese authorities would produce a
significant package of measures to boost domestic demand, ease the widening
credit crunch and regenerate activity in the property market. However, failure
to deliver convincing policies saw sentiment toward the Japanese market and
currency deteriorate steadily for most of the rest of the six-month period.
Japan returned -2.6% in US dollar terms, as measured by the unmanaged Financial
Times/Standard & Poor's (FT/S&P)--Actuaries World (ex-US) Index, for the
six-month period ended June 30, 1998.
European developed markets were strong, with Norway the one real exception, as
many of the leading economies prepared for economic and monetary union and the
launch of the new currency, the euro, in 1999. As part of this process, the
average level of interest rates fell, fueling flows out of money market and bond
funds into equities and also contributing to a broadening economic recovery in
the region. Europe was the only region globally to see steady upgrades in
earnings forecasts from company analysts. Mergers and acquisitions also became a
bigger focus as companies, as well as governments, prepared for European
Monetary Union (EMU). Europe, including the United Kingdom, produced the
strongest equity market returns for the six-month period, increasing 26.1% in US
dollar terms, as measured by the FT/S&P--Actuaries World (ex-US) Index.
International equity market indexes rose during the six months ended June 30,
1998. The unmanaged FT/S&P--Actuaries World (ex-US) Index's total return was
+13.55% in US dollar terms for the same period. During the six months ended June
30, 1998, the unmanaged International Finance Corporation (IFC) Investables
Composite Index returned -16%. The Fund's strategic benchmark index, which
combines FT/S&P indexes (for developed markets) and IFC indexes (for emerging
markets) using customized weights, rose by 4.32%. The Fund's Class A Shares
returned +10.63% for the same six-month period.
During the six-month period, the Fund's underweighting in the emerging markets
relative to the Fund's benchmark, particularly in the Asia-Pacific region, was
beneficial to performance. Also, our overweighting in Australia contributed
positively during the period. Negative factors included our underweighting in
Continental European equities in the first quarter; however, we adjusted our
exposure there during the second quarter. Our relatively high cash holding also
contributed adversely to the Fund's overall performance. Blue-chip companies
dominated returns in most markets. The Fund was invested largely in
mid-capitalization stocks over this period and consequently suffered relative to
the benchmark.
The effective cash position in the Fund was held above 10% of net assets for
most of the period. Japanese equities represented the Fund's major regional
exposure at the beginning of the year, opening the period at around 23% of net
assets. As the economic and financial prospects for Japan worsened, we reduced
our position in Japanese stocks to 15.2% of the Fund's net assets. We also
reduced our exposure to the markets in the Pacific Basin, excluding Japan, that
are classified as developed, from
167
<PAGE> 169
- --------------------------------------------------------------------------------
more than 10% of net assets at December 31, 1997 to approximately 3% at June 30,
1998.
Across Continental European markets (excluding the United Kingdom), the Fund
began the year significantly underweighted, with about 20% of its net assets
invested. During the six-month period, this weight was progressively increased
to 43% of the Fund's net assets by June 30, 1998. The United Kingdom accounted
for another 17% of net assets, down slightly over the period. We also reduced
the Fund's exposure to emerging markets during the period, although investments
in emerging Europe were raised slightly. In a number of countries (for example,
Austria, Greece, South Africa, Sweden and Switzerland), we have, from time to
time, achieved our targeted market exposure through the use of index tracking
instruments, known as OPALS. These instruments are exchange quoted (in
Luxembourg) and provide the owner with the equivalent investment exposure to
that of the specific MSCI country index. These instruments provide efficient and
cost-effective means of gaining market exposure for asset allocation purposes.
As a consequence, holdings in these instruments tend to be among the Fund's
largest investment holdings.
IN CONCLUSION
International equity markets have offered a very wide range of investment
opportunities during the past six months, with developed markets outside of Asia
providing sound positive returns. In contrast, Asian and Latin American markets
generated negative returns.
We remain cautious on emerging markets for the near term because of low
liquidity, downward revisions to earnings growth estimates and increased supply,
as Asia recapitalizes and Latin America and Eastern Europe accelerate their
privatization programs. We will need to see clear evidence in Asia of political
will to implement reform plans and signs of economic stability before we
reinvest in any significant manner. In our view, it is likely that the Latin
American markets will provide opportunities before any of the Asian markets.
However, the current weakness in commodity prices and economic difficulties in
Russia may have some intermediate-term adverse effects on the Brazilian and
South African stock markets.
We expect developed European markets to perform solidly during the second half
of the year, however, probably less spectacularly than in the first half, as
interest rates stay low in historical terms and economic growth continues to
trend upward. A sustained rally in Japan probably awaits evidence of accelerated
structural reforms in both the public and corporate sectors.
We appreciate your investment 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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Clive D. Lang
Clive Lang
Portfolio Manager
August 5, 1998
- ---------------------------------------------------------
We are pleased to announce that effective April 20, 1998, Clive Lang became
responsible for the day-to-day management of International Equity Focus Fund.
Mr. Lang joined Merrill Lynch Asset Management U.K., Ltd. (an affiliate of the
Investment Adviser) as Senior Quantitative Analyst in 1997. Prior to that, he
was employed at Panagora Asset Management Limited as chief investment officer
from 1995 to 1997 and as senior investment officer from 1990 to 1995.
- ---------------------------------------------------------
168
<PAGE> 170
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -7.81% +10.63%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. Past results shown
should not be considered a representation of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 -7.81%
- --------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/98 +5.66
- --------------------------------------------------------------------------------
169
<PAGE> 171
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<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 10,259 Nedcor Ltd. (Ordinary)(e)... $ 151,495 $ 223,325 0.1%
------------------------------------------------------------------------------------------------------
BEVERAGES 10,000 South African Breweries,
Ltd. ..................... 247,863 207,483 0.1
------------------------------------------------------------------------------------------------------
INDEX INSTRUMENTS 32,300 MSCI South Africa OPALS
(Class B)(g).............. 1,324,869 1,018,742 0.4
------------------------------------------------------------------------------------------------------
INSURANCE 15,000 Liberty Life Association of
Africa.................... 407,119 294,898 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA 2,131,346 1,744,448 0.7
- --------------------------------------------------------------------------------------------------------------------------
LATIN
AMERICA
- --------------------------------------------------------------------------------------------------------------------------
BRAZIL OIL & GAS 25,000 Petroleo Brasileiro
PRODUCERS S.A.--Petrobras
(ADR)(a).................. 525,000 460,938 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 12,000 Telecomunicacoes Brasileiras
S.A.--Telebras
(ADR)(a).................. 1,440,788 1,310,250 0.6
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 38,548 Companhia Energetica de
Minas Gerais S.A.
(CEMIG)(ADR)(a)........... 963,150 1,209,444 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 2,928,938 2,980,632 1.3
- --------------------------------------------------------------------------------------------------------------------------
MEXICO BEVERAGE 20,000 Panamerican Beverages, Inc.
(Class A)................. 699,043 628,750 0.3
------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 239,100 Cementos Mexicanos, S.A. de
C.V. (Cemex) (Class
B)(d)..................... 1,062,171 1,053,914 0.4
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 50,000 Grupo Financiero Bancomer,
S.A. de C.V. (GFB)
(ADR)(a).................. 509,375 368,345 0.1
------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 36,200 Kimberly-Clark de Mexico,
CARE S.A. de C.V. (ADR)(a)..... 758,395 624,450 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 3,028,984 2,675,459 1.1
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN
AMERICA 5,957,922 5,656,091 2.4
- --------------------------------------------------------------------------------------------------------------------------
NORTH
AMERICA
- --------------------------------------------------------------------------------------------------------------------------
CANADA BANKING 22,600 Bank of Nova Scotia (The)... 524,859 559,733 0.2
------------------------------------------------------------------------------------------------------
BANKING--INTERNATIONAL 12,200 Bank of Montreal............ 529,725 672,382 0.3
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 48,000 BC Telecom, Inc. ........... 1,275,260 1,796,285 0.8
------------------------------------------------------------------------------------------------------
TRANSPORTATION 82,300 Canadian Pacific Ltd. ...... 2,529,363 2,318,310 1.0
4,200 Canadian Pacific Ltd.
(NY Registered Shares).... 127,837 119,175 0.0
------------ ------------ -----
2,657,200 2,437,485 1.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA 4,987,044 5,465,885 2.3
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
170
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC SHARES VALUE PERCENT OF
BASIN INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA AIRLINES 111,800 Qantas Airways Limited...... $ 191,490 $ 168,302 0.1%
------------------------------------------------------------------------------------------------------
BANKING 50,500 Commonwealth Bank of
Australia................. 611,017 589,405 0.2
82,300 National Australia
Bank Ltd. ................ 1,175,525 1,085,977 0.5
99,000 Westpac Banking Corporation
Ltd. ..................... 646,724 604,105 0.3
------------ ------------ -----
2,433,266 2,279,487 1.0
------------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 50,100 Seven Network Ltd. ......... 196,141 150,840 0.1
------------------------------------------------------------------------------------------------------
BUILDING & 17,900 Leighton Holdings Limited... 73,629 62,709 0.0
CONSTRUCTION
------------------------------------------------------------------------------------------------------
CEMENT 93,800 Pioneer International
MANUFACTURERS Limited................... 261,035 223,720 0.1
------------------------------------------------------------------------------------------------------
DIVERSIFIED 68,100 Orica Limited............... 475,650 402,895 0.2
------------------------------------------------------------------------------------------------------
INSURANCE 51,500 GIO Australia Holdings
Limited................... 155,577 132,211 0.1
55,900 QBE Insurance Group
Limited................... 238,730 197,391 0.1
------------ ------------ -----
394,307 329,602 0.2
------------------------------------------------------------------------------------------------------
METALS & MINING 60,600 Comalco Ltd................. 260,897 212,111 0.1
78,700 Newcrest Mining Ltd.(d) .... 121,134 96,534 0.0
81,900 Rio Tinto Ltd. ............. 1,082,673 974,151 0.4
------------ ------------ -----
1,464,704 1,282,796 0.5
------------------------------------------------------------------------------------------------------
METALS--DIVERSIFIED 88,900 M.I.M. Holdings Limited .... 53,499 42,957 0.0
134,100 North Limited............... 368,030 275,809 0.1
------------ ------------ -----
421,529 318,766 0.1
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 33,600 Pacific Dunlop Ltd. ........ 64,884 54,328 0.0
------------------------------------------------------------------------------------------------------
OIL & GAS 112,900 Santos Limited.............. 436,775 349,708 0.1
PRODUCERS
------------------------------------------------------------------------------------------------------
PROPERTY 558 Lend Lease Corp. ........... 12,950 11,286 0.0
------------------------------------------------------------------------------------------------------
REAL ESTATE 48,200 Schroders Property Fund..... 80,044 72,858 0.0
INVESTMENT TRUSTS
58,300 Stockland Trust Group....... 153,520 133,271 0.1
17,500 Westfield Holdings Ltd. .... 70,250 85,440 0.0
------------ ------------ -----
303,814 291,569 0.1
------------------------------------------------------------------------------------------------------
RETAIL 82,200 Woolworth Limited........... 303,492 267,345 0.1
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 184,000 Telstra Corporation
Ltd.(d) .................. 458,313 471,910 0.2
------------------------------------------------------------------------------------------------------
TOBACCO 23,400 Rothmans Holdings Ltd. ..... 158,495 143,948 0.1
------------------------------------------------------------------------------------------------------
TRANSPORTATION 13,500 Brambles Industries Ltd. ... 284,334 265,031 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 7,934,808 7,074,242 3.0
- --------------------------------------------------------------------------------------------------------------------------
HONG KONG BANKING 33,200 HSBC Holdings Ltd. ......... 513,685 811,993 0.4
------------------------------------------------------------------------------------------------------
CONGLOMERATES 140 Hutchison Whampoa Ltd. ..... 892 739 0.0
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 70,900 Hong Kong and China Gas Co.
Ltd. ..................... 109,755 80,526 0.0
35,450 Hong Kong and China Gas Co.
Ltd. (Warrants)(c)........ 0 2,425 0.0
------------ ------------ -----
109,755 82,951 0.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG
KONG 624,332 895,683 0.4
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
171
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<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 AUTOMOBILES 41,000 Toyota Motor Corp. ......... $ 1,102,054 $ 1,062,207 0.4%
------------------------------------------------------------------------------------------------------
BANKING 86,000 Mitsubishi Trust and Banking
Corp. .................... 1,029,147 731,717 0.3
179,000 Sakura Bank Ltd. ........... 1,279,904 465,036 0.2
------------ ------------ -----
2,309,051 1,196,753 0.5
------------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 16,000 Nippon Broadcasting System
Inc. ..................... 896,875 675,471 0.3
------------------------------------------------------------------------------------------------------
BUILDING & 120,000 Nishimatsu Construction Co.
CONSTRUCTION Ltd. ..................... 605,194 588,872 0.2
------------------------------------------------------------------------------------------------------
CHEMICALS 143,000 Kaneka Corp. ............... 790,451 753,338 0.3
56,000 Shin-Etsu Chemical Co., Ltd.
(Ordinary)................ 1,240,613 969,907 0.4
------------ ------------ -----
2,031,064 1,723,245 0.7
------------------------------------------------------------------------------------------------------
CIRCUIT BOARD 51,000 Ibiden Co., Ltd. ........... 708,371 704,806 0.3
------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 400 NTT Data Corporation........ 1,870,397 1,446,200 0.6
------------------------------------------------------------------------------------------------------
ELECTRICAL 89,000 Anritsu Corp. .............. 1,208,765 802,843 0.3
EQUIPMENT
171,000 Fujikura Ltd. .............. 1,238,936 762,633 0.3
28,000 Murata Manufacturing Co.,
Ltd. ..................... 894,806 909,288 0.4
64,000 NEC Corporation. ........... 733,640 597,186 0.3
11,000 Rohm Co., Ltd. ............. 1,095,147 1,131,197 0.5
------------ ------------ -----
5,171,294 4,203,147 1.8
------------------------------------------------------------------------------------------------------
ELECTRONICS 96,000 Fujitsu Limited. ........... 1,037,908 1,011,474 0.4
134,000 Hitachi Ltd. ............... 1,201,101 875,153 0.4
46,000 Pioneer Electronic Corp. ... 1,028,858 879,700 0.4
15,400 Sony Corp. ................. 1,375,024 1,328,065 0.5
------------ ------------ -----
4,642,891 4,094,392 1.7
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 135,000 Daiwa Securities Co.,
Ltd. ..................... 637,815 581,619 0.3
40,000 Jafco Co., Ltd. ............ 2,419,402 1,053,619 0.4
------------ ------------ -----
3,057,217 1,635,238 0.7
------------------------------------------------------------------------------------------------------
MACHINERY 239,000 NSK Ltd. ................... 1,275,460 974,489 0.4
------------------------------------------------------------------------------------------------------
MANUFACTURING 130,000 Dai Nippon Screen
Manufacturing Co.,
Ltd. ..................... 871,798 532,871 0.2
------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 94,000 Ricoh Co., Ltd. ............ 1,016,548 991,080 0.4
------------------------------------------------------------------------------------------------------
PACKAGING & 1,000 Toyo Seikan Kaisha, Ltd. ... 30,312 12,268 0.0
CONTAINERS
------------------------------------------------------------------------------------------------------
PAPER & FOREST 129,000 Oji Paper Co., Ltd. ........ 787,352 562,286 0.2
PRODUCTS
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 94,000 Fujisawa Pharmaceutical Co.,
Ltd. ..................... 982,679 880,508 0.4
38,000 Sankyo Co., Ltd. ........... 966,524 866,566 0.4
46,000 Taisho Pharmaceutical Co.,
Ltd. ..................... 1,130,119 859,782 0.4
------------ ------------ -----
3,079,322 2,606,856 1.2
------------------------------------------------------------------------------------------------------
REAL ESTATE 128,000 Mitsui Fudosan Co., Ltd. ... 1,387,762 1,012,398 0.4
------------------------------------------------------------------------------------------------------
RETAIL 20,000 Ito-Yokado Co., Ltd. ....... 943,914 942,484 0.4
91,000 Takashimaya Co. ............ 903,504 686,916 0.3
33,000 Uny Co., Ltd. .............. 555,704 535,830 0.2
------------ ------------ -----
2,403,122 2,165,230 0.9
------------------------------------------------------------------------------------------------------
</TABLE>
172
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN STEEL 354,000 Nippon Steel Co. ........... $ 892,676 $ 623,338 0.3%
(CONCLUDED)
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 126 Nippon Telegraph & Telephone
Corporation(d)............ 1,192,086 1,045,680 0.4
70,000 Uniden Corporation.......... 734,493 765,317 0.4
------------ ------------ -----
1,926,579 1,810,997 0.8
------------------------------------------------------------------------------------------------------
TELEVISION 2,400 Nippon Television Network
Corp. .................... 723,841 696,255 0.3
------------------------------------------------------------------------------------------------------
TIRE & RUBBER 48,000 Bridgestone Corporation..... 1,154,259 1,136,177 0.5
------------------------------------------------------------------------------------------------------
TOBACCO 157 Japan Tobacco, Inc. ........ 1,137,934 1,063,888 0.5
------------------------------------------------------------------------------------------------------
TRADING 155,000 Mitsui & Co. ............... 986,871 838,926 0.4
404,000 Nissho Iwai Corp. .......... 1,148,837 696,803 0.3
------------ ------------ -----
2,135,708 1,535,729 0.7
------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 185 East Japan Railway
Company................... 866,471 870,463 0.4
------------------------------------------------------------------------------------------------------
TRANSPORTATION 130,000 Nippon Express Co., Ltd. ... 886,503 697,987 0.3
30,000 Tobu Railway Co., Ltd. ..... 108,407 79,454 0.0
394,000 Tokyu Corp. ................ 2,423,640 1,197,041 0.5
------------ ------------ -----
3,418,550 1,974,482 0.8
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 45,502,102 35,899,138 15.2
- --------------------------------------------------------------------------------------------------------------------------
MALAYSIA FINANCE 285 Rashid Hussain BHD
(Warrants)(c)............. 376 42 0.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIA 376 42 0.0
- --------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND ELECTRONICS 25,150 PDL Holdings Ltd. .......... 95,983 63,233 0.0
------------------------------------------------------------------------------------------------------
FINANCE 524,350 Wrightson Ltd. ............. 344,382 100,575 0.0
------------------------------------------------------------------------------------------------------
TEXTILES 206,550 Lane Walker Rudkin
Industries, Ltd. ......... 204,646 102,793 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NEW
ZEALAND 645,011 266,601 0.1
- --------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA ELECTRONICS 3,300 Samsung Electronics Company
(GDR)(b)(e)............... 198,000 52,388 0.0
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 42,356 SK Telecom Co. Ltd.
(ADR)(a).................. 539,571 235,605 0.1
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 17,580 Korea Electric Power
Corp. .................... 752,967 187,991 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH
KOREA 1,490,538 475,984 0.2
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 56,197,167 44,611,690 18.9
- --------------------------------------------------------------------------------------------------------------------------
SOUTHEAST
ASIA
- --------------------------------------------------------------------------------------------------------------------------
INDIA BANKING 38,500 State Bank of India
(GDR)(b).................. 941,916 456,225 0.2
------------------------------------------------------------------------------------------------------
CHEMICALS 33,700 Reliance Industries Ltd.
(GDR)(b)(d)............... 363,697 219,893 0.1
------------------------------------------------------------------------------------------------------
TOBACCO 10,400 ITC Ltd. (GDR)(b)........... 184,146 184,080 0.1
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 11,600 Bombay Suburban Electric
Supply Co. Ltd.
