<PAGE> 1
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE
-------------------------------------------------------------------------
SERIES FUNDS, INC.
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Balanced Fund................ 1
Basic Value Focus Fund................ 13
Capital Focus Fund.................... 25
Developing Capital Markets Focus
Fund................................ 39
Domestic Money Market Fund............ 58
Global Bond Focus Fund................ 69
Global Growth Focus Fund.............. 83
Global Strategy Focus Fund............ 98
Global Utility Focus Fund............. 116
Government Bond Fund.................. 130
High Current Income Fund.............. 142
Index 500 Fund........................ 160
International Equity Focus Fund....... 176
Natural Resources Focus Fund.......... 199
Prime Bond Fund....................... 212
Quality Equity Fund................... 227
Reserve Assets Fund................... 240
Special Value Focus Fund.............. 249
</TABLE>
Semi-Annual Report
June 30, 1999
<PAGE> 2
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. Meanwhile, Japan reported its first quarter of
positive economic growth in more than one year. There were growing signs of
improvement in some emerging economies (most notably South Korea and Mexico),
although concerns remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
PORTFOLIO MATTERS
As of June 30, 1999, the Fund's asset allocation was: US bonds, 44% of net
assets; US stocks, 52%; and cash reserves, 4%.
We reduced the Fund's allocation to US equities from 55% of net assets as of
December 31, 1998 to 52% as of June 30, 1999. We continued to believe that
investors will favor the shares of companies that offer a high degree of
earnings visibility in a steady growth/low inflationary economy. On this basis,
technology remained the largest single group represented among our US equity
commitments. Positions established in the technology sector during the past
three months included Sun Microsystems, Inc., Xerox Corporation and Siebel
Systems, Inc. Consumer staples, including healthcare and financial services,
also continued to account for a significant portion of US equity assets.
We increased the Fund's US bond commitment from 40% of net assets to 44%
during the six months ended June 30, 1999. We also increased the average
duration from 5.4 years to 7.0 years. Contrary to our earlier expectations, the
strength of the US economy persisted during the second quarter of 1999. However,
we expect the rise in intermediate-term and longer-term interest rates which has
taken place in recent months to gradually slow the rate of US economic growth in
coming quarters. In our view, any resultant reduction of inflationary
expectations would be likely to be supportive of a decline in US interest rates
during the second half of 1999.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
July 28, 1999
1
<PAGE> 3
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 + 6.54%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +13.26
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +10.78
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +6.54% +4.56%
</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.
2
<PAGE> 4
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 13,645 United Technologies
Corporation............... $ 506,717 $ 978,176 0.6%
- -----------------------------------------------------------------------------------------------------------------------
APPLICATION DEVELOPMENT 12,500 +Siebel Systems, Inc. ...... 461,524 828,125 0.5
SOFTWARE
- -----------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 28,400 Delphi Automotive Systems
Corporation............... 482,800 527,175 0.3
- -----------------------------------------------------------------------------------------------------------------------
AUTO-RELATED 14,700 The Hertz Corporation (Class
A)........................ 537,700 911,400 0.5
- -----------------------------------------------------------------------------------------------------------------------
BANKING 12,871 Bank of America
Corporation............... 633,565 943,605 0.5
8,100 The Bank of New York
Company, Inc. ............ 207,762 297,169 0.2
------------ ------------ -----
841,327 1,240,774 0.7
- -----------------------------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 34,800 Mellon Bank Corporation..... 1,115,441 1,265,850 0.7
6,850 Providian Financial
Corporation............... 288,333 640,475 0.4
------------ ------------ -----
1,403,774 1,906,325 1.1
- -----------------------------------------------------------------------------------------------------------------------