(GDR)(b).................. 237,297 117,160 0.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTHEAST ASIA 1,727,056 977,358 0.4
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
173
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN SHARES VALUE PERCENT OF
EUROPE INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRIA INDEX INSTRUMENTS 86,200 MSCI Austria OPALS (Class
B)(g)..................... $ 4,821,796 $ 4,999,600 2.1%
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRIA 4,821,796 4,999,600 2.1
- --------------------------------------------------------------------------------------------------------------------------
DENMARK INDEX INSTRUMENTS 30,000 MSCI Denmark OPALS (Class
B)(g)..................... 4,247,900 4,710,900 2.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 4,247,900 4,710,900 2.0
- --------------------------------------------------------------------------------------------------------------------------
FINLAND DIVERSIFIED 18,632 Outokumpu OY................ 306,348 237,944 0.1
------------------------------------------------------------------------------------------------------
PAPER & FOREST 35,834 Enso OY (R Shares).......... 289,964 387,674 0.2
PRODUCTS
49,037 Metsa Serla OY (Class B).... 334,649 474,150 0.2
12,801 UPM-Kymmene OY.............. 265,423 352,645 0.1
------------ ------------ -----
890,036 1,214,469 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 1,196,384 1,452,413 0.6
- --------------------------------------------------------------------------------------------------------------------------
FRANCE AGRICULTURE 3,000 Eridania Beghin-Say S.A. ... 444,024 662,695 0.3
OPERATIONS
------------------------------------------------------------------------------------------------------
AUTOMOBILES 3,817 Peugeot S.A. ............... 660,515 821,064 0.4
17,000 Renault S.A.(d) ............ 515,232 967,370 0.4
------------ ------------ -----
1,175,747 1,788,434 0.8
------------------------------------------------------------------------------------------------------
AUTOMOBILES & 8,000 Valeo S.A. ................. 544,012 818,069 0.3
EQUIPMENT
------------------------------------------------------------------------------------------------------
BANKING 13,118 Banque Nationale de Paris
S.A. ..................... 594,577 1,072,275 0.5
15,498 Compagnie Financiere de
Paribas (Ordinary)........ 1,507,338 1,659,172 0.7
4,588 Societe Generale de
Surveillance S.A. (Class
A) (Ordinary)............. 623,041 954,268 0.4
------------ ------------ -----
2,724,956 3,685,715 1.6
------------------------------------------------------------------------------------------------------
BEVERAGE 9,000 Pernod Ricard S.A. ......... 440,583 623,976 0.3
------------------------------------------------------------------------------------------------------
BROADCAST & 5,000 Canal Plus.................. 911,559 934,889 0.4
PUBLISHING
------------------------------------------------------------------------------------------------------
BUILDING & 6,000 Compagnie de Saint Gobain
CONSTRUCTION S.A. ..................... 1,065,774 1,112,931 0.5
------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 4,000 Lafarge S.A. ............... 386,671 413,668 0.2
------------------------------------------------------------------------------------------------------
CHEMICALS 9,000 L'Air Liquide S.A. ......... 1,457,070 1,489,203 0.6
------------------------------------------------------------------------------------------------------
COSMETICS-- 3,000 L'Oreal S.A. ............... 1,308,543 1,669,397 0.7
TOILETRIES
------------------------------------------------------------------------------------------------------
ELECTRONICS 1,000 Sagem S.A. ................. 662,175 778,357 0.3
------------------------------------------------------------------------------------------------------
ENGINEERING & 7,837 Bouygues S.A. .............. 1,007,298 1,423,848 0.6
CONSTRUCTION
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 2,639 EuraFrance S.A. ............ 1,314,046 1,659,336 0.7
------------------------------------------------------------------------------------------------------
FOODS 1,000 Fromageries Bel S.A. ....... 762,950 876,975 0.4
7,000 Groupe Danone S.A. ......... 1,559,828 1,930,835 0.8
2,000 Promodes S.A. .............. 966,677 1,108,629 0.5
------------ ------------ -----
3,289,455 3,916,439 1.7
------------------------------------------------------------------------------------------------------
INDUSTRIAL 11,000 Compagnie Generale des
Etablissements Michelin
(C.G.D.E.)(Class B)....... 695,838 635,228 0.3
------------------------------------------------------------------------------------------------------
INSURANCE 25,821 AXA-UAP..................... 2,831,517 2,905,316 1.2
13,600 Assurances Generales de
France S.A. (AGF)......... 561,122 769,845 0.3
------------ ------------ -----
3,392,639 3,675,161 1.5
------------------------------------------------------------------------------------------------------
</TABLE>
174
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FRANCE METAL PROCESSING 1,000 Compagnie Generale
(CONCLUDED) d'Industrie et
Participations (CGIP)..... $ 520,649 $ 528,667 0.2%
------------------------------------------------------------------------------------------------------
METALS 14,000 Pechiney S.A. (Class A)..... 709,996 564,077 0.2
------------------------------------------------------------------------------------------------------
OIL & RELATED 16,819 Elf Aquitaine S.A. ......... 2,107,387 2,365,541 1.0
14,000 Total S.A. (Class B)........ 1,564,339 1,820,799 0.8
------------ ------------ -----
3,671,726 4,186,340 1.8
------------------------------------------------------------------------------------------------------
RETAIL 1,000 Pinault-Printemps-Redoute
S.A. ..................... 752,990 837,263 0.3
------------------------------------------------------------------------------------------------------
STEEL 33,309 Usinor Sacilor S.A. ........ 666,751 514,778 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATION 6,741 Alcatel Alsthom Cie Generale
EQUIPMENT d'Electricite
S.A. ..................... 1,099,836 1,373,074 0.6
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 31,000 France Telecom S.A. ........ 1,692,346 2,138,992 0.9
------------------------------------------------------------------------------------------------------
TRANSPORTATION 421,000 Eurotunnel S.A.(d) ......... 403,401 463,250 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 30,338,085 35,893,787 15.2
- --------------------------------------------------------------------------------------------------------------------------
GERMANY APPAREL 300 Hugo Boss AG
(Preferred)............... 412,246 661,423 0.3
------------------------------------------------------------------------------------------------------
AUTOMOBILES 100 Bayerische Motoren Werke AG
(BMW)..................... 69,409 101,097 0.0
20 Bayerische Motoren Werke AG
(BMW) (New Shares)(d)..... 13,882 19,942 0.0
26,356 Daimler-Benz AG............. 1,870,302 2,591,508 1.1
4,738 Volkswagen AG............... 2,758,990 4,574,747 1.9
------------ ------------ -----
4,712,583 7,287,294 3.0
------------------------------------------------------------------------------------------------------
BANKING 14,000 BHF-Bank AG................. 435,750 532,794 0.2
1,900 Bayerische
Vereinsbank AG............ 119,162 161,035 0.1
2,600 Commerzbank AG.............. 93,517 98,947 0.0
19,571 Deutsche Bank AG............ 1,619,895 1,654,406 0.7
25,326 Dresdner Bank AG............ 1,266,820 1,367,873 0.6
------------ ------------ -----
3,535,144 3,815,055 1.6
------------------------------------------------------------------------------------------------------
BATTERIES 1,100 Varta AG.................... 171,525 212,206 0.1
------------------------------------------------------------------------------------------------------
CHEMICALS 18,375 BASF AG..................... 686,932 872,843 0.3
26,308 Bayer AG.................... 1,017,791 1,361,161 0.6
12,300 Henkel KGaA (Preferred)..... 694,916 1,216,236 0.5
41,073 Hoechst AG.................. 1,516,178 2,064,799 0.9
------------ ------------ -----
3,915,817 5,515,039 2.3
------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 2,400 SAP AG (Systeme Anwendungen,
Produkte in der
Datenverarbeitung)
(Preferred)............... 741,415 1,628,628 0.7
------------------------------------------------------------------------------------------------------
DIVERSIFIED 20,600 Metallgesellschaft AG....... 429,647 423,936 0.2
16,913 RWE AG...................... 828,469 1,000,614 0.4
3,529 Thyssen AG.................. 831,029 897,303 0.4
16,062 VEBA AG..................... 941,251 1,079,727 0.4
100 Viag AG..................... 49,364 68,801 0.0
------------ ------------ -----
3,079,760 3,470,381 1.4
------------------------------------------------------------------------------------------------------
ELECTRONICS 14,288 Siemens AG.................. 979,757 871,828 0.4
------------------------------------------------------------------------------------------------------
ENGINEERING & 537 Philipp Holzmann AG(d)...... 161,233 127,914 0.1
CONSTRUCTION
------------------------------------------------------------------------------------------------------
</TABLE>
175
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<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 FOOTWEAR 3,700 Adidas AG................... $ 507,777 $ 644,610 0.3%
(CONCLUDED) 2,300 Salamander AG............... 367,973 378,407 0.1
------------ ------------ -----
875,750 1,023,017 0.4
------------------------------------------------------------------------------------------------------
INSURANCE 4,000 AMB Aachener und Muenchener
Beteiligungs AG........... 415,158 467,538 0.2
5,400 Allianz AG.................. 1,284,295 1,799,302 0.8
------------ ------------ -----
1,699,453 2,266,840 1.0
------------------------------------------------------------------------------------------------------
MACHINERY & 17,300 AGIV-AG fuer Industrie und
EQUIPMENT Verkehrswesen(d).......... 363,337 479,171 0.2
23,900 FAG Kugelfischer Georg
Schaefer AG............... 378,201 358,129 0.1
866 Jungheinrich AG
(Preferred)............... 175,638 160,708 0.1
2,271 Kloeckner-Werke AG(d)....... 139,358 163,418 0.1
4,000 Mannesmann AG............... 187,909 411,035 0.2
------------ ------------ -----
1,244,443 1,572,461 0.7
------------------------------------------------------------------------------------------------------
METALS 10,000 Degussa AG.................. 465,421 639,818 0.3
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 5,400 Schering AG................. 556,061 635,664 0.3
------------------------------------------------------------------------------------------------------
RETAIL 571 Karstadt AG................. 196,660 277,561 0.1
------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 4,576 Moebel Walther AG........... 254,899 187,583 0.1
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 2,900 Deutsche Telekom AG......... 57,335 79,360 0.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 23,059,502 30,272,072 12.8
- --------------------------------------------------------------------------------------------------------------------------
GREECE INDEX INSTRUMENTS 15,000 MSCI Greece OPALS (Class
B)(g)..................... 1,202,941 1,038,750 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GREECE 1,202,941 1,038,750 0.4
- --------------------------------------------------------------------------------------------------------------------------
HUNGARY BANKING 5,000 OTP Bank (GDR)(b)........... 241,200 245,500 0.1
------------------------------------------------------------------------------------------------------
FOODS 6,000 Pick Szeged Szalamigyar es
Husuzem Reszvenytarsasag
(GDR)(b).................. 62,712 70,350 0.0
------------------------------------------------------------------------------------------------------
OIL & GAS 9,500 Mol Magyar Olaj-Es Gazipari
PRODUCERS Reszvenytarsasag
(GDR)(b).................. 254,918 256,500 0.1
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 2,500 Richter Gedeon Vegyeszeti
Gyar Reszvenytarsasag
(GDR)(b)(d)............... 236,929 200,000 0.1
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 13,000 Magyar Tavkozlesi
Reszvenytarsasag
(ADR)(a).................. 398,482 382,687 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY 1,194,241 1,155,037 0.5
- --------------------------------------------------------------------------------------------------------------------------
IRELAND BUILDING & 15,603 CRH PLC..................... 170,576 221,546 0.1
CONSTRUCTION
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN IRELAND 170,576 221,546 0.1
- --------------------------------------------------------------------------------------------------------------------------
ITALY CHEMICALS 537,587 MontEdison S.p.A. .......... 400,883 667,068 0.3
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 369,718 Telecom Italia S.p.A.(d) ... 1,763,571 1,790,334 0.7
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 2,164,454 2,457,402 1.0
- --------------------------------------------------------------------------------------------------------------------------
NETHERLANDS CHEMICALS 2,742 Akzo Nobel N.V. ............ 352,766 610,804 0.3
------------------------------------------------------------------------------------------------------
ELECTRONICS 9,227 Philips Electronics N.V. ... 600,285 777,250 0.3
------------------------------------------------------------------------------------------------------
ENGINEERING & 191 Volker Wessels
CONSTRUCTION Stevin N.V. .............. 6,135 5,626 0.0
------------------------------------------------------------------------------------------------------
</TABLE>
176
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<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 INSURANCE 7,848 ING Groep N.V. ............. $ 307,223 $ 514,953 0.2%
(CONCLUDED)
------------------------------------------------------------------------------------------------------
PACKAGING & 32,885 Koninklijke
CONTAINERS KNP BT N.V. .............. 742,395 850,474 0.4
------------------------------------------------------------------------------------------------------
STEEL 2,502 Ispat International
N.V.(d)................... 67,765 47,698 0.0
2,294 Ispat International N.V. (NY
Registered Shares)(d)..... 50,511 43,013 0.0
------------ ------------ -----
118,276 90,711 0.0
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 8,031 Royal PTT Nederland N.V. ... 168,107 309,767 0.1
5,063 TNT Post Group N.V.(d) ..... 70,920 129,693 0.1
------------ ------------ -----
239,027 439,460 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 2,366,107 3,289,278 1.4
- --------------------------------------------------------------------------------------------------------------------------
NORWAY COMPUTER SOFTWARE 2,773 Merkantildata ASA........... 32,892 35,099 0.0
------------------------------------------------------------------------------------------------------
INDEX INSTRUMENTS 36,000 MSCI Norway OPALS (Class
B)(g)..................... 4,335,840 3,952,800 1.7
------------------------------------------------------------------------------------------------------
OIL & GAS 18,192 Saga Petroleum A.S. (Class
PRODUCERS B)........................ 268,656 257,563 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORWAY 4,637,388 4,245,462 1.8
- --------------------------------------------------------------------------------------------------------------------------
POLAND AUTOMOBILES & 13,435 T.C. Debica S.A. ........... 209,323 269,895 0.1
EQUIPMENT
------------------------------------------------------------------------------------------------------
INDEX INSTRUMENTS 20,000 MSCI Poland OPALS (Class
B)(g)..................... 1,328,251 1,300,200 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND 1,537,574 1,570,095 0.7
- --------------------------------------------------------------------------------------------------------------------------
PORTUGAL INDEX INSTRUMENTS 40,000 MSCI Portugal OPALS (Class
B)(g)..................... 2,476,379 3,248,000 1.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGAL 2,476,379 3,248,000 1.4
- --------------------------------------------------------------------------------------------------------------------------
SPAIN UTILITIES--ELECTRIC 13,608 Endesa, S.A. ............... 231,324 298,261 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 231,324 298,261 0.1
- --------------------------------------------------------------------------------------------------------------------------
SWEDEN AUTOMOBILES & 6,349 Volvo AB (Class B).......... 205,791 189,089 0.1
EQUIPMENT
------------------------------------------------------------------------------------------------------
ELECTRICAL 27,298 Electrolux AB............... 313,524 468,973 0.2
------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 9,471 Mo Och Domsjo AB (Class
B)........................ 302,406 270,787 0.1
25,006 Stora Kopparbergs Bergslags
AB........................ 312,548 393,536 0.2
------------ ------------ -----
614,954 664,323 0.3
------------------------------------------------------------------------------------------------------
INDEX INSTRUMENTS 20,800 MSCI Sweden OPALS (Class
B)(g)..................... 4,811,714 4,713,488 2.0
------------------------------------------------------------------------------------------------------
INSURANCE 24,351 Skandia Forsakrings AB...... 116,419 348,111 0.1
------------------------------------------------------------------------------------------------------
METALS & MINING 29,721 Avesta Sheffield AB......... 326,708 147,217 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 6,389,110 6,531,201 2.8
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
177
<PAGE> 179
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SWITZERLAND BANKING 436 Banque Cantonale de Geneve
(BCG)..................... $ 145,264 $ 137,922 0.0%
------------------------------------------------------------------------------------------------------
DIVERSIFIED 1,174 Oerlikon-Buehrle
Holding AG................ 116,369 214,539 0.1
------------------------------------------------------------------------------------------------------
INDEX INSTRUMENTS 16,200 MSCI Swiss OPALS
(Class B)(g).............. 5,846,580 5,918,670 2.5
------------------------------------------------------------------------------------------------------
MEDICAL--DRUGS 151 Novartis AG (Registered
Shares)................... 236,533 251,434 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWITZERLAND 6,344,746 6,522,565 2.7
- --------------------------------------------------------------------------------------------------------------------------
TURKEY BANKING 4,200,000 Turkiye Garanti Bankasi
A.S.(d) .................. 203,294 193,261 0.1
------------------------------------------------------------------------------------------------------
BANKING & 5,800,000 Turkiye Is Bankasi A.S. .... 252,574 234,205 0.1
FINANCIAL
------------------------------------------------------------------------------------------------------
BANKING-- 11,200,000 Yapi ve Kredi Bankasi
INTERNATIONAL A.S. ..................... 275,058 286,079 0.1
------------------------------------------------------------------------------------------------------
INVESTMENT 4,100,000 Haci Omer Sabanci Holding
MANAGEMENT A.S. ..................... 259,890 254,113 0.1
------------------------------------------------------------------------------------------------------
RETAIL STORES 1,299,000 Carsi Buyuk
Magazacilik A.S........... 139,451 129,305 0.0
------------------------------------------------------------------------------------------------------
STEEL 1,400,000 Eregli Demir Ve Celik
Fabrikalari T.A.S.(d) .... 203,676 218,241 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TURKEY 1,333,943 1,315,204 0.5
- --------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM AUTOMOBILES & 78,303 LucasVarity PLC............. 249,624 310,944 0.1
EQUIPMENT
------------------------------------------------------------------------------------------------------
BANKING 42,861 HSBC Holdings PLC........... 1,109,946 1,087,722 0.4
129,659 Lloyds TSB Group PLC........ 1,645,723 1,813,978 0.8
77,018 National Westminster Bank
PLC (Ordinary)............ 1,426,005 1,376,284 0.6
52,700 Royal Bank of Scotland Group
PLC....................... 802,827 914,471 0.4
------------ ------------ -----
4,984,501 5,192,455 2.2
------------------------------------------------------------------------------------------------------
BEVERAGE 8,609 Bass PLC.................... 143,243 161,309 0.1
------------------------------------------------------------------------------------------------------
BUILDING & 86,900 Hanson PLC.................. 453,588 528,136 0.2
CONSTRUCTION
16,920 Jarvis PLC.................. 203,721 196,206 0.1
------------ ------------ -----
657,309 724,342 0.3
------------------------------------------------------------------------------------------------------
CHEMICALS 32,947 Inspec Group PLC............ 92,235 143,477 0.1
28,400 Laporte PLC................. 339,328 338,806 0.1
------------ ------------ -----
431,563 482,283 0.2
------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 2,569 Misys PLC................... 102,999 145,951 0.1
------------------------------------------------------------------------------------------------------
DIVERSIFIED 320,588 BTR PLC..................... 1,170,758 909,332 0.4
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 41,100 Cattles PLC................. 343,749 411,452 0.2
84,300 Man (ED&F) Group PLC........ 359,525 436,029 0.2
------------ ------------ -----
703,274 847,481 0.4
------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 103,059 Allied Domecq PLC
(Ordinary)................ 919,423 968,101 0.4
------------------------------------------------------------------------------------------------------
FOOD PROCESSING 164,522 Unilever PLC................ 1,405,834 1,751,342 0.7
------------------------------------------------------------------------------------------------------
FOODS 73,100 Associated British
Foods PLC................. 755,743 689,725 0.3
97,014 Safeway PLC................. 556,474 635,331 0.3
61,400 Tate & Lyle PLC............. 518,627 486,874 0.2
------------ ------------ -----
1,830,844 1,811,930 0.8
------------------------------------------------------------------------------------------------------
</TABLE>
178
<PAGE> 180
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED INSURANCE 149,200 Prudential Corporation
PLC....................... $ 2,215,952 $ 1,965,383 0.8%
KINGDOM 44,619 Royal & Sun Alliance
(CONCLUDED) Insurance Group PLC....... 479,304 461,198 0.2
------------ ------------ -----
2,695,256 2,426,581 1.0
------------------------------------------------------------------------------------------------------
INVESTMENT TRUSTS 424,000 Fleming Japanese Investment
Trust PLC (The)(d)........ 1,038,318 944,438 0.4
------------------------------------------------------------------------------------------------------
LEISURE & RECORD 53,600 EMI Group PLC............... 476,759 468,622 0.2
PRODUCTS
------------------------------------------------------------------------------------------------------
MANUFACTURING 133,600 FKI PLC..................... 426,782 385,637 0.2
------------------------------------------------------------------------------------------------------
MERCHANDISING 23,937 J Sainsbury PLC............. 176,367 213,274 0.1
------------------------------------------------------------------------------------------------------
METALS & MINING 13,531 Rio Tinto PLC............... 196,043 152,391 0.1
------------------------------------------------------------------------------------------------------
OIL & RELATED 94,200 British Petroleum Co.
PLC....................... 1,400,973 1,373,689 0.6
150,500 Shell Transport & Trading
Co. PLC................... 1,154,796 1,059,681 0.4
------------ ------------ -----
2,555,769 2,433,370 1.0
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 113,700 Glaxo Wellcome PLC.......... 2,949,031 3,412,855 1.5
159,964 SmithKline Beecham
PLC....................... 1,794,831 1,952,373 0.8
------------ ------------ -----
4,743,862 5,365,228 2.3
------------------------------------------------------------------------------------------------------
PROPERTY 174,571 Guardian Royal Exchange
PLC....................... 1,285,922 1,022,364 0.4
------------------------------------------------------------------------------------------------------
PUBLISHING 63,600 EMAP PLC.................... 1,151,992 1,286,133 0.5
------------------------------------------------------------------------------------------------------
STEEL 83,979 British Steel PLC(d)........ 172,837 184,607 0.1
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 109,300 British Telecommunications
PLC....................... 979,538 1,349,516 0.6
43,835 Cable & Wireless PLC........ 363,981 532,450 0.2
214,800 Orange PLC(d)............... 1,158,474 2,275,801 1.0
------------ ------------ -----
2,501,993 4,157,767 1.8
------------------------------------------------------------------------------------------------------
TOBACCO 75,449 B.A.T. Industries PLC....... 646,421 755,320 0.3
144,900 Gallaher Group PLC.......... 719,809 800,849 0.3
------------ ------------ -----
1,366,230 1,556,169 0.6
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 132,800 ScottishPower PLC........... 1,136,045 1,163,278 0.5
------------------------------------------------------------------------------------------------------
UTILITIES--WATER 13,287 Anglian Water PLC........... 142,319 186,223 0.1
89,600 Severn Trent PLC............ 1,317,163 1,568,977 0.6
93,700 Thames Water PLC............ 1,337,232 1,705,652 0.7
60,810 United Utilities PLC........ 727,803 884,237 0.4
------------ ------------ -----
3,524,517 4,345,089 1.8
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED KINGDOM 36,048,064 39,410,418 16.7
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN
EUROPE 129,760,514 148,631,991 62.8
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
179
<PAGE> 181
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $2,341,000 Atlantic Asset
Securitization Corp.,
5.56% due 7/14/1998....... $ 2,335,938 $ 2,335,938 1.0%
8,207,000 Countrywide Home Loans,
Inc., 5.54% due
7/14/1998................. 8,189,318 8,189,318 3.5
6,570,000 General Motors Acceptance
Corp., 6.50% due
7/01/1998................. 6,568,814 6,568,814 2.8
6,000,000 Lexington Parker Discount
Capital Co. LLC, 5.54% due
7/13/1998................. 5,987,997 5,987,997 2.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMERCIAL PAPER 23,082,067 23,082,067 9.8
- --------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT United States Treasury
OBLIGATIONS* Bills(f):
2,000,000 4.925% due 7/02/1998........ 1,999,453 1,999,860 0.8
500,000 4.99% due 8/13/1998......... 496,951 497,110 0.2
3,500,000 5.07% due 8/20/1998......... 3,474,932 3,476,480 1.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
US GOVERNMENT OBLIGATIONS 5,971,336 5,973,450 2.5
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 29,053,403 29,055,517 12.3
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $229,814,452 236,142,980 99.8
============
VARIATION MARGIN ON
FINANCIAL FUTURES
CONTRACTS**............... 1,721 0.0
UNREALIZED APPRECIATION ON
FORWARD FOREIGN EXCHANGE
CONTRACTS***.............. 419,678 0.2
OTHER ASSETS LESS
LIABILITIES............... 44,878 0.0
------------ -----
NET ASSETS.................. $236,609,257 100.0%
============ =====
- --------------------------------------------------------------------------------------------------------------------------
</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 and are non-income
producing. The purchase price and the number of shares are
subject to adjustment under certain conditions until the
expiration date.
(d) Non-income producing security.
(e) The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities Act
of 1933.
(f) Securities held as collateral in connection with open
financial futures contracts.
(g) Optimized Portfolio As Listed Securities (OPALS) are
investments that are exchange quoted and provide an
equivalent investment exposure to that of the specific
Morgan Stanley Capital International (MSCI) country index.
180
<PAGE> 182
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
* Commercial Paper and certain 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.
** Financial futures contracts purchased as of June 30, 1998
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTES 1a & 1b)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
48 Taiwan MSCI............................... SIMEX July 1998 $1,397,760
- --------------------------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT PRICE--$1,392,672) $1,397,760
==========
- --------------------------------------------------------------------------------------------------
</TABLE>
Financial futures contracts sold as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTES 1a & 1b)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
18 CAC 40 Index.............................. MATIF July 1998 $2,234,467
- --------------------------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT PRICE--$2,234,460) $2,234,467
==========
- --------------------------------------------------------------------------------------------------
</TABLE>
*** Forward foreign exchange contracts as of June 30, 1998 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
FOREIGN CURRENCY PURCHASED EXPIRATION DATE (NOTE 1b)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yen 724,477,000 ........................................................... July 1998 $ 34,396
- -------------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$5,200,000) 34,396
--------
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- -------------------------------------------------------------------------------------------------------------------------
Yen 1,495,306,850 ........................................................... July 1998 385,282
- -------------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$11,194,655) 385,282
--------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET $419,678
========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
181
<PAGE> 183
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$229,814,452) (Note
1a)....................................................... $236,142,980
Unrealized appreciation on forward foreign exchange
contracts (Note 1b)....................................... 419,678
Cash on deposit for financial futures contracts (Note 1b)... 127,983
Cash........................................................ 1,263,754
Foreign cash (Note 1c)...................................... 15,492,246
Receivables:
Securities sold........................................... $4,815,385
Dividends................................................. 1,002,306
Options closed (Note 1b).................................. 746,900
Forward foreign exchange contracts (Note 1b).............. 687,613
Variation margin (Note 1b)................................ 1,721
Capital shares sold....................................... 990 7,254,915
----------
Deferred organization expenses (Note 1f).................... 688
Prepaid expenses and other assets........................... 24,083
------------
Total assets................................................ 260,726,327
------------
- --------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Open foreign currency settlements......................... 16,025,281
Securities purchased...................................... 6,278,666
Capital shares redeemed................................... 305,689
Investment adviser (Note 2)............................... 231,565
Forward foreign exchange contracts (Note 1b).............. 111,340
----------
22,952,541
Accrued expenses and other liabilities...................... 1,164,529
------------
Total liabilities........................................... 24,117,070
------------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $236,609,257
============
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 2,158,667
Paid-in capital in excess of par............................ 244,140,847
Undistributed investment income--net........................ 4,166,186
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (20,689,737)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 6,833,294
------------
NET ASSETS.................................................. $236,609,257
============
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $236,609,257 and 21,586,670
shares outstanding........................................ $ 10.96
============
- --------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
182
<PAGE> 184
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $481,976 foreign withholding tax)......... $ 4,667,230
Interest and discount earned................................ 2,181,724
------------
Total income................................................ 6,848,954
------------
- ------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 1,617,968
Custodian fees.............................................. 147,996
Accounting services (Note 2)................................ 46,427
Pricing services............................................ 23,501
Professional fees........................................... 20,130
Printing and shareholder reports............................ 5,602
Directors' fees and expenses................................ 5,443
Transfer agent fees (Note 2)................................ 2,860
Amortization of organization expenses (Note 1f)............. 393
Other....................................................... 2,753
------------
Total expenses.............................................. 1,873,073
------------
Investment income--net...................................... 4,975,881
------------
- ------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized loss from:
Investments--net.......................................... (15,037,719)
Foreign currency transactions--net........................ (574,592) (15,612,311)
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 53,603,107
Foreign currency transactions--net........................ 216,384 53,819,491
------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 38,207,180
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 43,183,061
============
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
183
<PAGE> 185
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 4,975,881 $ 6,934,157
Realized gain (loss) on investments and foreign currency
transactions--net......................................... (15,612,311) 27,216,905
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 53,819,491 (58,787,070)
------------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ 43,183,061 (24,636,008)
------------- ------------
- -----------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (3,758,389) (6,787,677)
Realized gain on investments--net:
Class A................................................... (31,568,333) (2,626,115)
------------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (35,326,722) (9,413,792)
------------- ------------
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital
share transactions........................................ (196,469,941) 110,192,830
------------- ------------
- -----------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (188,613,602) 76,143,030
Beginning of period......................................... 425,222,859 349,079,829
------------- ------------
End of period*.............................................. $236,609,257 $425,222,859
============= ============
- -----------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 4,166,186 $ 2,948,694
============= ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
184
<PAGE> 186
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE -------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998+ 1997+ 1996+ 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.80 $ 11.63 $ 11.06 $ 10.90 $ 11.03
-------- -------- -------- -------- --------
Investment income--net.............................. .13 .20 .23 .20 .19
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............ .92 (.71) .49 .37 (.13)
-------- -------- -------- -------- --------
Total from investment operations.................... 1.05 (.51) .72 .57 .06
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.09) (.23) (.15) (.01) (.18)
Realized gain on investments--net................. (.80) (.09) -- (.17) (.01)
In excess of realized gain on investments--net.... -- -- -- (.23) --
-------- -------- -------- -------- --------
Total dividends and distributions................... (.89) (.32) (.15) (.41) (.19)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 10.96 $ 10.80 $ 11.63 $ 11.06 $ 10.90
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 10.63%++ (4.55%) 6.62% 5.48% .55%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .87%* .90% .89% .89% .97%
======== ======== ======== ======== ========
Investment income--net.............................. 2.31%* 1.69% 1.96% 1.95% 1.09%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $236,609 $425,223 $349,080 $265,602 $247,884
======== ======== ======== ======== ========
Portfolio turnover.................................. 50.56% 127.96% 49.87% 100.02% 58.84%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
185
<PAGE> 187
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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. Futures
contracts are valued at the 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 financial 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
186
<PAGE> 188
- --------------------------------------------------------------------------------
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-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--Deferred organization expenses are charged
to expense on a straight-line basis over a period not exceeding five years.
(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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $32,228 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $171,940,849 and $345,148,082, respectively.
187
<PAGE> 189
- --------------------------------------------------------------------------------
Net realized gains (losses) for the six months ended June 30, 1998 and net
unrealized gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------
<S> <C> <C>
Investments:
Long-term............................. $(19,142,227) $6,326,414
Short-term............................ 12,524 2,114
Financial futures contracts........... 4,765,241 5,081
Options written....................... 46,135 --
Options purchased..................... (719,392) --
------------ ----------
Total investments...................... (15,037,719) 6,333,609
------------ ----------
Currency transactions:
Options written....................... (1,794,513) --
Options purchased..................... 880,975 --
Foreign currency transactions......... (1,518,867) 80,007
Forward foreign exchange contracts.... 1,857,813 419,678
------------ ----------
Total currency transactions............ (574,592) 499,685
------------ ----------
Total.................................. $(15,612,311) $6,833,294
============ ==========
- --------------------------------------------------------------------
</TABLE>
Transactions in options written for the six months ended June 30, 1998, 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.............. -- --
Options written................... 657,201 $ 55,296
Options expired................... (657,201) (55,296)
-------- --------
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.............. 1,868,261 $ 280,239
Options written................... -- --
Options closed.................... (1,868,261) (280,239)
---------- ---------
Outstanding put options written,
end of period.................... -- $ --
========== =========
- ------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $6,328,528, of which $23,306,829 related to appreciated securities
and $16,978,301 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments, for Federal income tax purposes was $229,814,452.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $(196,469,941) and $110,192,830 for the six months ended June 30, 1998 and
for the year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold........................ 2,147,446 $ 23,096,707
Shares issued to shareholders in
reinvestment of dividends and
distributions..................... 3,547,854 35,326,722
----------- -------------
Total issued....................... 5,695,300 58,423,429
Shares redeemed.................... (23,482,840) (254,893,370)
----------- -------------
Net decrease....................... (17,787,540) $(196,469,941)
=========== =============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 11,676,001 $137,644,281
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 835,399 9,413,792
---------- ------------
Total issued......................... 12,511,400 147,058,073
Shares redeemed...................... (3,164,784) (36,865,243)
---------- ------------
Net increase......................... 9,346,616 $110,192,830
========== ============
- -----------------------------------------------------------------
</TABLE>
5. COMMITMENTS:
At June 30, 1998, 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 $96,000 and $557,000, respectively.
188
<PAGE> 190
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The six-month period ended June 30, 1998 was difficult for natural resource
investments. While the Fund showed improved performance relative to its peer
group of broad-based natural resource funds, it suffered losses during May and
June and lost ground against relevant benchmarks as economic conditions
continued to deteriorate in Asia. The collapse of Asian currencies (particularly
the Japanese yen) has been translated into near-universal commodity price
declines. As we discussed in our last letter to shareholders, the impact of
stagnation in Asian economies was a major concern in the outlook for natural
resource investments. However, the actual results have been much worse than our
expectations, with severe contractions likely for several economies in the
region in 1998. The near collapse of the Japanese yen could lead to another
round of currency depreciation, and the potential devaluation of the Chinese
reminbi. In the absence of concrete fiscal reform by Japanese authorities, this
remains a risk with highly negative consequences.
PORTFOLIO MATTERS
We continued to migrate to holdings that we believe have less earnings risk
exposure, or we believe may be positioned to take advantage of declining prices
in the feedstock used in their operations. However, the investment environment
was unique over the period in that there were no safe havens, with natural
resource stocks suffering declines in virtually all commodity segments. This was
particularly true for energy-related stocks. After rallying on preliminary
production cuts by Organization of Petroleum Exporting Countries (OPEC) and non-
OPEC producers, oil prices retraced their gains and tested lows not seen in 12
years. A second round of cuts brought prices back to the $14 per barrel range.
However, this is far below the earlier consensus expectations, and oil company
shares have been battered by earnings estimate cuts. We continue to expect the
remainder of 1998 to be volatile, as strict OPEC quota compliance will be
necessary to work off inventories that were as much as 160 million barrels above
year-ago levels. Even this may be difficult since we believe that Asian oil
demand has fallen more than prevailing industry estimates.
The shares of oil service stocks were particularly hard-hit over the six
months, as lower oil company revenues have resulted in curtailed drilling plans.
The Fund benefited from a low exposure to energy stocks early in the year, as
energy holdings were reduced to less than 40% of total assets. However, we
subsequently increased energy exposure to 47% of total assets with emphasis on
major integrated oil stocks, natural gas-leveraged production companies, and
deep-water drilling and construction stocks. We believe that North American
natural gas capacity utilization is close to full capacity as demand continues
to increase and current production becomes more difficult to replace from mature
fields. Summer prices currently in the $2.40 per thousand cubic feet range are
strong despite a rapid build in North American gas storage levels. We believe
that extensive fuel switching to residual oil for electricity generation is
responsible for the inventory build, and this may limit further near-term
strength in gas prices. We increased the Fund's holdings in Canadian gas
producers, where realized prices are at steep discounts to US prices as a result
of pipeline constraints. As two new export pipeline projects are completed this
winter, we expect this differential to close.
New stocks purchased to capitalize on our positive natural gas outlook
included Alberta Energy Co. Ltd., Snyder Oil Corp., Vastar Resources, Inc. and
Enron Oil and Gas Co. We also took new positions in larger integrated oil
companies including Mobil Corp., Chevron Corp. and Unocal Corp., all of which
traded at attractive valuation levels and had defensive characteristics to the
Fund.
We continued to have substantial exposure to gold shares despite the sale of
nearly one-quarter of the Fund's gold company stocks. Gold stocks rallied early
in the year on expectations that gold's role as an asset backing the currency of
the European Monetary Union (EMU) would be above extremely bearish estimates
that existed in late 1997. However, weak Asian currencies and economies resulted
in sharply reduced demand for jewelry fabrication and hoarding for investment
purposes. In addition, consensus expectations for gold's role as an asset
backing the EMU moved above our estimate. This created a negative surprise for
the commodity when European central bank head Wim Duisenberg announced that the
gold weighting of European Monetary Reserves would be only in the 10%-15% range.
While this was on target with our estimate, gold fell given the perceived
shortfall. The Fund was particularly hurt by its exposure to Australian gold
mining stocks. While many of these companies sold gold forward and enjoyed
rising margins as costs of production declined in local currency terms, the
stock prices have been devastated by declining Australian stock markets for gold
and
189
<PAGE> 191
- --------------------------------------------------------------------------------
the local Australian stock markets. The companies should be attractive
acquisition candidates at current levels, but we are worried that further demand
shortfalls and currency depreciation could drive these shares back to their 1997
lows. We continue to be concerned about gold's failure to act as a safe haven in
times of economic turmoil. Unless gold shows better performance in the face of
widespread currency declines, we anticipate a further review of gold's
investment role in the Fund.
We reduced the Fund's exposure to steel and metals stocks with sales across
all metals groups. We eliminated our shares of Falconbridge Ltd., Inco Ltd., QNI
Ltd. and RGC Ltd., and reduced our positions in Nippon Steel Corp., Rio Tinto
PLC, Sumitomo Metal Industries Inc. and Industrias Penoles, S.A. de C.V. We also
took partial profits in the shares of Alumax Inc., which received a merger offer
from Aluminum Company of America, and maintained positions in Centaur Mining
Ltd. and Resolute Ltd., for their exposure to laterite nickel mines. These
projects are in the start-up phase, and we believe they offer significant upside
potential should commissioning be successful. Unfortunately, the stocks were
tainted by the collapse of the Australian stock market. While global inventories
of most metals are at relatively low levels, we doubt that there will be any
near-term catalysts for base metals stocks until resumption in Asian economic
growth appears visible.
Paper and forest products stocks rallied significantly during the first half
of the six-month period, as capacity utilization trends appeared better balanced
as demand continued to absorb capacity added in the last cycle, and as industry
consolidation accelerated with several mergers in the group. Unfortunately, the
steep declines in Asian demand and export of some grades into European and
American markets resulted in the group giving up all of its earlier share price
gains. We sold shares in Avenor Inc. after the company received a takeover bid
from Abitibi Consolidated Holdings, and also made partial sales in Slocan Forest
Products Ltd., Weyerhaeuser Co. and Willamette Industries Inc. Nonetheless, the
Fund remains overweighted in the forest products group relative to natural
resource benchmarks. However, it is difficult to see a catalyst for stock
appreciation within our investment time horizon. Therefore, we plan to reduce
positions should any selling opportunities present themselves.
Chemical stocks continued to register the best returns in the natural resource
sector, but showed signs of weakening as the first half of 1998 came to a close.
Many chemical stocks have reported a series of positive earnings surprises
resulting from declining feedstock costs stemming from low oil and natural gas
prices. However, capacity utilization is forecast to fall with new production
from newly completed chemical projects and plant expansions over the coming 18
months. Given our forecast for rising natural gas prices and a trough in oil
prices, we expect to maintain our underweighted position in the commodity
chemical area. During the period, we maintained a position in E.I. duPont de
Nemours & Co. DuPont had a strong first half performance in response to the
announcement of its upcoming initial public offering of 20% of its interest in
its Conoco energy subsidiary, and its eventual spin-off to shareholders. In
addition, investors held out expectations of a potential price/earnings ratio
upward revision, as the company's life sciences division becomes a larger
component of its earnings. Unfortunately, the company reported that it
anticipated an earnings shortfall in the second quarter as a result of low oil
prices and lower demand in its seed businesses subsequent to the end of the
first half of the year, erasing some of the stock's earlier gains.
We reduced the Fund's exposure to the gold and base metals groups, with the
proceeds used to increase the weighting of the energy group. In addition, we
increased the Fund's cash position from 3% of net assets to 5% as of June 30. We
expect to strive to maintain higher cash balances in light of the weak resource
environment, as well as to exploit buying opportunities as they become
available.
Progress was made in restructuring the Fund. During the six months ended June
30, 1998, we reduced Fund holdings to 93 positions from 110 at December 31,
1997. Our goal continues to be the creation of a more focused Fund. In addition,
new positions in the Fund were concentrated in companies that we believe have
solid ongoing operations, and away from companies that, in our view, are highly
dependent on exploration successes.
IN CONCLUSION
The investment environment for natural resources has been extremely difficult
since the onset of the Asian financial crisis one year ago. While the Fund's
performance has improved relative to other natural resource funds, we share our
investors' frustration over the negative returns. However, we believe that
continued progress has been made in repositioning the Fund. Many of the Fund's
shortfalls had been in smaller-capitalization companies with an emphasis on
exploration. As we shift to more established companies supported by underlying
production and cash flow, we believe the Fund is better positioned to avoid some
of the problems that have hindered performance.
190
<PAGE> 192
- --------------------------------------------------------------------------------
The outlook for natural resource investments is expected to remain highly
volatile. While we believed that the effects of Asian financial distress were
being underestimated, the outcome surpassed our expectations. Despite remedial
steps by governments to address the situation, it is difficult to see that
commodities have reached a trough in terms of demand and prices. We continue to
seek opportunities to invest in companies that can exploit declining commodity
prices, or companies whose share prices already discount the economic turmoil.
In addition, we believe that the energy sector is poised for a rebound,
particularly in natural gas leveraged stocks. We hope to improve the Fund's
performance relative to other natural resource funds with continued
restructuring of the Fund.
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Robert Shearer
Robert M. Shearer
Senior Vice President and Portfolio Manager
August 3, 1998
191
<PAGE> 193
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -18.08% -2.79%
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset
values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset
value on the ex-dividend date. Insurance-related fees and
expenses are not reflected in these returns. Past results
shown should not be considered a representation of future
performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 -18.08%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 + 1.49
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 + 3.02
- --------------------------------------------------------------------------------
192
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALUMINUM 2,566 +Alumax, Inc. ................... $ 97,659 $ 118,994 0.6%
3,000 Aluminum Co. of America.......... 157,209 197,812 0.9
5,400 Pechiney, S.A. (A Shares)........ 214,896 217,573 1.0
----------- ----------- -----
469,764 534,379 2.5
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 5,400 Air Products & Chemicals,
Inc. .......................... 154,427 216,000 1.0
4,800 BASF AG.......................... 115,117 228,008 1.1
1,500 Dow Chemical Co. ................ 106,941 145,031 0.7
6,700 duPont (E.I.) de Nemours &
Co. ........................... 158,310 499,988 2.4
----------- ----------- -----
534,795 1,089,027 5.2
- ------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCES 20,000 Asahi Glass Co., Ltd. ........... 240,000 108,249 0.5
COMPANIES 4,800 Ashland Inc. .................... 203,468 247,800 1.2
68,000 North Ltd. ...................... 255,416 139,858 0.7
----------- ----------- -----
698,884 495,907 2.4
- ------------------------------------------------------------------------------------------------------------------------
GOLD 145,337 Acacia Resources Ltd. ........... 239,893 154,862 0.7
17,500 Ashanti Goldfields Co. Ltd.
(GDR)**........................ 434,367 133,875 0.6
23,500 Cambior Inc. .................... 315,479 138,311 0.7
131,500 Delta Gold N.L. ................. 237,845 161,299 0.8
16,700 +Getchell Gold Corp. ............ 671,591 250,500 1.2
170,000 Great Central Mines N.L. ........ 491,004 162,185 0.8
67,600 +Miramar Mining Corp. ........... 345,062 86,932 0.4
13,864 Newmont Mining Corp. ............ 512,680 327,537 1.6
169,000 Normandy Mining Ltd. ............ 190,999 138,198 0.7
39,000 Placer Dome Inc. ................ 819,544 458,250 2.2
24,800 Prime Resource Group, Inc. ...... 242,631 173,804 0.8
199,000 +Resolute Ltd. .................. 412,978 120,815 0.6
42,643 Resolute Ltd. (Rights)(a)........ 1,303 476 0.0
22,200 +Sutton Resources Ltd. .......... 199,967 126,128 0.6
----------- ----------- -----
5,115,343 2,433,172 11.7
- ------------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL 4,400 Amerada Hess Corp. .............. 245,421 238,975 1.1
COMPANIES 6,000 Amoco Corp. ..................... 162,710 249,750 1.2
10,400 British Petroleum, Co., PLC
(ADR)*......................... 396,812 917,800 4.4
3,300 Chevron Corp..................... 275,595 274,106 1.3
3,300 Mobil Corp. ..................... 260,486 252,862 1.2
1,700 OMV AG........................... 181,957 227,783 1.1
25,000 Petro-Canada..................... 272,871 404,687 1.9
8,200 Societe Nationale Elf Aquitaine
(ADR)*......................... 302,991 582,200 2.8
5,800 Total, S.A. (Class B)............ 355,347 754,331 3.6
4,300 Unocal Corporation............... 152,600 153,725 0.7
8,000 Yacimientos Petroliferos Fiscales
S.A. (YPF)(ADR)*............... 137,480 240,500 1.1
----------- ----------- -----
2,744,270 4,296,719 20.4
- ------------------------------------------------------------------------------------------------------------------------
METALS & MINING 323,741 +Centaur Mining & Exploration
Ltd. .......................... 445,291 112,312 0.5
31,700 Industrias Penoles, S.A. de
C.V. .......................... 139,878 100,562 0.5
177,200 M.I.M. Holdings Ltd. ............ 242,497 85,625 0.4
44,325 Minsur S.A. (T Shares)........... 111,555 87,504 0.4
35,000 Mitsubishi Materials Corp. ...... 173,212 71,480 0.3
14,000 Noranda Inc. .................... 249,761 241,954 1.1
14,800 Outokumpu OYJ.................... 263,036 189,006 0.9
9,400 P.T. Tambang Timah (GDR)**(b).... 115,742 41,830 0.2
2,900 Phelps Dodge Corp. .............. 169,146 165,844 0.8
18,100 Rio Tinto PLC.................... 236,489 203,849 1.0
315,000 Savage Resources Ltd. ........... 241,918 113,183 0.5
23,000 Sumitomo Metal Mining Co.
Ltd. .......................... 191,265 93,447 0.4
11,500 Trellborg 'B' Fria............... 148,886 151,420 0.7
126,900 WMC Ltd. ........................ 734,286 382,067 1.8
----------- ----------- -----
3,462,962 2,040,083 9.5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
193
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OIL & GAS PRODUCERS 10,000 Alberta Energy Co. Ltd. ......... $ 218,243 $ 234,742 1.1%
7,600 Apache Corp. .................... 202,753 239,400 1.1
15,700 +Baytex Energy Ltd. (Class A).... 207,278 91,869 0.4
3,812 Burlington Resources Inc. ....... 91,553 164,154 0.8
10,400 +Chieftain International,
Inc. .......................... 233,254 246,350 1.2
3,000 Devon Energy Corp. .............. 104,958 104,813 0.5
26,100 +EEX Corp. ...................... 252,239 244,687 1.2
5,700 +EVI Weatherford Inc. ........... 259,963 211,613 1.0
11,800 Enron Oil & Gas Co............... 260,645 238,950 1.1
8,175 Enterprise Oil PLC............... 53,081 74,338 0.4
33,800 +Gulf Canada Resources, Ltd. .... 266,175 166,888 0.8
14,400 +Northrock Resources Ltd. ....... 118,257 149,908 0.7
16,000 +Oryx Energy Co. ................ 285,442 354,000 1.7
14,200 +Renaissance Energy Ltd. ........ 256,352 213,043 1.0
10,900 Snyder Oil Corp.................. 231,441 217,319 1.0
7,500 Vastar Resources, Inc. .......... 316,450 327,656 1.6
----------- ----------- -----
3,358,084 3,279,730 15.6
- ------------------------------------------------------------------------------------------------------------------------
OIL SERVICES 5,400 Coflexip Stena Offshore, Inc.
(ADR)*......................... 106,810 329,400 1.6
7,900 Ente Nazionale Idrocarbori (ENI)
S.p.A (ADR)*................... 369,325 513,500 2.4
9,600 McDermott International, Inc. ... 357,891 330,600 1.6
7,800 +Noble Drilling Corp. ........... 247,364 187,687 0.9
2,000 Schlumberger Ltd. ............... 57,253 136,625 0.6
8,200 +Stolt Comex Seaway, S.A. ....... 203,059 157,850 0.8
4,100 +Stolt Comex Seaway, S.A.
(ADR)*......................... 50,429 70,725 0.3
12,900 +TransCoastal Marine
Services, Inc. ................ 236,000 77,803 0.4
5,900 Transocean Offshore Inc. ........ 186,969 262,550 1.2
----------- ----------- -----
1,815,100 2,066,740 9.8
- ------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 8,466 Aracruz Celulose S.A. (Class
B)(ADR)*....................... 135,818 96,830 0.5
4,000 Champion International Corp. .... 208,741 196,750 0.9
3,300 Georgia-Pacific Corp. ........... 156,631 194,494 0.9
10,000 +Georgia-Pacific Corp.
(Timber Group)................. 236,852 230,625 1.1
4,500 International Paper Co. ......... 151,314 193,500 0.9
24,300 Metsa Serla OY 'B'............... 200,736 234,963 1.1
7,000 Mo Och Domsjo AB 'B' Co. ........ 168,523 200,138 1.0
39,600 Slocan Forest Products Ltd. ..... 401,080 183,221 0.9
12,000 +Stone Container Corp. .......... 147,680 187,500 0.9
5,400 Weyerhaeuser Co. ................ 213,440 249,412 1.2
3,800 Willamette Industries, Inc. ..... 79,562 121,600 0.6
----------- ----------- -----
2,100,377 2,089,033 10.0
- ------------------------------------------------------------------------------------------------------------------------
PLANTATIONS 136,000 Golden Hope Plantations BHD...... 240,608 124,756 0.6
90,000 Kuala Lumpur Kepong BHD.......... 120,553 145,564 0.7
----------- ----------- -----
361,161 270,320 1.3
- ------------------------------------------------------------------------------------------------------------------------
REFINING 7,100 Sun Company, Inc. ............... 196,376 275,569 1.3
5,976 Ultramar Diamond Shamrock
Corp. ......................... 202,960 188,617 0.9
----------- ----------- -----
399,336 464,186 2.2
- ------------------------------------------------------------------------------------------------------------------------
STEEL 104,000 British Steel PLC................ 274,493 228,618 1.1
3,700 Koninklijke Nederlandsche
Hoogovens en Staalfabrienken
N.V. .......................... 134,715 160,394 0.8
64,000 Nippon Steel Corp. .............. 214,851 112,694 0.5
77,000 Sumitomo Metal Industries,
Ltd. .......................... 235,308 123,916 0.6
----------- ----------- -----
859,367 625,622 3.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
194
<PAGE> 196
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WOOD PRODUCTS 6,900 Louisiana-Pacific Corp. ....... $ 162,564 $ 125,925 0.6%
26,800 Riverside Forest Products
Ltd. ........................ 352,710 182,350 0.9
----------- ----------- -----
515,274 308,275 1.5
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 22,434,717 19,993,193 95.1
- -----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM INVESTMENTS
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY
OBLIGATIONS*** $1,141,000 Federal Home Loan Mortgage
Corp., 5.85% due 7/01/1998... 1,140,815 1,140,815 5.4
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS 1,140,815 1,140,815 5.4
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.............. $23,575,532 21,134,008 100.5
===========
LIABILITIES IN EXCESS OF OTHER
ASSETS....................... (102,697) (0.5)
----------- -----
NET ASSETS..................... $21,031,311 100.0%
=========== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The rights may be exercised until 7/10/1998.
(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).
*** 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.
+ Non-income producing security.
See Notes to Financial Statements.
195
<PAGE> 197
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$23,575,532) (Note
1a)....................................................... $21,134,008
Cash........................................................ 283
Foreign cash (Note 1c)...................................... 7,962
Dividends receivable........................................ 73,290
Prepaid expenses and other assets........................... 2,076
-----------
Total assets................................................ 21,217,619
-----------
- --------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... $148,647
Investment adviser (Note 2)............................... 12,326
Capital shares redeemed................................... 8,708 169,681
--------
Accrued expenses and other liabilities...................... 16,627
-----------
Total liabilities........................................... 186,308
-----------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $21,031,311
===========
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 239,643
Paid-in capital in excess of par............................ 24,492,474
Undistributed investment income--net........................ 117,933
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (1,377,273)
Unrealized depreciation on investments and foreign currency
transactions--net......................................... (2,441,466)
-----------
NET ASSETS.................................................. $21,031,311
===========
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $21,031,311 and 2,396,433
shares outstanding........................................ $ 8.78
===========
- --------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
196
<PAGE> 198
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $26,116 foreign withholding tax).......... $ 268,688
Interest and discount earned................................ 33,219
-----------
Total income................................................ 301,907
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 79,220
Custodian fees.............................................. 9,153
Pricing services............................................ 5,471
Professional fees........................................... 3,797
Accounting services (Note 2)................................ 3,441
Transfer agent fees (Note 2)................................ 2,805
Printing and shareholders report............................ 2,418
Directors' fees and expenses................................ 427
Other....................................................... 547
-----------
Total expenses.............................................. 107,279
-----------
Investment income--net...................................... 194,628
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized loss from:
Investments--net.......................................... (1,152,067)
Foreign currency transactions--net........................ (3,653) (1,155,720)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 455,427
Foreign currency transactions--net........................ 443 455,870
----------- -----------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (699,850)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (505,222)
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
197
<PAGE> 199
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 194,628 $ 366,478
Realized gain (loss) on investments and foreign currency
transactions--net......................................... (1,155,720) 3,472,408
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 455,870 (7,588,129)
----------- ------------
Net decrease in net assets resulting from operations........ (505,222) (3,749,243)
----------- ------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (450,432) (223,099)
Realized gain on investments--net:
Class A................................................... (3,678,818) (2,977,040)
----------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (4,129,250) (3,200,139)
----------- ------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (1,313,583) (11,268,247)
----------- ------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (5,948,055) (18,217,629)
Beginning of period......................................... 26,979,366 45,196,995
----------- ------------
End of period*.............................................. $21,031,311 $ 26,979,366
=========== ============
- ------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 117,933 $ 373,737
=========== ============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
198
<PAGE> 200
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE -------------------------------------------------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS. FOR THE SIX
MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998+ 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 10.66 $ 13.12 $ 11.95 $ 10.82 $ 10.82
------- ------- ------- ------- -------
Investment income--net.................................. .07 .14 .18 .20 .17
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net.................... (.32) (1.68) 1.40 1.15 (.02)
------- ------- ------- ------- -------
Total from investment operations........................ (.25) (1.54) 1.58 1.35 .15
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................ (.18) (.06) (.20) (.19) (.15)
Realized gain on investments--net..................... (1.45) (.86) (.21) (.03) --
------- ------- ------- ------- -------
Total dividends and distributions....................... (1.63) (.92) (.41) (.22) (.15)
------- ------- ------- ------- -------
Net asset value, end of period.......................... $ 8.78 $ 10.66 $ 13.12 $ 11.95 $ 10.82
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................... (2.79%)++ (12.52%) 13.52% 12.65% 1.44%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................ .88%* .81% .78% .78% .87%
======= ======= ======= ======= =======
Investment income--net.................................. 1.60%* .99% 1.43% 1.75% 1.91%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $21,031 $26,979 $45,197 $43,102 $39,715
======= ======= ======= ======= =======
Portfolio turnover...................................... 13.57% 20.93% 31.11% 30.15% 10.94%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
199
<PAGE> 201
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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 the 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 financial 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
200
<PAGE> 202
- --------------------------------------------------------------------------------
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-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--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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $909 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $3,176,191 and $8,503,923, respectively.
201
<PAGE> 203
- --------------------------------------------------------------------------------
Net realized losses for the six months ended June 30, 1998 and net unrealized
gains (losses) as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $(1,152,067) $(2,441,524)
Foreign currency transactions......... (3,653) 58
----------- -----------
Total................................. $(1,155,720) $(2,441,466)
=========== ===========
- --------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized depreciation for Federal income tax purposes
aggregated $2,441,524, of which $3,440,855 related to appreciated securities and
$5,882,379 related to depreciated securities. At June 30, 1998, the aggregate
cost of investments for Federal income tax purposes was $23,575,532.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$1,313,583 and $11,268,247 for the six months June 30, 1998 and for the year
ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 5,958 $ 54,620
Shares issued to shareholders in
reinvestment of dividends and
distributions.......................... 456,271 4,129,250
-------- -----------
Total issued............................ 462,229 4,183,870
Shares redeemed......................... (596,343) (5,497,453)
-------- -----------
Net decrease............................ (134,114) $(1,313,583)
======== ===========
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 25,316 $ 321,714
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 264,256 3,200,139
---------- ------------
Total issued......................... 289,572 3,521,853
Shares redeemed...................... (1,202,808) (14,790,100)
---------- ------------
Net decrease......................... (913,236) $(11,268,247)
========== ============
- -----------------------------------------------------------------
</TABLE>
202
<PAGE> 204
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
During January, the bond market traded within a very narrow range as investors
tried to assess the impact of the Asian financial crisis on US economic growth.
The yield curve steepened from 24 basis points (0.24%) to 52 basis points as the
yield on long-term bonds dropped from 5.92% to 5.80%. In February, the bond
market backed up to 6% on long-term Treasury bonds, despite some favorable news.
Most significantly, the Federal Government ran a $17 billion budget surplus for
the 12 months ended January 1998. Commodity prices trended down, and there was
no change in the growth of the Consumer Price Index. However, investors were
concerned with rapid money supply growth fueling a continuing record-high stock
market against a background of full employment. In March, long-term bonds traded
within a very narrow range, starting at a yield of 6.01% and finishing the month
at 5.93%. This decline was the result of mounting evidence of a continuing
strong domestic economy. Consumer spending, employment and production data
remained in a growth trend. The Federal Reserve Board reported in its March
"beige book" that many US firms were desperate to find workers and were being
forced to offer large wage increases. Nevertheless, the stock market, as
measured by the Dow Jones Industrial Average (DJIA), soared more than 400 points
during March, and the bond market's reaction to these concerns was clearly
muted.
After a strong first quarter of 1998, in which the economy grew at a rate of
5.4%, there were signs that a slower growth pattern was emerging. Three of the
major factors that fueled the first-quarter growth slowed down during the
spring. These were consumer spending, inventory accumulation and capital
expenditure. In addition, data on job growth, hours worked and industrial
production further indicated slower growth for the second quarter. In April, the
DJIA reached the 9,200 level and left investors concerned about inflated stock
prices. Each new release of economic data was examined under the assumption that
the Federal Reserve Board would raise interest rates at its May meeting, but no
such decision was made. Instead, the combination of low energy prices, a strong
dollar and weak demand in Asia pushed interest rates lower. With inflation
almost nonexistent, the yield on the long-term bond fell below 5.80% in May and
continued its rally to below 5.60% in June.
During the six-month period ended June 30, 1998, we kept the duration of the
Fund in the 5.8-year--5.9-year range, which was consistent with the duration of
the Merrill Lynch Corporate Master Index. Structured securities comprised 7.2%
of the Fund's net assets by June 30, 1998. The average quality rating of the
Fund was A+, as rated by Standard & Poor's Corp., which was slightly higher than
the Merrill Lynch Corporate Master Index average of A.
During the same period, we reduced the Fund's cash position and purchased
floating rate notes as well as added to asset-backed obligations and real estate
investment trusts as yield spreads widened. In addition, we kept the Fund
slightly underweighted in utilities and Canadian and Yankee issues because their
values were being impacted by the deteriorating situation in Asia.
203
<PAGE> 205
- --------------------------------------------------------------------------------
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Christopher G. Ayoub
Christopher G. Ayoub
Senior Vice President and Co-Portfolio Manager
/s/ Jay C. Harbeck
Jay C. Harbeck
Senior Vice President and Co-Portfolio Manager
August 3, 1998
204
<PAGE> 206
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +10.26% +4.18%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Insurance-related fees
and expenses are not reflected in these returns. Past results shown should not
be considered a representation of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +10.26%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 + 6.45
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 + 8.67
- --------------------------------------------------------------------------------
205
<PAGE> 207
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<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 $ 823,949 Arcadia Automobile Receivables
SECURITIES+--6.4% Trust, 6.10% due
6/15/2000................... $ 823,788 $ 824,970
NR* Baa2 6,000,000 Bistro Trust 1998-1000, 6.58%
due 3/26/2001++............. 5,999,760 6,017,760
Citibank, Credit Card Master
Trust I:
AAA Aaa 4,000,000 5.85% due 4/10/2003........... 3,998,440 3,988,720
AAA Aaa 7,000,000 5.807% due 12/10/2008......... 6,998,110 6,986,875
A A2 6,000,000 First Dominion Funding I,
6.431% due 6/10/2013+++..... 5,977,422 5,970,000
AAA Aaa 4,500,000 First Union-Lehman Brothers,
6.56% due 11/15/2035........ 4,567,368 4,583,250
AAA Aaa 1,904,120 GMAC Grantor Trust, 6.50% due
4/15/2002................... 1,903,589 1,914,174
AAA Aaa 5,500,000 IMC-Home Equity, 6.36% due
8/20/2022................... 5,498,934 5,505,159
------------ ------------
35,767,411 35,790,908
- ---------------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--10.9% BBB+ A3 2,500,000 BB&T Corporation, 7.25% due
6/15/2007................... 2,488,325 2,656,100
Bank of New York Co., Inc.:
A A2 4,000,000 7.625% due 7/15/2002.......... 4,306,000 4,222,760
A A2 2,000,000 7.875% due 11/15/2002......... 2,213,400 2,139,660
BankAmerica Corp.:
A A1 7,000,000 8.375% due 3/15/2002.......... 7,361,550 7,519,470
A+ Aa3 1,000,000 7.125% due 5/12/2005.......... 985,500 1,051,210
A A2 2,000,000 First Interstate Bancorp,
11.25% due 3/27/2001........ 2,354,060 2,246,240
A- a2 8,000,000 Fleet Capital Trust II, 7.92%
due 12/11/2026.............. 7,922,070 8,567,440
HSBC Americas Inc.:
A- A3 3,000,000 7% due 11/01/2006............. 2,974,800 3,090,150
BBB+ A2 1,000,000 7.808% due 12/15/2026++....... 988,460 1,027,566
BBB A1 4,000,000 KeyCorp Capital I, 6.427% due
7/01/2028................... 3,959,760 3,963,960
BBB+ Baa1 5,000,000 MBNA America Bank N.A., 5.987%
due 6/10/2004............... 4,922,850 4,915,650
A- a2 3,000,000 Mellon Capital II, 7.995% due
1/15/2027................... 2,860,410 3,258,990
A A3 4,500,000 Mellon Financial Co., 6.375%
due 2/15/2010............... 4,518,180 4,508,595
A A1 5,000,000 NationsBank Corp., 6.50% due
8/15/2003................... 4,755,150 5,067,100
Norwest Corp.:
AA- Aa3 2,500,000 6.75% due 5/12/2000........... 2,529,975 2,539,550
AA- Aa3 3,000,000 6.125% due 10/15/2000......... 2,994,660 3,015,300
BBB+ a1 1,000,000 Wells Fargo Capital I, 7.96%
due 12/15/2026.............. 982,070 1,088,430
------------ ------------
59,117,220 60,878,171
- ---------------------------------------------------------------------------------------------------------------------------
CANADIAN Province of Quebec
PROVINCES**--1.4% (Canada)(2):
A+ A2 3,500,000 8.80% due 4/15/2003........... 3,944,780 3,865,330
A+ A2 3,500,000 7.125% due 2/09/2024.......... 3,645,635 3,746,190
------------ ------------
7,590,415 7,611,520
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
206
<PAGE> 208
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (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--8.4% AA- Aa3 $10,000,000 Associates Corp. of North
America, 6.375% due
6/15/2000................... $ 10,016,600 $ 10,073,900
A A2 1,500,000 Beneficial Corporation, 6.80%
due 9/16/2003............... 1,500,000 1,538,504
A aa3 6,100,000 CIT Capital Trust I, 7.70% due
2/15/2027................... 6,072,184 6,490,107
CIT Group Holdings, Inc.:
A+ Aa3 4,490,000 7.125% due 6/17/2002.......... 4,704,083 4,666,053
A+ Aa3 5,000,000 6.625% due 6/15/2005.......... 5,016,950 5,128,250
Commercial Credit Co.:
A+ A1 3,250,000 10% due 5/01/1999............. 3,626,350 3,353,642
A+ A1 1,500,000 6.75% due 7/01/2007........... 1,534,980 1,556,565
BBB Baa2 5,000,000 Erac USA Finance Company,
6.375% due 5/15/2003++...... 4,996,550 4,981,000
AA- Aa3 9,000,000 Norwest Financial, Inc.,
6.625% due 7/15/2004........ 8,960,310 9,247,140
------------ ------------
46,428,007 47,035,161
- ---------------------------------------------------------------------------------------------------------------------------
FINANCE--OTHER--14.0% A+ A1 1,500,000 Allstate Corp., 6.75% due
5/15/2018................... 1,499,565 1,528,290
Bear Stearns Companies, Inc.
(The):
A A2 3,000,000 6.75% due 8/15/2000........... 2,980,950 3,043,080
A A2 1,000,000 6.70% due 8/01/2003........... 1,002,800 1,021,950
BBB- Baa2 3,000,000 Commercial Net Lease Realty,
7.125% due 3/15/2008........ 2,991,870 3,004,470
A+ A1 3,500,000 Dean Witter, Discover & Co.,
6.75% due 8/15/2000......... 3,486,805 3,553,130
Donaldson, Lufkin & Jenrette,
Inc.:
A- A3 5,500,000 6.875% due 11/01/2005......... 5,477,000 5,642,010
A- A3 1,500,000 6.50% due 6/01/2008........... 1,493,775 1,499,880
A A2 350,000 Equitable Companies Inc.,
7% due 4/01/2028............ 360,668 357,574
Equitable Life Assurance
Society++:
A A2 4,355,000 6.95% due 12/01/2005.......... 4,110,249 4,517,642
A A2 1,500,000 7.70% due 12/01/2015.......... 1,489,740 1,670,759
BBB- Baa3 2,000,000 Hospitality Properties Trust,
7% due 3/01/2008............ 1,996,400 1,998,100
Lehman Brothers Holdings,
Inc.:
A Baa1 4,000,000 6.50% due 10/01/2002.......... 3,996,200 4,025,600
A Baa1 2,000,000 7.375% due 5/15/2004.......... 2,098,260 2,105,440
AA Aa2 6,500,000 MBIA, Inc., 7.15% due
7/15/2027................... 6,484,075 7,000,175
A+ A1 5,500,000 Morgan Stanley Group, Inc.,
6.875% due 3/01/2007........ 5,480,255 5,698,880
NR* A2 4,500,000 Mortgage Capital Funding,
Inc., 6.726% due
6/18/2008................... 4,545,000 4,545,000
PaineWebber Group, Inc.:
BBB+ Baa1 3,000,000 9.25% due 12/15/2001.......... 3,501,570 3,261,420
BBB+ Baa1 2,000,000 8.875% due 3/15/2005.......... 2,012,540 2,266,380
BBB+ Baa1 4,250,000 Simon Debartolo Group LP,
7.375% due 6/15/2018++...... 4,233,735 4,216,667
Smith Barney Holdings, Inc.:
A A2 2,000,000 5.875% due 2/01/2001.......... 1,993,680 1,993,058
A A2 2,000,000 6.625% due 11/15/2003......... 1,988,320 2,040,312
BBB Baa2 3,000,000 Spieker Properties LP, 7.35%
due 12/01/2017++............ 2,999,850 3,007,623
A+ aa3 2,000,000 Travelers Capital II, 7.75%
due 12/01/2036.............. 2,003,400 2,095,760
</TABLE>
207
<PAGE> 209
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (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--OTHER Travelers Corp. (The):
(CONCLUDED)
AA- Aa3 $ 1,000,000 9.50% due 3/01/2002........... $ 1,084,200 $ 1,109,480
AA- Aa3 6,000,000 7.875% due 5/15/2025.......... 6,053,840 6,934,800
------------ ------------
75,364,747 78,137,480
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--CONSUMER Anheuser-Busch Cos., Inc.:
GOODS--4.5%
A+ A1 2,500,000 8.75% due 12/01/1999.......... 2,839,090 2,592,875
A+ A1 5,000,000 7.375% due 7/01/2023.......... 5,127,300 5,297,150
A A3 5,500,000 Avon Products, Inc., 6.25% due
5/01/2018++................. 5,493,180 5,644,688
BBB- Baa3 4,000,000 Flowers Industries, Inc.,
7.15% due 4/15/2028......... 3,978,800 4,110,720
A A1 3,000,000 Pepsico, Inc., 5.75% due
1/02/2003................... 2,984,820 2,987,115
A A2 4,000,000 Philip Morris Companies, Inc.,
9% due 1/01/2001............ 4,071,540 4,247,960
------------ ------------
24,494,730 24,880,508
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- AA Aa2 2,000,000 BP America Inc., 9.375% due
ENERGY--2.5% 11/01/2000.................. 2,204,960 2,152,280
A Aa3 3,000,000 Dresser Industries, Inc.,
7.60% due 8/15/2096......... 2,991,270 3,452,010
Occidental Petroleum Corp.:
BBB Baa2 2,000,000 6.40% due 4/01/2003........... 1,997,860 2,013,516
BBB Baa2 4,500,000 6.50% due 4/01/2005........... 4,474,350 4,499,955
A+ A1 1,500,000 Texaco Capital Inc., 9% due
12/15/1999.................. 1,731,670 1,563,420
------------ ------------
13,400,110 13,681,181
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A A2 3,500,000 AlliedSignal Inc., 6.20% due
MANUFACTURING--10.9% 2/01/2008................... 3,495,310 3,534,895
BBB+ A3 5,500,000 Applied Materials Inc., 7.125%
due 10/15/2017.............. 5,462,380 5,586,625
duPont (E.I.) de Nemours &
Co.:
AA- Aa3 8,750,000 6.75% due 9/01/2007........... 9,031,708 9,114,700
AA- Aa3 2,950,000 8.25% due 1/15/2022........... 3,066,304 3,236,976
Ford Motor Credit Company:
A A1 3,000,000 7% due 9/25/2001.............. 2,988,060 3,075,060
A A1 2,500,000 7.75% due 3/15/2005........... 2,497,725 2,702,825
A A1 2,000,000 8.90% due 1/15/2032........... 2,471,480 2,559,420
AAA Aaa 3,245,000 General Electric Capital
Corp., 8.125% due
5/15/2012................... 3,449,052 3,755,114
General Motors Acceptance
Corp.:
A A2 5,000,000 7.70% due 4/15/2016........... 5,455,750 5,562,650
A A2 4,000,000 8.80% due 3/01/2021........... 4,689,040 4,957,280
BBB- Baa2 1,500,000 Georgia-Pacific Group, 7.25%
due 6/01/2028............... 1,492,545 1,529,880
A- Baa1 2,000,000 Goodrich (B.F.) Company, 7%
due 4/15/2038............... 1,988,220 2,055,000
BBB+ A3 2,500,000 Martin Marietta Corp., 6.50%
due 4/15/2003............... 2,515,325 2,526,700
A A1 6,910,000 PPG Industries, Inc., 6.50%
due 11/01/2007.............. 6,888,855 7,085,307
BBB Baa1 3,500,000 Raytheon Company, 6.50% due
7/15/2005................... 3,536,820 3,571,778
------------ ------------
59,028,574 60,854,210
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
208
<PAGE> 210
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL-- A A2 $ 2,500,000 Bass America, Inc., 8.125% due
SERVICES--13.3% 3/31/2002................... $ 2,668,930 $ 2,666,800
A A2 4,000,000 Carnival Cruise Lines, Inc.,
7.70% due 7/15/2004......... 4,208,480 4,302,680
Computer Associates
International, Inc.++:
A- Baa1 8,000,000 6.25% due 4/15/2003........... 7,984,960 8,003,296
A- Baa1 1,000,000 6.375% due 4/15/2005.......... 994,710 1,004,401
Dillard's, Inc.:
A+ A2 3,000,000 9.125% due 8/01/2011.......... 3,240,150 3,727,260
A+ A2 1,500,000 7.85% due 10/01/2012.......... 1,677,420 1,678,785
A A2 1,855,886 +Disney Enterprises, Inc.,
6.85% due 1/10/2007++....... 1,854,642 1,904,696
A+ A1 7,000,000 Electronic Data Systems
Corporation, 6.85% due
5/15/2000++................. 6,994,470 7,106,442
A A2 4,850,000 First Data Corp., 6.375% due
12/15/2007.................. 4,837,536 4,935,263
AAA Aaa 3,000,000 Johnson & Johnson, 8.72% due
11/01/2024.................. 3,000,000 3,470,250
BBB- Baa3 3,800,000 News America Inc., 7.30% due
4/30/2028................... 3,807,676 3,909,212
A A2 5,200,000 Nordstrom, Inc., 6.95% due
3/15/2028................... 5,198,700 5,308,680
A- A2 7,000,000 Sears, Roebuck & Co., 6.82%
due 10/17/2002.............. 7,014,280 7,184,870
BBB- Baa3 2,500,000 TCI Communications, Inc.,
8.75% due 8/01/2015......... 2,932,650 3,009,800
BBB- Baa2 4,000,000 Time Warner Entertainment Co.,
8.375% due 3/15/2023........ 4,618,120 4,685,240
A- Baa1 3,500,000 Tyco International Group S.A.,
7% due 6/15/2028............ 3,474,765 3,540,215
AA Aa2 7,000,000 Wal-Mart Stores, Inc., 8.50%
due 9/15/2024............... 7,036,810 7,996,240
------------ ------------
71,544,299 74,434,130
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- Southwest Airlines, Inc.:
TRANSPORTATION--1.6%
A- A3 3,000,000 9.40% due 7/01/2001........... 3,420,210 3,259,290
A- A3 4,000,000 8% due 3/01/2005.............. 3,980,450 4,354,400
A- A3 1,000,000 7.875% due 9/01/2007.......... 992,600 1,116,400
------------ ------------
8,393,260 8,730,090
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES-- AA- A2 6,000,000 GTE California, Inc., 8.07%
COMMUNICATIONS--4.2% due 4/15/2024............... 6,412,380 6,525,420
A Baa1 1,500,000 GTE Corp., 9.375% due
12/01/2000.................. 1,647,090 1,607,175
AAA Aaa 3,000,000 Indiana Bell Telephone Co.,
Inc., 7.30% due 8/15/2026... 3,030,280 3,352,860
A Baa2 5,300,000 MCI Communications Corp.,
6.125% due 4/15/2012........ 5,285,849 5,280,284
Southwestern Bell
Telecommunications Corp.:
AA Aa3 1,000,000 6.125% due 3/01/2000.......... 1,005,000 1,003,260
AA Aa3 1,000,000 6.625% due 4/01/2005.......... 958,450 1,032,510
AA Aa3 2,000,000 6.375% due 11/15/2007......... 2,009,520 2,029,060
BBB- Baa2 2,500,000 WorldCom Inc., 7.75% due
4/01/2007................... 2,722,350 2,711,650
------------ ------------
23,070,919 23,542,219
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
209
<PAGE> 211
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (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-- AAA Aaa $ 8,000,000 Cleveland Electric/Toledo
ELECTRIC--4.8% Edison (Class B), 7.13% due
7/01/2007................... $ 8,392,720 $ 8,582,800
AA- A1 3,500,000 Pacific Gas and Electric
Company, 6.25% due
8/01/2003................... 3,565,275 3,536,645
A- A3 2,000,000 Pennsylvania Power & Light
Co., 6.125% due 5/01/2001... 1,998,800 2,004,800
A- A3 4,000,000 Public Service Electric & Gas
Co., 6.50% due 6/01/2000.... 3,998,315 4,032,760
A A2 7,500,000 Virginia Electric & Power Co.,
8.625% due 10/01/2024....... 7,416,540 8,531,775
------------ ------------
25,371,650 26,688,780
- ---------------------------------------------------------------------------------------------------------------------------
YANKEE AA- Aa2 1,500,000 ABN AMRO Holding N.V., 7.125%
CORPORATES**--10.8% due 6/18/2007(1)............ 1,499,265 1,575,810
BBB- Baa3 5,000,000 Abitibi-Consolidated Inc.,
6.95% due 4/01/2008(3)...... 4,990,300 5,052,000
BBB A3 1,500,000 AmVescap PLC, 6.375% due
5/15/2003++(1).............. 1,497,285 1,505,791
A+ A1 6,000,000 Australia & New Zealand
Banking Group Ltd., 7.55%
due 9/15/2006(1)............ 5,990,880 6,377,160
A- Baa1 8,000,000 Enersis S.A., 6.90% due
12/01/2006(3)............... 7,979,360 7,540,640
BBB+ Baa3 8,000,000 Fairfax Financial Holdings
Ltd., 7.375% due
4/15/2018(1)................ 7,982,560 8,206,560
A A1 2,000,000 Ford Capital B.V., 9.50% due
6/01/2010(1)................ 2,217,880 2,492,840
A+ A1 5,500,000 Grand Metropolitan Investment
Corp., 6.50% due
9/15/1999(1)................ 5,615,810 5,531,570
AAA Aaa 1,500,000 International Bank for
Reconstruction &
Development, 5.625% due
3/17/2003(1)................ 1,494,975 1,498,980
A A2 5,000,000 Norsk Hydro ASA, 6.70% due
1/15/2018(3)................ 4,974,400 5,043,350
A+ Aa3 2,000,000 Sony Corporation, 6.125% due
3/04/2003(3)................ 1,995,760 2,004,660
AA+ Aaa 12,500,000 Swiss Bank Corp. NY, 7.375%
due 6/15/2017(1)............ 13,366,130 13,618,125
------------ ------------
59,604,605 60,447,486
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE
BONDS & NOTES--93.7% 509,175,947 522,711,844
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Notes & Bonds:
OBLIGATIONS--3.0%
AAA Aaa 2,500,000 5.75% due 10/31/2002.......... 2,491,895 2,520,300
AAA Aaa 2,000,000 5.75% due 11/30/2002.......... 1,994,688 2,016,560
AAA Aaa 1,000,000 5.625% due 12/31/2002......... 1,007,969 1,004,370
AAA Aaa 2,500,000 5.75% due 8/15/2003........... 2,501,562 2,526,550
AAA Aaa 500,000 5.875% due 2/15/2004.......... 490,156 509,220
AAA Aaa 2,500,000 7.25% due 8/15/2004........... 2,673,281 2,719,925
AAA Aaa 5,000,000 6.125% due 11/15/2027......... 5,310,781 5,357,800
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT
OBLIGATIONS--3.0% 16,470,332 16,654,725
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
210
<PAGE> 212
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REPURCHASE $ 9,903,000 Nikko Securities Company,
AGREEMENTS***--1.7% purchased on 6/30/1998 to
yield 6.15% to 7/01/1998.... $ 9,903,000 $ 9,903,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM
SECURITIES--1.7% 9,903,000 9,903,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.4%...... $535,549,279 549,269,569
============
OTHER ASSETS LESS
LIABILITIES--1.6%........... 8,759,434
------------
NET ASSETS--100.0%............ $558,029,003
============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Rated.
** Corresponding industry groups for foreign securities, which are denominated
in US dollars:
(1) Financial Institution
(2) Government Entity
(3) Industrial
*** Repurchase Agreements are fully collateralized by US Government Obligations.
+ Subject to principal paydowns.
++ The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
+++ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $5,970,000, representing 1.1% of net
assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Dominion Funding I, 6.431% due 6/10/2013.............. 5/20/1998 $5,977,422 $5,970,000
- --------------------------------------------------------------------------------------------------------------
TOTAL $5,977,422 $5,970,000
========== ==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
211
<PAGE> 213
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$535,549,279) (Note
1a)....................................................... $549,269,569
Cash........................................................ 771
Receivables:
Interest.................................................. $8,257,081
Securities sold........................................... 2,028,663
Capital shares sold....................................... 819,870
Loaned securities (Note 6)................................ 546 11,106,160
----------
Prepaid expenses and other assets........................... 35,168
------------
Total assets................................................ 560,411,668
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 2,119,156
Investment adviser (Note 2)............................... 201,551
Capital shares redeemed................................... 14,836 2,335,543
----------
Accrued expenses and other liabilities...................... 47,122
------------
Total liabilities........................................... 2,382,665
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $558,029,003
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 4,570,035
Paid-in capital in excess of par............................ 549,738,380
Undistributed investment income--net........................ 3,033,500
Accumulated realized capital losses on investments--net
(Note 5).................................................. (13,033,202)
Unrealized appreciation on investments--net................. 13,720,290
------------
NET ASSETS.................................................. $558,029,003
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $558,029,003 and 45,700,350
shares outstanding........................................ $ 12.21
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
212
<PAGE> 214
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and discount earned................................ $18,648,481
Other income................................................ 18,907
-----------
Total income................................................ 18,667,388
-----------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $1,116,993
Accounting services (Note 2)................................ 42,942
Custodian fees.............................................. 22,467
Professional fees........................................... 16,120
Printing and shareholder reports............................ 13,975
Directors' fees and expenses................................ 5,186
Pricing services............................................ 3,710
Transfer agent fees (Note 2)................................ 2,226
Registration fees........................................... 155
Other....................................................... 2,767
----------
Total expenses.............................................. 1,226,541
-----------
Investment income--net...................................... 17,440,847
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1d &
3):
Realized gain on investments--net........................... 3,357,553
Change in unrealized appreciation on investments--net....... 1,443,841
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $22,242,241
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
213
<PAGE> 215
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 17,440,847 $ 34,680,688
Realized gain (loss) on investments--net.................... 3,357,553 (659,507)
Change in unrealized appreciation on investments--net....... 1,443,841 8,588,890
------------ ------------
Net increase in net assets resulting from operations........ 22,242,241 42,610,071
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1E):
Investment income--net:
Class A................................................... (17,587,450) (34,630,429)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (17,587,450) (34,630,429)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital
share transactions........................................ 25,604,169 (18,603,327)
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 30,258,960 (10,623,685)
Beginning of period......................................... 527,770,043 538,393,728
------------ ------------
End of period*.............................................. $558,029,003 $527,770,043
============ ============
- --------------------------------------------------------------------------------------------------
*Undistributed investment income--net....................... $ 3,033,500 $ 3,180,103
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
214
<PAGE> 216
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ----------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 12.11 $ 11.91 $ 12.45 $ 11.12 $ 12.64
-------- -------- -------- -------- --------
Investment income--net............................ .40 .78 .80 .82 .77
Realized and unrealized gain (loss) on
investments--net................................ .10 .20 (.55) 1.34 (1.36)
-------- -------- -------- -------- --------
Total from investment operations.................. .50 .98 .25 2.16 (.59)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.......................... (.40) (.78) (.79) (.83) (.76)
In excess of realized gain on
investments--net.............................. -- -- -- -- (.17)
-------- -------- -------- -------- --------
Total dividends and distributions................. (.40) (.78) (.79) (.83) (.93)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 12.21 $ 12.11 $ 11.91 $ 12.45 $ 11.12
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................ 4.18%++ 8.64% 2.21% 20.14% (4.80%)
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.......................................... .46%* .47% .49% .50% .54%
======== ======== ======== ======== ========
Investment income--net............................ 6.50%* 6.62% 6.67% 7.00% 6.74%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $558,029 $527,770 $538,394 $489,838 $391,234
======== ======== ======== ======== ========
Portfolio turnover................................ 62.08% 89.22% 91.88% 90.12% 139.89%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
215
<PAGE> 217
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A Shares
and Class B Shares have equal voting, dividend, liquidation and other rights,
except that only shares of the respective classes are entitled to vote on
matters concerning only that class and Class B Shares bear certain expenses
related to the distribution of such shares. 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) Repurchase agreements--The Fund invests in securities pursuant to
repurchase agreements. Under such agreements, the counterparty agrees to
repurchase the security at a mutually agreed upon time and price. The Fund takes
possession of the underlying securities, marks to market such securities and, if
necessary, receives additional securities daily to ensure that the contract is
fully collateralized.
(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).
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 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 funds and portfolios
and provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the funds. 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 such 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, 1998, the aggregate average
daily net assets of the Fund and the Company's High Current Income Fund was
approximately $1,127,365,000.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed
216
<PAGE> 218
- --------------------------------------------------------------------------------
on Class B Shares, to 1.25% of its average daily net assets. Any such 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, 1998, the Fund paid Merrill Lynch Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith, Inc., $4,618 for
providing security price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $347,186,560 and $323,995,037, respectively.
Net realized gains for the six months ended June 30, 1998 and net unrealized
gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments................... $3,357,553 $13,720,290
---------- -----------
Total................................... $3,357,553 $13,720,290
========== ===========
- ------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $13,720,290, of which $15,940,227 related to appreciated securities
and $2,219,937 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $535,549,279.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $25,604,169 and $(18,603,327) for the six months ended June 30, 1998 and
for the year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
- ------------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 1,663,940 $20,195,895
Shares issued to shareholders in
reinvestment of dividends.............. 1,457,308 17,587,450
---------- -----------
Total issued............................ 3,121,248 37,783,345
Shares redeemed......................... (1,006,705) (12,179,176)
---------- -----------
Net increase............................ 2,114,543 $25,604,169
========== ===========
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 3,589,337 $ 42,528,752
Shares issued to shareholders in
reinvestment of dividends........... 2,931,101 34,630,429
---------- ------------
Total issued......................... 6,520,438 77,159,181
Shares redeemed...................... (8,146,214) (95,762,508)
---------- ------------
Net decrease......................... (1,625,776) $(18,603,327)
========== ============
- -----------------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31,1997, the Fund had a net capital loss carryforward of
approximately $16,332,000, of which $14,796,000 expires in 2002, $855,000
expires in 2003 and $681,000 expires in 2005. This amount will be available to
offset like amounts of any future taxable gains.
6. LOANED SECURITIES:
At June 30, 1998, the Fund held US Treasury bonds having an aggregate value of
approximately $3,232,000, as collateral for portfolio securities loaned having a
market value of approximately $3,215,000.
7. SUBSEQUENT EVENT:
On July 1, 1998, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.066378 per share payable on July 1, 1998 to
shareholders of record as of July 1, 1998.
217
<PAGE> 219
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on US
capital markets.
PORTFOLIO MATTERS
As of June 30, 1998, the Fund's asset allocation was: US stocks, 85% of net
assets; foreign stocks, 14%; and cash reserves, 1%.
During the first six months of 1998, we increased the Fund's allocation to
foreign equities from 7% of net assets to 14%. We concentrated the Fund's new
positions in Europe, purchasing shares of Alstom, Daimler-Benz AG and
UPM-Kymmene Oyj. We allocated the Fund's remaining foreign equity assets to
Canadian companies Magna International, Inc. and The Seagram Company Ltd., as
well as to the Japanese company, Sony Corporation.
In the US equity portion of the Fund's portfolio, we continued to place
emphasis on the shares of companies that we believed would benefit from a
healthy US economy and a high level of consumer confidence. We also preferred
companies that we believed have limited exposure to the economic problems of
Asia. The Fund's largest weighting as of June 30, 1998 was in the
consumer-related sectors, both cyclicals and staples. Representation in these
sectors included Carnival Corp. in leisure and tourism, Wal-Mart Stores, Inc. in
the merchandising sector and Bristol-Myers Squibb Co. in the health and personal
care sector. Other sectors with significant representation were financial
services, specifically insurance, and technology. We also shifted assets away
from the largest-capitalization issues through the sales of positions in
American Express Company, Microsoft Corp. and Pfizer, Inc.
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 next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
August 3, 1998
218
<PAGE> 220
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +22.40% +14.85%
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. Past results shown
should not be considered a representation of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +22.40%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +17.44
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +15.52
- --------------------------------------------------------------------------------
219
<PAGE> 221
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE 260,000 GenCorp, Inc. ............... $ 7,589,255 $ 6,565,000 0.7%
80,000 +Orbital Sciences Corp. ..... 2,054,827 2,990,000 0.3
------------ ------------ -----
9,644,082 9,555,000 1.0
- -----------------------------------------------------------------------------------------------------------------------
AIRLINES 163,000 +US Airways Group Inc. ...... 6,016,537 12,917,750 1.4
- -----------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 308,000 Federal-Mogul Corp. ......... 12,676,233 20,790,000 2.3
- -----------------------------------------------------------------------------------------------------------------------
AUTOMOBILE RENTAL & LEASING 356,500 +Avis Rent-A-Car, Inc. ...... 7,759,464 8,823,375 1.0
260,000 Hertz Corp. (Class A)........ 9,750,454 11,521,250 1.2
------------ ------------ -----
17,509,918 20,344,625 2.2
- -----------------------------------------------------------------------------------------------------------------------
BANKING 210,000 Bank of New York Co.,
Inc. ...................... 4,459,316 12,744,375 1.4
60,000 Bank of New York Co., Inc.
(Warrants)(c).............. 433,750 10,800,000 1.2
149,200 BankAmerica Corporation...... 7,807,115 12,896,475 1.4
309,900 First Union Corporation...... 15,243,173 18,051,675 1.9
------------ ------------ -----
27,943,354 54,492,525 5.9
- -----------------------------------------------------------------------------------------------------------------------
BROADCASTING--MEDIA 586,500 +Capstar Broadcasting Corp.
(Class A).................. 11,143,500 14,735,813 1.6
209,000 +Chancellor Media Corp. ..... 6,925,490 10,371,625 1.1
------------ ------------ -----
18,068,990 25,107,438 2.7
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 238,200 Great Lakes Chemical
Corp. ..................... 10,174,066 9,394,013 1.0
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 360,000 +Gartner Group, Inc.
(Class A).................. 12,215,534 12,577,500 1.4
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 163,500 +Cisco Systems, Inc. ........ 9,693,907 15,052,219 1.6
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 271,200 +BMC Software, Inc. ......... 5,091,115 14,085,450 1.5
207,500 Computer Associates
International, Inc. ....... 5,678,779 11,529,219 1.3
------------ ------------ -----
10,769,894 25,614,669 2.8
- -----------------------------------------------------------------------------------------------------------------------
COMPUTERS 433,000 COMPAQ Computer Corp. ....... 14,209,496 12,286,375 1.3
86,600 International Business
Machines Corp. ............ 9,019,416 9,942,763 1.1
------------ ------------ -----
23,228,912 22,229,138 2.4
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS 683,200 Dial Corporation (The)....... 13,653,219 17,720,500 1.9
- -----------------------------------------------------------------------------------------------------------------------
CONTAINERS 341,000 +Owens-Illinois, Inc. ....... 9,908,876 15,259,750 1.7
- -----------------------------------------------------------------------------------------------------------------------
COSMETICS 118,400 Gillette Company............. 6,768,606 6,711,800 0.7
- -----------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 160,000 General Electric Co. ........ 11,666,668 14,560,000 1.6
- -----------------------------------------------------------------------------------------------------------------------
ELECTRONICS 124,300 Intel Corporation............ 10,197,268 9,205,969 1.0
158,500 Texas Instruments Inc. ...... 10,297,317 9,242,531 1.0
------------ ------------ -----
20,494,585 18,448,500 2.0
- -----------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT 318,400 +Premier Parks Inc. ......... 17,941,316 21,213,400 2.3
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 330,800 +Heller Financial, Inc. ..... 9,204,476 9,924,000 1.1
155,800 Providian Financial Corp. ... 9,717,155 12,240,037 1.3
------------ ------------ -----
18,921,631 22,164,037 2.4
- -----------------------------------------------------------------------------------------------------------------------
FOODS 246,000 +Keebler Foods Co. .......... 6,949,540 6,765,000 0.7
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--ARGENTINA* 146,000 Yacimientos Petroliferos
Fiscales S.A.
(ADR)(a)(10)............... 4,451,032 4,389,125 0.5
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA* 143,800 +Imax Corporation(6)......... 3,832,321 3,235,500 0.3
157,600 Magna International, Inc.
(Class A)(2)............... 10,271,216 10,815,300 1.2
230,000 Seagram Company Ltd.
(The)(3)................... 9,860,278 9,415,625 1.0
------------ ------------ -----
23,963,815 23,466,425 2.5
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--FINLAND* 615,000 UPM-Kymmene Oyj(9)........... 19,342,390 16,942,149 1.8
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
220
<PAGE> 222
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOREIGN--FRANCE* 505,500 +Alstom(7)................... $ 17,238,015 $ 16,645,073 1.8%
171,600 +ST Microelectronics N.V. (NY
Registered Shares)(11)..... 14,200,285 11,990,550 1.3
------------ ------------ -----
31,438,300 28,635,623 3.1
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--GERMANY* 178,100 Daimler-Benz AG(1)........... 17,421,749 17,512,049 1.9
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--JAPAN* 44,000 Sony Corporation
(ADR)(a)(4)................ 3,235,891 3,786,750 0.4
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--NETHERLANDS* 321,100 Royal Dutch Petroleum Co. (NY
Registered
Shares)(8)................. 17,807,223 17,600,294 1.9
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--SOUTH KOREA* 2,688 +Hyundai Engineering &
Construction Co., Ltd.
(GDR)(b)(d)(5)............. 34,497 847 0.0
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN--UNITED KINGDOM* 397,052 Diageo PLC (ADR)(a)(3)....... 16,863,446 19,132,943 2.1
- -----------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 222,200 Black & Decker Corporation
(The)...................... 7,442,791 13,554,200 1.5
- -----------------------------------------------------------------------------------------------------------------------
HEALTHCARE-- 194,000 Columbia/HCA Healthcare
PRODUCTS/SERVICES Corp. ..................... 5,943,511 5,650,250 0.6
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE 157,500 Allmerica Financial Corp. ... 9,672,916 10,237,500 1.1
292,000 Equitable Companies
Inc. (The) ................ 15,347,662 21,881,750 2.4
327,000 Travelers Group, Inc. ....... 13,125,038 19,824,375 2.1
152,200 UNUM Corporation............. 4,828,905 8,447,100 0.9
------------ ------------ -----
42,974,521 60,390,725 6.5
- -----------------------------------------------------------------------------------------------------------------------
MACHINERY 399,300 Ingersoll-Rand Co. .......... 11,982,947 17,594,156 1.9
- -----------------------------------------------------------------------------------------------------------------------
MANUFACTURING 215,600 Tyco International Ltd. ..... 11,149,255 13,582,800 1.5
- -----------------------------------------------------------------------------------------------------------------------
MEDICAL 165,300 Beckman Coulter Inc. ........ 9,922,152 9,628,725 1.0
- -----------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 548,368 +HEALTHSOUTH Corporation..... 14,867,891 14,634,571 1.6
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS 450,000 El Paso Natural Gas
Company.................... 11,417,701 17,212,500 1.9
227,500 Enron Corp. ................. 9,843,119 12,299,219 1.3
------------ ------------ -----
21,260,820 29,511,719 3.2
- -----------------------------------------------------------------------------------------------------------------------
OIL SERVICE 108,000 Schlumberger Ltd. ........... 6,305,990 7,377,750 0.8
- -----------------------------------------------------------------------------------------------------------------------
PETROLEUM 407,000 Unocal Corp. ................ 14,976,338 14,550,250 1.6
- -----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 158,000 Bristol-Myers Squibb Co. .... 15,010,381 18,160,125 2.0
262,500 Warner-Lambert Company....... 12,517,750 18,210,937 2.0
------------ ------------ -----
27,528,131 36,371,062 4.0
- -----------------------------------------------------------------------------------------------------------------------
PRINTING/PUBLISHING 378,600 +World Color Press, Inc. .... 11,378,140 13,251,000 1.4
- -----------------------------------------------------------------------------------------------------------------------
RAILROADS 54,800 Burlington Northern
Santa Fe Inc. ............. 5,086,509 5,380,675 0.6
- -----------------------------------------------------------------------------------------------------------------------
REAL ESTATE 170,950 Starwood Hotels &
INVESTMENT TRUSTS Resorts(e)................. 5,653,340 8,259,022 0.9
- -----------------------------------------------------------------------------------------------------------------------
RETAIL 425,000 +Safeway Inc. ............... 12,389,021 17,292,187 1.9
254,000 Sears, Roebuck & Co. ........ 12,829,430 15,509,875 1.7
369,000 Wal-Mart Stores, Inc. ....... 15,213,293 22,416,750 2.4
------------ ------------ -----
40,431,744 55,218,812 6.0
- -----------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 300,000 Lowe's Companies, Inc. ...... 10,809,478 12,168,750 1.3
476,200 Rite Aid Corporation......... 8,384,634 17,887,262 1.9
------------ ------------ -----
19,194,112 30,056,012 3.2
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
221
<PAGE> 223
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS & WARRANTS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS 252,000 +SmarTalk TeleServices,
Inc........................ $ 6,942,358 $ 3,559,500 0.4%
262,569 +Tele-Communications, Inc.
(Class A).................. 4,748,992 10,076,085 1.1
710,862 +Tele-Communications TCI
Ventures Group............. 5,919,015 14,217,240 1.5
407,200 +WorldCom Inc. .............. 11,945,769 19,672,850 2.1
------------ ------------ -----
29,556,134 47,525,675 5.1
- -----------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 425,600 Carnival Corp. (Class A)..... 6,326,276 16,864,400 1.8
113,100 Royal Caribbean
Cruises Ltd. .............. 5,114,186 8,991,450 1.0
------------ ------------ -----
11,440,462 25,855,850 2.8
- -----------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 388,300 +USA Waste Services, Inc. ... 16,201,249 19,172,312 2.1
- -----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS & WARRANTS 712,100,248 909,949,635 98.5
- -----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $9,941,000 General Motors Acceptance
Corp., 6.50% due
7/01/1998.................. 9,939,205 9,939,205 1.1
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 9,939,205 9,939,205 1.1
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............ $722,039,453 919,888,840 99.6
============
UNREALIZED APPRECIATION ON
FORWARD FOREIGN EXCHANGE
CONTRACTS***............... 558,326 0.1
OTHER ASSETS LESS
LIABILITIES................ 3,355,005 0.3
------------ -----
NET ASSETS................... $923,802,171 100.0%
============ =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number of
shares are subject to adjustment under certain conditions until the
expiration date.
(d) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(e) Formerly Starwood Lodging Trust.
* Corresponding industry groups for foreign securities:
(1) Auto & Truck
(2) Automobile Parts
(3) Beverages
(4) Electronics
(5) Engineering & Construction
(6) Entertainment
(7) Machinery & Equipment
(8) Oil--International
(9) Paper & Forest Products
(10) Petroleum
(11) Semiconductors
222
<PAGE> 224
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
** Commercial Paper is traded on a discount basis; the interest rate shown is
the discount rate paid at the time of purchase by the Fund.
*** Forward foreign exchange contracts sold as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION
(DEPRECIATION)
FOREIGN CURRENCY SOLD EXPIRATION DATE (NOTE 1b)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
C$ 30,000,000 .......................................................... July 1998 $ (7,922)
DM 63,100,000 .......................................................... July 1998 396,801
Fim 87,400,000 .......................................................... September 1998 72,909
Frf 173,100,000 .......................................................... July 1998 91,255
L 11,100,000 .......................................................... July 1998 (21,903)
Y 495,000,000 .......................................................... September 1998 27,186
- -----------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET (US$
COMMITMENT--$122,760,696) $558,326
========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
See Notes to Financial Statements.
223
<PAGE> 225
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$722,039,453) (Note
1a)....................................................... $919,888,840
Unrealized appreciation on forward foreign exchange
contracts (Note 1b)....................................... 558,326
Receivables:
Securities sold........................................... $2,663,458
Dividends................................................. 2,457,480 5,120,938
----------
Prepaid expenses and other assets (Note 1f)................. 52,081
------------
Total assets................................................ 925,620,185
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,173,408
Investment adviser (Note 2)............................... 346,006
Forward foreign exchange contracts (Note 1b).............. 105,475
Capital shares redeemed................................... 48,003 1,672,892
----------
Accrued expenses and other liabilities...................... 145,122
------------
Total liabilities........................................... 1,818,014
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $923,802,171
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 2,438,521
Paid-in capital in excess of par............................ 646,140,738
Undistributed investment income--net........................ 5,194,743
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 71,652,575
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 198,375,594
------------
NET ASSETS.................................................. $923,802,171
============
- ---------------------------------------------------------------------------------------
NET ASSETS VALUE:
Class A--Based on net assets of $923,802,171 and 24,385,205
shares outstanding........................................ $ 37.88
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
224
<PAGE> 226
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $291,330 foreign withholding tax)......... $ 6,739,915
Interest and discount earned................................ 453,775
Other income................................................ 158,247
------------
Total income................................................ 7,351,937
------------
- ----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 1,968,212
Accounting services (Note 2)................................ 73,745
Custodian fees.............................................. 37,583
Professional fees........................................... 25,506
Printing and shareholder reports............................ 20,388
Directors' fees and expenses................................ 8,724
Registration fees (Note 1f)................................. 8,086
Transfer agent fees (Note 2)................................ 2,251
Pricing services............................................ 1,018
Other....................................................... 4,214
-----------
Total expenses.............................................. 2,149,727
------------
Investment income--net...................................... 5,202,210
------------
- ----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain from:
Investments--net.......................................... 72,532,711
Foreign currency transactions--net........................ 322,639 72,855,350
-----------
Change in unrealized appreciation on:
Investments--net.......................................... 48,508,230
Foreign currency transactions--net........................ 518,745 49,026,975
----------- ------------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 121,882,325
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $127,084,535
============
- ----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
225
<PAGE> 227
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 5,202,210 $ 9,621,453
Realized gain on investments and foreign currency
transactions--net......................................... 72,855,350 113,655,662
Change in unrealized appreciation on investments and foreign
currency transactions--net................................ 49,026,975 50,541,550
------------- ------------
Net increase in net assets resulting from operations........ 127,084,535 173,818,665
------------- ------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (8,061,972) (5,217,029)
Realized gain on investments--net:
Class A................................................... (115,958,721) (37,207,312)
------------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (124,020,693) (42,424,341)
------------- ------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital
share transactions........................................ 45,674,347 (50,605,570)
------------- ------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 48,738,189 80,788,754
Beginning of period......................................... 875,063,982 794,275,228
------------- ------------
End of period*.............................................. $923,802,171 $875,063,982
============= ============
- ------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 5,194,743 $ 8,054,505
============= ============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
226
<PAGE> 228
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A+
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 38.42 $ 32.83 $ 32.76 $ 27.74 $ 29.02
-------- -------- -------- -------- --------
Investment income--net.............................. .20 .41 .58 .58 .38
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............ 4.70 6.94 4.44 5.48 (.74)
-------- -------- -------- -------- --------
Total from investment operations.................... 4.90 7.35 5.02 6.06 (.36)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.35) (.22) (.66) (.45) (.25)
Realized gain on investments--net................. (5.09) (1.54) (4.29) (.59) (.67)
-------- -------- -------- -------- --------
Total dividends and distributions................... (5.44) (1.76) (4.95) (1.04) (.92)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 37.88 $ 38.42 $ 32.83 $ 32.76 $ 27.74
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 14.85%++ 23.70% 17.90% 22.61% (1.20%)
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .47%* .48% .49% .51% .54%
======== ======== ======== ======== ========
Investment income--net.............................. 1.14%* 1.16% 1.89% 1.94% 1.39%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $923,802 $875,064 $794,275 $644,551 $464,360
======== ======== ======== ======== ========
Portfolio turnover.................................. 52.45% 100.08% 88.30% 140.32% 60.57%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
227
<PAGE> 229
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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
228
<PAGE> 230
- --------------------------------------------------------------------------------
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
funds and provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the funds.
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, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $50,538 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $474,078,397 and $542,088,499, respectively.
Net realized gains (losses) for the six months ended June 30, 1998 and net
unrealized gains (losses) as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ----------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $72,532,708 $197,849,387
Short-term investments............... 3 --
Forward foreign exchange contracts... 332,098 558,326
Foreign currency transactions........ (9,459) (32,119)
----------- ------------
Total................................ $72,855,350 $198,375,594
=========== ============
- ----------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $197,849,387, of which $215,040,081 related to appreciated securities
and $17,190,694 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $722,039,453.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $45,674,347 and $(50,605,570) for the six months ended June 30, 1998 and
for the year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 249,123 $ 8,584,616
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 3,754,789 124,020,693
---------- -------------
Total issued.......................... 4,003,912 132,605,309
Shares redeemed....................... (2,392,189) (86,930,962)
---------- -------------
Net increase.......................... 1,611,723 $ 45,674,347
========== =============
- -------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 762,740 $ 26,562,888
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,378,757 42,424,341
---------- -------------
Total issued......................... 2,141,497 68,987,229
Shares redeemed...................... (3,562,259) (119,592,799)
---------- -------------
Net decrease......................... (1,420,762) $ (50,605,570)
========== =============
- -----------------------------------------------------------------
</TABLE>
229
<PAGE> 231
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 1998, Reserve Assets Fund's net
annualized yield was 5.09%*. The Fund's 7-day yield Class A Shares as of June
30, 1998 was 5.01%. The average portfolio maturity was 76 days at June 30, 1998,
compared to 70 days at December 31, 1997.
THE ENVIRONMENT
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on the US
capital markets.
During the six-month period ended June 30, 1998 we maintained a constructive
average life for the Fund in order to take advantage of a trend toward lower
interest rates. The Fund's composition at the end of June and as of our last
report is detailed below:
<TABLE>
<CAPTION>
- ------------------------------------------------------
Issue 6/30/98 12/31/97
- ------------------------------------------------------
<S> <C> <C>
Bank Notes....................... 15.0% 11.6%
Certificates of Deposit.......... 1.1 3.6
Certificates of
Deposit--Yankee................ 2.0 2.6
Commercial Paper................. 45.0 44.8
Corporate Notes.................. 15.2 3.4
Funding Agreements............... 4.5 4.7
Medium-Term Notes................ -- 6.4
Repurchase Agreements............ -- 1.7
US Government Agency &
Instrumentality Obligations--
Discount....................... 0.5 3.7
US Government Agency &
Instrumentality Obligations--
Non-Discount................... 16.8 19.0
Liabilities in Excess of Other
Assets......................... (0.1) (1.5)
----- -----
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 with
you in our next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Jacqueline Rogers
Jacqueline Rogers
Vice President and Portfolio Manager
August 3, 1998
- ---------------
* Based on a constant investment throughout the period, with dividends
compounded daily, and reflecting a net return to the investor after all
expenses.
230
<PAGE> 232
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--15.0% $ 200,000 American Express Centurion Bank+........ 5.598% 3/19/99 $ 200,000
100,000 Bank of New York (The).................. 5.85 8/20/98 100,020
100,000 Comerica Bank, Detroit+................. 5.566 2/02/99 99,977
100,000 Comerica Bank, Detroit+................. 5.556 2/09/99 99,971
100,000 FCC National Bank....................... 5.65 3/03/99 99,864
150,000 FNB of Chicago.......................... 5.89 8/26/98 150,057
200,000 FNB of Chicago.......................... 5.52 2/16/99 199,567
200,000 First Tennessee Bank N.A., Memphis...... 5.82 4/30/99 200,004
100,000 Huntington National Bank+............... 5.546 1/20/99 99,973
100,000 KeyBank, N.A.+.......................... 5.52 8/20/98 99,990
500,000 KeyBank, N.A.+.......................... 5.52 8/28/98 499,946
100,000 LaSalle National Bank, Chicago.......... 5.55 2/05/99 99,806
400,000 LaSalle National Bank, Chicago.......... 5.55 2/08/99 397,938
100,000 LaSalle National Bank, Chicago.......... 5.55 2/22/99 99,800
400,000 PNC Bank N.A.+.......................... 5.60 10/01/98 399,932
500,000 PNC Bank N.A.+.......................... 5.57 1/29/99 499,797
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$3,348,930) 3,346,642
- ------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 250,000 Chase Manhattan Bank USA, N.A. ......... 5.87 7/21/98 250,013
DEPOSIT--1.1%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$250,000) 250,013
- ------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 100,000 ABN-AMRO Bank N.V., Chicago............. 5.77 7/28/98 99,995
DEPOSIT--YANKEE--2.0% 250,000 Bayerische Vereinsbank AG, New York..... 5.71 10/06/98 249,846
100,000 Westdeutsche Landesbank Girozentrale,
New York.............................. 5.83 8/03/98 100,003
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT--YANKEE (COST--$449,958) 449,844
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--45.0% 1,000,000 Aesop Funding Corp. .................... 5.54 7/08/98 998,923
284,000 Alpine Securitization Corp. ............ 5.55 7/09/98 283,650
350,000 Apreco Inc. ............................ 5.60 7/01/98 350,000
305,000 Apreco Inc. ............................ 5.54 7/24/98 303,919
531,000 Carnival (UK) PLC....................... 5.52 8/19/98 526,953
533,000 Carnival (UK) PLC....................... 5.53 8/19/98 528,937
308,000 Concord Minutemen Capital Co. LLC....... 6.50 7/01/98 308,000
252,000 Countrywide Home Loans, Inc. ........... 5.53 7/21/98 251,223
511,000 Countrywide Home Loans, Inc. ........... 5.54 8/28/98 506,390
282,000 Countrywide Home Loans, Inc. ........... 5.535 9/02/98 279,236
250,000 Credit Suisse First Boston, Inc......... 5.50 2/16/99 241,151
215,000 Cregem North America, Inc. ............. 5.50 7/01/98 215,000
192,000 Finova Capital Corp. ................... 5.55 9/14/98 189,760
150,000 General Electric Capital Corp. ......... 5.47 2/18/99 144,645
473,000 Lehman Brothers Holdings, Inc. ......... 5.54 9/23/98 466,819
500,000 Lehman Brothers Holdings, Inc. ......... 5.54 12/22/98 486,563
454,000 Lexington Parker Capital Co. LLC ....... 5.57 7/10/98 453,368
602,000 Morgan (J.P.) & Co., Inc. .............. 5.36 7/17/98 600,515
100,000 Morgan Stanley, Dean Witter & Co. ...... 5.616 2/08/99 100,000
497,000 Old Line Funding Corp. ................. 5.53 7/02/98 496,924
477,000 Rexam PLC .............................. 5.56 7/22/98 475,453
500,000 Salomon, Smith Barney Holdings, Inc..... 5.48 7/16/98 498,844
294,000 Salomon, Smith Barney Holdings, Inc..... 5.51 8/14/98 292,006
382,000 Three Rivers Funding Corp. ............. 5.63 7/14/98 381,223
676,000 Windmill Funding Corp. ................. 5.55 7/07/98 675,375
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$10,055,416) 10,054,877
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--15.2% 100,000 Associates Corp. of North America....... 6.75 6/28/99 100,790
200,000 CIT Group Holdings, Inc. (The).......... 6.50 7/13/98 200,157
100,000 CIT Group Holdings, Inc. (The).......... 5.58 8/17/98 99,989
100,000 CIT Group Holdings, Inc. (The).......... 5.64 1/12/99 99,974
250,000 CIT Group Holdings, Inc. (The).......... 5.54 6/28/99 249,803
44,829 Chase Manhattan Auto Owners Trust
1998-A, Class A-1++................... 5.549 3/12/99 44,812
100,000 Chase Manhattan Corp. .................. 5.597 3/25/99 99,993
</TABLE>
231
<PAGE> 233
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE $ 49,218 Ford Owners Trust 1998-A++.............. 5.545% 2/16/99 $ 49,125
NOTES 200,000 General Electric Capital Corp. ......... 5.57 6/03/99 199,909
(CONCLUDED) 200,000 General Motors Acceptance Corp. ........ 7.375 5/26/99 202,660
100,000 General Motors Acceptance Corp. ........ 6.55 6/04/99 100,640
100,000 General Motors Acceptance Corp. ........ 7.375 6/09/99 101,390
100,000 General Motors Acceptance Corp. ........ 5.702 2/27/01 99,893
100,000 Goldman Sachs Group, L.P. .............. 5.656 7/13/99 100,012
250,000 IBM Credit Corp. ....................... 5.868 8/13/98 250,234
250,000 IBM Credit Corp. ....................... 6.625 4/19/99 251,525
544,843 LABS Trust Series 1996-4 Senior
Notes+++................................ 5.656 12/28/98 544,843
100,000 Morgan Stanley, Dean Witter & Co. ...... 5.544 1/15/99 100,000
300,000 Norwest Corporation..................... 6.00 10/13/98 300,150
37,895 Premier Auto Trust 1998-1++............. 5.545 11/06/98 37,867
58,112 Premier Auto Trust 1998-2++............. 5.608 12/06/98 58,079
90,890 Premier Auto Trust 1998-3++............. 5.62 2/08/99 90,890
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$3,383,141) 3,382,735
- ------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--4.5% 1,000,000 Jackson National Life Insurance Co.+.... 5.672 5/03/99 1,000,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$1,000,000) 1,000,000
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY & 10,000 Federal National Mortgage Association... 5.50 8/05/98 9,947
INSTRUMENTALITY
OBLIGATIONS-- 37,000 Federal National Mortgage Association... 5.49 8/27/98 36,680
DISCOUNT--0.5% 62,000 Federal National Mortgage Association... 5.47 9/30/98 61,146
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT AGENCY & INSTRUMENTALITY
OBLIGATIONS--DISCOUNT (COST--$107,768) 107,773
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY & 300,000 Federal Home Loan Banks+................ 5.592 10/20/98 299,973
INSTRUMENTALITY
OBLIGATIONS-- 150,000 Federal Home Loan Banks................. 5.99 8/11/99 149,985
NON-DISCOUNT--16.8% 100,000 Federal Home Loan Banks................. 5.855 1/20/00 99,930
50,000 Federal Home Loan Banks................. 5.865 3/17/00 49,955
100,000 Federal Home Loan Banks................. 5.705 3/23/00 99,860
100,000 Federal Home Loan Banks................. 5.875 5/18/00 100,030
100,000 Federal Home Loan Mortgage Corp. ....... 5.685 8/21/98 100,093
300,000 Federal National Mortgage
Association+............................ 5.596 10/20/98 299,960
200,000 Federal National Mortgage Association... 5.37 2/26/99 199,682
700,000 Federal National Mortgage
Association+............................ 5.521 3/03/99 699,802
250,000 Federal National Mortgage
Association+............................ 5.601 4/09/99 249,903
560,000 Federal National Mortgage
Association+............................ 5.311 5/25/99 557,217
100,000 Student Loan Marketing Association+..... 5.557 10/06/98 99,983
100,000 Student Loan Marketing Association...... 4.50 8/02/99 98,780
100,000 Student Loan Marketing Association...... 5.81 1/27/00 99,900
250,000 Student Loan Marketing Association+..... 5.576 2/04/00 249,904
200,000 US Treasury Notes....................... 5.625 11/30/98 200,250
100,000 US Treasury Notes....................... 5.625 12/31/99 100,094
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$3,755,146) 3,755,301
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$22,350,359)--100.1%........... 22,347,185
LIABILITIES IN EXCESS OF OTHER
ASSETS--(0.1%)........................ (19,763)
-----------
NET ASSETS--100.0%...................... $22,327,422
===========
- ------------------------------------------------------------------------------------------------------------------------
</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 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, 1998.
+ Variable Rate Note.
++ Subject to principal paydowns.
See Notes to Financial Statements.
232
<PAGE> 234
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$22,350,359*) (Note
1a)....................................................... $22,347,185
Receivables:
Interest.................................................. $164,829
Capital shares sold....................................... 24,207 189,036
--------
Prepaid expenses and other assets........................... 17,925
-----------
Total assets................................................ 22,554,146
-----------
- ------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 206,429
Capital shares redeemed................................... 11,024
Investment adviser (Note 2)............................... 9,061 226,514
--------
Accrued expenses and other liabilities...................... 210
-----------
Total liabilities........................................... 226,724
-----------
- ------------------------------------------------------------------------------------
NET ASSETS.................................................. $22,327,422
===========
- ------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 500,000,000
shares authorized+........................................ $ 2,233,060
Paid-in capital in excess of par............................ 20,097,536
Unrealized depreciation on investments--net................. (3,174)
-----------
NET ASSETS.................................................. $22,327,422
===========
- ------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $22,327,422 and 22,330,596
shares outstanding........................................ $ 1.00
===========
- ------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. As of June 30, 1998, net unrealized
depreciation for Federal income tax purposes amounted to $3,174, of which
$1,317 related to appreciated securities and $4,491 related to depreciated
securities.
+ The Fund is authorized to issue 500,000,000 Class B Shares.
See Notes to Financial Statements.
233
<PAGE> 235
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and discount earned................................ $620,241
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $54,211
Custodian fees.............................................. 5,408
Professional fees........................................... 3,946
Transfer agent fees (Note 2)................................ 2,295
Accounting services (Note 2)................................ 2,287
Printing and shareholder reports............................ 1,176
Directors' fees and expenses................................ 228
Other....................................................... 872
-------
Total expenses.............................................. 70,423
--------
Investment income--net...................................... 549,818
--------
- --------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTE
1d):
Realized gain on investments--net........................... 1,864
Change in unrealized appreciation/depreciation on
investments--net.......................................... (3,662)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $548,020
========
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
234
<PAGE> 236
- --------------------------------------------------------------------------------
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
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 549,818 $ 1,081,759
Realized gain on investments--net........................... 1,864 1,873
Change in unrealized appreciation/depreciation on
investments--net.......................................... (3,662) 740
----------- ------------
Net increase in net assets resulting from operations........ 548,020 1,084,372
----------- ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (549,818) (1,081,759)
Realized capital gain on investments--net:
Class A................................................... (1,864) (1,873)
----------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (551,682) (1,083,632)
----------- ------------
- --------------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares............................ 5,697,117 8,423,689
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions (Note 1e)..... 551,747 1,083,837
----------- ------------
6,248,864 9,507,526
Cost of shares redeemed..................................... (5,020,002) (11,291,415)
----------- ------------
Net increase (decrease) in net assets derived from capital
share transactions........................................ 1,228,862 (1,783,889)
----------- ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 1,225,200 (1,783,149)
Beginning of period......................................... 21,102,222 22,885,371
----------- ------------
End of period............................................... $22,327,422 $ 21,102,222
=========== ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
235
<PAGE> 237
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN CLASS A
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL -----------------------------------------------------------
STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 1994
<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 .0506 .0501 .0543 .0371
Realized and unrealized gain (loss) on
investments--net...................................... (.0001) .0001 (.0005) .0018 (.0009)
------- ------- ------- ------- -------
Total from investment operations........................ .0249 .0507 .0496 .0561 .0362
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................ (.0250) (.0506) (.0501) (.0543) (.0362)
Realized gain on investments--net..................... (.0001) (.0001) (.0001) (.0004) --+
------- ------- ------- ------- -------
Total dividends and distributions....................... (.0251) (.0507) (.0502) (.0547) (.0362)
------- ------- ------- ------- -------
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...................... 5.09%* 5.19% 5.13% 5.61% 3.79%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................ .65%* .62% .61% .61% .65%
======= ======= ======= ======= =======
Investment income and realized gain on
investments--net...................................... 5.09%* 5.06% 4.96% 5.47% 3.75%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $22,327 $21,102 $22,885 $25,550 $32,196
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Amount is less than $.0001 per share.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
236
<PAGE> 238
- --------------------------------------------------------------------------------
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 18 separate funds. Each fund
offers two 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 that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. 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) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additional securities daily to ensure that the contract is fully collateralized.
(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 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).
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.
(e) 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 funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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.
237
<PAGE> 239
- --------------------------------------------------------------------------------
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
is the Fund's distributor.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, 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.
238
<PAGE> 240
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
JUNE 30, 1998--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Increasing volatility characterized the capital markets during the six-month
period ended June 30, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would impact US exports
and the US trade deficit and slow overall US business activity. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by developments in Asia. To
date, there have been only a few signs that Asia's troubles are influencing US
economic activity--such as a surge in the accumulation of inventories--largely
because domestic demand has remained strong. In Europe, the major event was the
greater progress toward achieving European Monetary Union, although there were
concerns that interest rates may have to be increased, especially in the United
Kingdom, to curtail potential inflationary pressures.
As we move into the second half of 1998, it is likely that investor focus will
remain on developments in Asia. The US Federal Reserve Board has kept monetary
policy on hold as the Asian financial crisis deepened, which has benefited US
bond and stock prices. Looking ahead, if there is continued evidence of
noninflationary economic growth, it should have a positive influence on the US
capital markets.
PORTFOLIO MATTERS
During the six months ended June 30, 1998, the Fund significantly outperformed
the unmanaged Russell 2000 Index as the Fund's Class A Shares had a total return
of +9.76%, compared to the total return of +4.93% for the Russell 2000 Index.
The Fund's outperformance relative to the benchmark is attributable to our stock
selection, since the Fund's sector positioning had a neutral impact on
performance during the six-month period.
The Russell 2000 Index of small-capitalization stocks lagged the broad market
averages during the first half of the calendar year as investors favored more
liquid large-capitalization issues. Both the unmanaged Dow Jones Industrial
Average and the unmanaged Standard & Poor's 500 Composite Index (S&P 500)
appreciated sharply during the six-month period ended June 30, 1998, while the
Russell 2000 Index appreciated more modestly. The +4.93% total return provided
by the Russell 2000 Index trailed the +17.71% total return provided by the S&P
500 for the same six-month period.
Within the benchmark Russell 2000 Index, the consumer discretionary,
transportation and utilities sectors posted the steepest advances, while the
healthcare and energy sectors declined. The Fund's investment performance was
hindered by a lack of investments in the utilities sector, but the overweighting
in the transportation sector neutralized the impact. On balance, Fund
performance was neither helped nor hurt by our sector allocation strategy.
The Fund's specific stock holdings sharply outperformed their respective
sectors in the benchmark Russell 2000 Index. Individual stocks that most
benefited Fund performance during the six-month period included Visix Inc. and
Paxson Communications Corp. Shares of Visix Inc., a developer of laser vision
correction technologies, rallied sharply as first-quarter earnings exceeded
analysts' expectations and the company resolved a long-standing legal dispute.
Sharp price appreciation and the large size of the investment position combined
to make Visix Inc. a leading contributor to Fund performance during the June
quarter. Shares of Paxson Communications Corp., a broadcast television network,
also rallied. Recent television station acquisitions have drawn attention to the
value of the company's broadcast properties and to the potential for increased
cash flow with the launch of family-oriented programming later this year.
As small-capitalization stocks faltered during the first half of the year, we
actively accumulated investments where we believed the long-term earnings growth
prospects were favorable. Price declines in computer distribution and oil
services stocks provided opportunities to increase existing positions and
acquire new investments at attractive valuation levels. Meanwhile, we reduced
investments in the biotechnology and leisure industries.
Looking ahead, we are concerned about a potential slowdown in US economic
growth. A weak domestic economy generally does not provide a favorable
investment climate for small-capitalization stocks. However, we believe relative
valuations still favor small-capitalization stocks over large-capitalization
stocks, and the earnings outlook remains favorable. The quarter ended March 31,
1998 marked the fourth consecutive quarter in which earnings growth for the
Russell 2000 Index exceeded large compa-
239
<PAGE> 241
- --------------------------------------------------------------------------------
nies' earnings growth as measured by composite earnings for the S&P 500.
IN CONCLUSION
We appreciate your investment in Special Value Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Daniel V. Szemis
Daniel V. Szemis
Senior Vice President and Co-Portfolio Manager
/s/ R. Elise Baum
R. Elise Baum
Vice President and Co-Portfolio Manager
August 3, 1998
240
<PAGE> 242
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +14.34% +9.76%
- -----------------------------------------------------------------------------------------
Class B Shares - 2.43** +9.85
- -----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. Past results shown
should not be considered a representation of future performance.
** Total return is for the period from 10/23/97 (commencement of operations) to
6/30/98.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/98 +14.34%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +15.98
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +10.93
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
AGGREGATE TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Inception (10/23/97) through 6/30/98 -2.43%
- --------------------------------------------------------------------------------
241
<PAGE> 243
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
SECTOR* HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUTO & TRANSPORTATION
- -----------------------------------------------------------------------------------------------------------------------
116,900 Air Express International
Corporation................. $ 2,817,000 $ 3,127,075 0.6%
247,200 Circle International
Group Inc................... 6,418,341 6,921,600 1.3
208,300 +Landair Services, Inc........ 4,367,727 6,118,812 1.2
172,700 Meritor Automotive, Inc....... 3,798,340 4,144,800 0.8
583,000 +Miller Industries, Inc....... 5,415,932 4,518,250 0.8
225,900 Walbro Corp................... 4,338,063 3,162,600 0.6
------------ ------------ -----
27,155,403 27,993,137 5.3
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY
- -----------------------------------------------------------------------------------------------------------------------
650,900 +APAC Teleservices, Inc....... 6,111,132 3,783,356 0.7
144,100 +Boise Cascade Office Products
Corporation................. 2,387,683 2,233,550 0.4
292,000 +Caribiner International
Inc......................... 6,408,065 5,110,000 1.0
622,000 Danka Business Systems PLC
(ADR)**..................... 11,880,151 7,347,375 1.4
115,100 Dover Downs Entertainment
Inc......................... 2,868,975 3,568,100 0.7
69,900 +Global DirectMail Corp....... 1,556,007 882,487 0.2
161,000 +HA-LO Industries, Inc........ 3,433,385 5,011,125 1.0
490,000 Heilig-Meyers Company......... 6,938,485 6,033,125 1.1
183,200 +ITI Technologies, Inc........ 4,425,974 5,175,400 1.0
401,700 +Micro Warehouse, Inc......... 5,010,100 6,176,137 1.2
742,767 +Midway Games Inc............. 11,641,415 11,605,734 2.2
773,900 +Paxson Communications
Corp........................ 8,351,931 9,383,538 1.8
248,500 +Sodak Gaming, Inc............ 3,051,238 1,553,125 0.3
231,900 Unitog Company................ 5,649,579 5,101,800 1.0
313,900 +WMS Industries, Inc.......... 989,245 1,314,456 0.2
------------ ------------ -----
80,703,365 74,279,308 14.2
- -----------------------------------------------------------------------------------------------------------------------
ENERGY
- -----------------------------------------------------------------------------------------------------------------------
103,200 +Barrett Resources
Corporation................. 3,228,040 3,863,550 0.7
150,400 +Basin Explorations Inc....... 2,580,355 2,650,800 0.5
312,100 +Benton Oil & Gas Co.......... 4,636,227 3,316,062 0.6
162,000 +Brown (Tom) Inc.............. 3,571,862 3,047,625 0.6
181,000 +Forcenergy Inc............... 4,054,323 3,224,062 0.6
200,000 +Key Energy Group, Inc........ 3,089,854 2,625,000 0.5
198,900 +Louis Dreyfus Natural Gas
Corp........................ 3,755,967 3,766,669 0.7
214,800 +Newpark Resources, Inc....... 2,730,031 2,389,650 0.5
50,000 +Plains Resources, Inc........ 748,212 896,875 0.2
82,400 +Stone Energy Corporation..... 2,900,168 2,930,350 0.6
------------ ------------ -----
31,295,039 28,710,643 5.5
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES
- -----------------------------------------------------------------------------------------------------------------------
47,350 American National
Insurance Co................ 4,420,316 4,951,034 0.9
124,300 +BISYS Group, Inc. (The)...... 4,120,527 5,096,300 1.0
156,360 Charter One Financial, Inc.... 3,874,422 5,247,833 1.0
91,000 HCC Insurance
Holdings, Inc............... 1,509,200 2,002,000 0.4
53,000 National Data Corporation..... 1,975,236 2,318,750 0.4
187,100 PXRE Corp..................... 4,954,722 5,613,000 1.1
------------ ------------ -----
20,854,423 25,228,917 4.8
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
242
<PAGE> 244
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
SECTOR* HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTHCARE
- -----------------------------------------------------------------------------------------------------------------------
137,835 +AXYS Pharmaceuticals, Inc.... $ 1,360,557 $ 964,845 0.2%
59,400 +Biomatrix, Inc............... 2,049,300 2,413,125 0.5
137,300 +COR Therapeutics, Inc........ 1,501,776 1,905,038 0.4
91,000 +DVI, Inc..................... 2,029,777 2,320,500 0.4
135,000 +EndoSonics Corporation....... 1,255,474 801,563 0.1
217,000 +Genome Therapeutics
Corporation................. 1,852,452 969,719 0.2
448,600 +HCIA Inc..................... 5,508,525 5,803,763 1.1
242,850 +Magainin
Pharmaceuticals, Inc........ 2,567,638 1,244,606 0.2
196,600 +Magellan Health
Services, Inc............... 5,058,630 4,988,725 0.9
628,000 +MedPartners, Inc............. 6,166,121 5,024,000 1.0
291,000 +NABI, Inc.................... 2,103,909 882,094 0.2
160,000 +NeoRx Corp................... 1,034,843 770,000 0.1
76,000 +Neurogen Corporation......... 1,014,406 1,349,000 0.3
87,600 +Pharmaceutical Product
Development, Inc............ 1,145,911 1,927,200 0.4
77,200 +Pharmacopeia, Inc............ 1,391,293 1,100,100 0.2
175,000 +Scios Inc.................... 1,232,798 1,547,656 0.3
85,500 +Sierra Health Services,
Inc......................... 1,774,125 2,153,531 0.4
540,300 +VISX, Inc.................... 11,968,332 32,147,850 6.1
------------ ------------ -----
51,015,867 68,313,315 13.0
- -----------------------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING
- -----------------------------------------------------------------------------------------------------------------------
257,400 +ACX Technologies, Inc........ 5,969,072 5,598,450 1.1
250,000 Apogee Enterprises, Inc....... 2,973,387 3,812,500 0.7
133,100 Castle (A.M.) & Company....... 2,990,833 2,928,200 0.6
197,800 +Citation Corp................ 3,030,695 3,943,637 0.7
411,400 Commonwealth
Industries Inc.............. 7,950,098 4,062,575 0.8
8,300 Foamex International Inc...... 109,575 144,212 0.0
109,000 +Giant Cement Holdings,
Inc......................... 2,256,953 3,106,500 0.6
117,000 Inland Steel Industries,
Inc......................... 3,409,244 3,297,937 0.6
361,800 +Insituform Technologies, Inc.
(Class A)................... 3,108,006 4,997,363 1.0
13,700 Internet Corporation.......... 246,600 248,312 0.1
124,800 +Novamerican Steel Inc........ 1,448,747 904,800 0.2
246,000 +Paxar Corporation............ 3,532,266 2,829,000 0.5
92,200 Quanex Corp................... 2,591,707 2,794,813 0.5
103,000 +Ryerson Tull, Inc. (Class
A).......................... 1,589,378 2,111,500 0.4
308,000 +Shiloh Industries, Inc....... 6,067,867 6,237,000 1.2
138,000 +Wolverine Tube, Inc.......... 4,059,788 5,244,000 1.0
------------ ------------ -----
51,334,216 52,260,799 10.0
- -----------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS
- -----------------------------------------------------------------------------------------------------------------------
200,000 +Dan River Inc. (Class A)..... 3,009,997 3,400,000 0.7
612,900 +Metromedia International
Group, Inc.................. 7,257,681 7,316,494 1.4
136,700 +Primark Corp................. 3,866,666 4,280,419 0.8
256,000 +SITEL Corp................... 2,288,618 1,696,000 0.3
258,400 +Scott Technologies, Inc.
(Class A)................... 3,597,088 3,779,100 0.7
------------ ------------ -----
20,020,050 20,472,013 3.9
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
243
<PAGE> 245
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
SECTOR* HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCER DURABLES
- -----------------------------------------------------------------------------------------------------------------------
101,000 AGCO Corp..................... $ 3,164,545 $ 2,076,813 0.4%
120,500 +Allen Telecom, Inc........... 1,995,561 1,400,812 0.3
196,450 Applied Industrial
Technologies, Inc........... 4,768,850 4,039,503 0.8
373,200 +Brown & Sharpe Manufacturing
Company (Class A)........... 4,914,080 4,478,400 0.9
59,000 +Cuno Incorporated............ 844,588 1,275,875 0.2
150,000 +DONCASTERS
PLC (ADR)**................. 3,921,500 4,171,875 0.8
246,000 +ESCO Electronics
Corporation................. 4,306,683 4,674,000 0.9
117,600 General Cable Corp............ 2,176,335 3,395,700 0.6
64,000 Kennametal Inc................ 2,875,932 2,672,000 0.5
14,700 +Kent Electronics
Corporation................. 294,882 269,194 0.1
130,000 Oakwood Homes
Corporation................. 2,944,753 3,900,000 0.7
142,500 Ryland Group, Inc. (The)...... 2,316,947 3,740,625 0.7
202,000 Stewart & Stevenson Services,
Inc......................... 5,046,027 3,585,500 0.7
169,000 +Toll Brothers, Inc........... 3,564,163 4,848,188 0.9
79,000 +Triumph Group, Inc........... 2,256,240 3,318,000 0.6
------------ ------------ -----
45,391,086 47,846,485 9.1
- -----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY
- -----------------------------------------------------------------------------------------------------------------------
263,400 +Alpha Industries, Inc........ 3,938,816 3,934,538 0.7
279,000 +Anixter International Inc.... 4,817,958 5,318,437 1.0
211,100 +Bell Industries, Inc. ....... 3,362,044 2,401,263 0.5
4,300 +Black Box Corporation........ 141,900 142,706 0.0
287,000 +Boole & Babbage, Inc......... 4,240,250 6,852,125 1.3
122,500 +Brite Voice Systems, Inc..... 1,011,216 1,393,437 0.3
101,200 +Broderbund Software, Inc..... 1,922,060 2,302,300 0.4
665,500 +CHS Electronics, Inc......... 12,476,724 11,812,625 2.2
100,000 +C.P. Clare Corporation....... 1,272,313 950,000 0.2
78,900 +Cylink Corporation........... 1,137,344 946,800 0.2
323,200 +DII Group, Inc............... 7,794,400 5,514,600 1.1
412,000 +DSP Communications, Inc...... 7,398,539 5,665,000 1.1
154,800 +Hadco Corporation............ 5,763,341 3,579,750 0.7
196,402 +Harbinger Corporation........ 2,948,800 4,750,473 0.9
135,200 +Harmonic Lightwaves, Inc..... 2,119,230 2,078,700 0.4
292,100 +IKOS Systems, Inc............ 2,561,201 1,141,016 0.2
45,000 +Information Resources,
Inc......................... 803,559 832,500 0.1
283,300 +Learning Company,
Inc. (The).................. 3,851,176 8,392,763 1.6
726,200 +Mentor Graphics
Corporation................. 7,396,500 7,670,487 1.5
308,600 +Network Equipment
Technologies, Inc........... 4,760,887 4,841,163 0.9
408,500 +Phoenix Technologies Ltd..... 5,562,148 5,157,313 1.0
289,800 +Planar Systems, Inc.......... 3,436,828 3,042,900 0.6
193,300 +Platinum Technology, Inc..... 4,771,298 5,521,131 1.1
295,000 +Rational Software
Corporation................. 4,268,729 4,498,750 0.8
223,200 +Read-Rite Corporation........ 2,150,835 2,008,800 0.4
93,500 +Sterling Commerce, Inc....... 3,154,307 4,534,750 0.9
133,400 +Storage Technology Corp...... 3,213,627 5,786,225 1.1
602,551 +Structural Dynamics Research
Corporation................. 13,720,375 13,858,673 2.6
633,900 +Sybase, Inc.................. 8,675,349 4,397,681 0.8
244,100 Telxon Corporation............ 5,620,174 7,841,713 1.5
115,000 +TriQuint Semiconductor,
Inc......................... 2,338,199 2,185,000 0.4
------------ ------------ -----
136,630,127 139,353,619 26.5
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
244
<PAGE> 246
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
SECTOR* HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UTILITIES
- -----------------------------------------------------------------------------------------------------------------------
316,600 +Applied Digital Access,
Inc......................... $ 2,460,145 $ 1,583,000 0.3%
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 466,859,721 486,041,236 92.6
- -----------------------------------------------------------------------------------------------------------------------
FACE AMOUNT
SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER*** $10,000,000 Finova Capital Corp., 5.53%
due 8/03/1998............... 9,947,772 9,947,772 1.9
9,726,000 General Motors Acceptance
Corp., 6.50% due 7/01/1998.. 9,724,244 9,724,244 1.9
10,000,000 Lexington Parker Capital Co.
LLC, 5.58% due 7/17/1998.... 9,973,650 9,973,650 1.9
10,000,000 Park Avenue Receivables Corp.,
5.55% due 7/14/1998......... 9,978,417 9,978,417 1.9
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 39,624,083 39,624,083 7.6
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............. $506,483,804 525,665,319 100.2
============
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (1,008,822) (0.2)
------------ -----
NET ASSETS.................... $524,656,497 100.0%
============ =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Holdings are classified into the economic sectors found in the Russell 2000
Index.
** American Depositary Receipts (ADR).
*** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
245
<PAGE> 247
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$506,483,804) (Note
1a)....................................................... $525,665,319
Cash........................................................ 119,901
Receivables:
Securities sold........................................... $4,263,521
Capital shares sold....................................... 257,839
Dividends................................................. 70,941.... 4,592,301
----------
Prepaid expenses and other assets........................... 28,983
------------
Total assets................................................ 530,406,504
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 4,856,098
Capital shares redeemed................................... 485,306
Investment adviser (Note 2)............................... 347,955
Distributor (Note 2)...................................... 361 5,689,720
----------
Accrued expenses and other liabilities...................... 60,287
------------
Total liabilities........................................... 5,750,007
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $524,656,497
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... $ 2,236,704
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... 3,734
Paid-in capital in excess of par............................ 482,800,222
Undistributed investment income--net........................ 287,573
Undistributed realized capital gains on investment--net..... 20,146,749
Unrealized appreciation on investments--net................. 19,181,515
------------
NET ASSETS.................................................. $524,656,497
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $523,781,596 and 22,367,038
shares outstanding........................................ $ 23.42
============
Class B--Based on net assets of $874,901 and 37,343 shares
outstanding............................................... $ 23.43
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
246
<PAGE> 248
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Interest and discount earned................................ $ 1,647,496
Dividends (net of $12,751 foreign withholding tax).......... 734,536
-----------
Total income................................................ 2,382,032
-----------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $1,980,173
Accounting services (Note 2)................................ 44,865
Custodian fees.............................................. 28,457
Professional fees........................................... 17,845
Printing and shareholder reports............................ 11,466
Directors' fees and expenses................................ 5,571
Transfer agent fees (Note 2)................................ 2,332
Registration fees........................................... 492
Distribution fees--Class B (Note 2)......................... 327
Pricing services............................................ 165
Other....................................................... 2,751
----------
Total expenses.............................................. 2,094,444
-----------
Investment income--net...................................... 287,588
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1d
& 3):
Realized gain on investments--net........................... 20,441,421
Change in unrealized appreciation/depreciation on
investments--net.......................................... 26,025,389
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $46,754,398
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
247
<PAGE> 249
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 287,588 $ 1,476,791
Realized gain on investments--net........................... 20,441,421 109,665,458
Change in unrealized appreciation/depreciation on
investments--net.......................................... 26,025,389 (60,400,517)
------------- ------------
Net increase in net assets resulting from operations........ 46,754,398 50,741,732
------------- ------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (1,476,063) (1,422,649)
Class B................................................... (726) --
Realized gain on investments--net:
Class A................................................... (109,791,780) (22,153,543)
Class B................................................... (56,533) --
------------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (111,325,102) (23,576,192)
------------- ------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 107,365,482 1,666,914
------------- ------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 42,794,778 28,832,454
Beginning of period......................................... 481,861,719 453,029,265
------------- ------------
End of period*.............................................. $524,656,497 $481,861,719
============= ============
- ------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 287,573 $ 1,476,774
============= ============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
248
<PAGE> 250
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A+
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 27.75 $ 26.22 $ 27.98 $ 19.26 $ 20.96
-------- -------- -------- -------- --------
Investment income--net.............................. .01 .09 .13 .17 .05
Realized and unrealized gain (loss) on
investments--net.................................. 2.08 2.80 1.84 8.64 (1.56)
-------- -------- -------- -------- --------
Total from investment operations.................... 2.09 2.89 1.97 8.81 (1.51)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.09) (.08) (.14) (.09) --
Realized gain on investments--net................. (6.33) (1.28) (3.59) -- (.19)
-------- -------- -------- -------- --------
Total dividends and distributions................... (6.42) (1.36) (3.73) (.09) (.19)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 23.42 $ 27.75 $ 26.22 $ 27.98 $ 19.26
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 9.76%++ 11.72% 8.11% 45.90% (7.27%)
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .79%* .80% .81% .81% .83%
======== ======== ======== ======== ========
Investment income--net.............................. .11%* .32% .50% .72% .27%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $523,781 $481,614 $453,029 $339,921 $170,044
======== ======== ======== ======== ========
Portfolio turnover.................................. 31.84% 147.06% 80.84% 96.79% 88.48%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
249
<PAGE> 251
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B+++
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE ---------------------------------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED OCTOBER 23, 1997+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 27.74 $ 31.23
------- --------
Investment loss--net........................................ --++++ (.01)
Realized and unrealized gain (loss) on investments--net..... 2.10 (3.48)
------- --------
Total from investment operations............................ 2.10 (3.49)
------- --------
Less dividends and distributions:
Investment income--net.................................... (.08) --
Realized gain on investments--net......................... (6.33) --
------- --------
Total dividends and distributions........................... (6.41) --
------- --------
Net asset value, end of period.............................. $ 23.43 $ 27.74
======= ========
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 9.85%++ (11.18%)++
======= ========
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .94%* .96%*
======= ========
Investment loss--net........................................ (.04%)* (.24%)*
======= ========
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $ 875 $ 248
======= ========
Portfolio turnover.......................................... 31.84% 147.06%
======= ========
- ------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
+++ Based on average shares outstanding.
++ Aggregate total investment return.
++++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
250
<PAGE> 252
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL 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 18 separate funds. Each fund
offers two 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, that are
not affiliated with ML & Co., for their separate accounts to fund benefits under
certain variable annuity and variable life insurance contracts. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. Special 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) 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. The Company has also entered into a Distribution
Agreement and Distribution Plan with Merrill
251
<PAGE> 253
- --------------------------------------------------------------------------------
Lynch Funds Distributor ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
MLAM is responsible for the management of the Company's funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. 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.
Pursuant to the Distribution Plan adopted by the Company, in accordance with
Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the
Distributor an ongoing distribution fee each month at the annual rate of 0.15%
of the average daily value of the Fund's Class B net assets.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such 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, 1998, Merrill Lynch, Pierce, Fenner & Smith
Inc., a subsidiary of ML & Co., earned $27,682 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 Fund by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, MLFDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1998 were $154,955,762 and $151,010,080, respectively.
Net realized gains for the six months ended June 30, 1998 and net unrealized
gains as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $20,441,421 $19,181,515
----------- -----------
Total.................................. $20,441,421 $19,181,515
=========== ===========
- ------------------------------------------------------------------
</TABLE>
At June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $19,181,515, of which $69,611,066 related to appreciated securities
and $50,429,551 related to depreciated securities. At June 30, 1998, the
aggregate cost of investments for Federal income tax purposes was $506,483,804.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$107,365,482 and $1,666,914 for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 1,161,914 $ 26,979,488
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 5,216,495 111,267,843
---------- ------------
Total issued........................... 6,378,409 138,247,331
Shares redeemed........................ (1,366,816) (31,546,947)
---------- ------------
Net increase........................... 5,011,593 $106,700,384
========== ============
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1997 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 2,566,273 $ 68,132,882
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 960,725 23,576,192
---------- ------------
Total issued........................... 3,526,998 91,709,074
Shares redeemed........................ (3,446,348) (90,294,889)
---------- ------------
Net increase........................... 80,650 $ 1,414,185
========== ============
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class B Shares for the Six Months Ended Dollar
June 30, 1998 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 27,182 $ 642,488
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 2,686 57,259
---------- ------------
Total issued........................... 29,868 699,747
Shares redeemed........................ (1,461) (34,649)
---------- ------------
Net increase........................... 28,407 $ 665,098
========== ============
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class B Shares for the Period Dollar
October 23, 1997+ to December 31, 1997 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 10,276 $ 291,595
Shares redeemed........................ (1,340) (38,866)
---------- ------------
Net increase........................... 8,936 $ 252,729
========== ============
- --------------------------------------------------------------------
+ Commencement of operations.
</TABLE>
252
<PAGE> 254
- ---------------------------------------------------------
MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.
- ---------------------------------------------------------
PRINCIPAL OFFICE OF THE FUNDS
Box 9011
Princeton, NJ 08543-9011
DISTRIBUTOR
Princeton 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:
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
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
President
Joe Grills
Director
Walter Mintz
Director
Robert S. Salomon Jr.
Director
Melvin R. Seiden
Director
Stephen B. Swensrud
Director
Terry K. Glenn
Executive Vice President
Christopher G. Ayoub
Senior Vice President
Lawrence R. Fuller
Senior Vice President
Jay C. Harbeck
Senior Vice President
Norman R. Harvey
Senior Vice President
Vincent T. Lathbury III
Senior Vice President
Kevin J. McKenna
Senior Vice President
Eric S. Mitofsky
Senior Vice President
Joseph T. Monagle Jr.
Senior Vice President
Grace Pineda
Senior Vice President
Kevin M. Rendino
Senior Vice President
Thomas R. Robinson
Senior Vice President
Walter D. Rogers
Senior Vice President
Kurt Schansinger
Senior Vice President
Robert M. Shearer
Senior Vice President
Daniel V. Szemis
Senior Vice President
Paolo H. Valle
Senior Vice President
R. Elise Baum
Vice President
Donald C. Burke
Vice President
Robert F. Murray
Vice President
Jacqueline L. Rogers
Vice President
Gerald M. Richard
Treasurer
Jennifer L. Sawin
Secretary
<PAGE> 255
- --------------------------------------------------------------------------------
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. The Domestic
Money Market Fund and Reserve Assets Fund 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
#16897-6/98