BEVERAGES 38,000 PepsiCo, Inc. .............. 1,455,646 1,470,125 0.8
- -----------------------------------------------------------------------------------------------------------------------
BROADCASTING--CABLE 55,568 +AT&T Corp.--Liberty Media
Group (Class A)........... 657,891 2,042,124 1.2
- -----------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 17,100 +American Tower Corporation
(Class A)................. 427,500 410,400 0.2
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 3,900 Eaton Corporation........... 262,734 358,800 0.2
3,400 Hewlett-Packard Company..... 249,553 341,700 0.2
------------ ------------ -----
512,287 700,500 0.4
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 12,550 E.I. du Pont de Nemours and
Company................... 787,957 857,322 0.5
27,000 Rohm and Haas Company....... 1,023,884 1,157,625 0.6
------------ ------------ -----
1,811,841 2,014,947 1.1
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 24,980 +Quintiles Transnational
Corp. .................... 1,161,643 1,047,599 0.6
- -----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 32,600 +MCI WorldCom Inc. ......... 1,066,855 2,803,600 1.6
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 8,600 +America Online, Inc. ...... 744,866 950,300 0.5
42,400 +Cisco Systems, Inc. ....... 874,233 2,732,150 1.6
------------ ------------ -----
1,619,099 3,682,450 2.1
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 5,800 +Transaction Systems
Architects, Inc. (Class
A)........................ 232,943 226,200 0.1
- -----------------------------------------------------------------------------------------------------------------------
COMPUTERS 13,950 +Dell Computer
Corporation............... 437,278 515,278 0.3
7,400 +EMC Corporation............ 257,922 407,000 0.2
19,000 International Business
Machines Corporation...... 998,789 2,455,750 1.4
3,700 +Sun Microsystems, Inc. .... 226,646 254,837 0.2
33,000 Tandy Corporation........... 927,701 1,612,875 0.9
------------ ------------ -----
2,848,336 5,245,740 3.0
- -----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 54,100 The Dial Corporation........ 1,138,100 2,011,844 1.1
- -----------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 13,150 General Electric Company.... 1,106,811 1,485,950 0.8
22,250 Intel Corporation........... 1,372,993 1,322,484 0.8
9,400 +Lattice Semiconductor
Corporation............... 472,175 582,800 0.3
19,750 Motorola, Inc. ............. 1,106,220 1,871,312 1.1
12,300 PECO Energy Company......... 419,240 515,062 0.3
------------ ------------ -----
4,477,439 5,777,608 3.3
- -----------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT 40,800 +Premier Parks Inc. ........ 1,200,176 1,499,400 0.9
7,100 The Walt Disney Company..... 248,335 218,769 0.1
------------ ------------ -----
1,448,511 1,718,169 1.0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCE 7,200 +The Goldman Sachs Group,
Inc. ..................... $ 381,600 $ 520,200 0.3%
12,600 +TD Waterhouse Group,
Inc. ..................... 302,400 315,787 0.2
------------ ------------ -----
684,000 835,987 0.5
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 13,000 Associates First Capital
Corporation (Class A)..... 447,457 576,063 0.3
10,000 Citigroup Inc. ............. 458,660 475,000 0.3
22,200 Wells Fargo Company......... 883,552 949,050 0.5
------------ ------------ -----
1,789,669 2,000,113 1.1
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- 30,000 Household International,
CONSUMER Inc. ..................... 1,296,256 1,421,250 0.8
- -----------------------------------------------------------------------------------------------------------------------
FOOD 32,900 +Keebler Foods Company...... 948,933 999,338 0.6
- -----------------------------------------------------------------------------------------------------------------------
HARDWARE TOOLS 9,750 The Black & Decker
Corporation............... 538,543 615,469 0.3
- -----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 8,300 Colgate-Palmolive Company... 761,689 819,625 0.5
- -----------------------------------------------------------------------------------------------------------------------
INFORMATION PROCESSING 16,800 +Unisys Corporation......... 548,526 654,150 0.4
4,100 Xerox Corporation........... 229,557 242,156 0.1
------------ ------------ -----
778,083 896,306 0.5
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE 4,400 American International
Group, Inc. .............. 515,211 515,075 0.3
6,800 +Clear Channel
Communications, Inc. ..... 480,282 468,775 0.2
7,100 The Equitable Companies
Incorporated.............. 390,533 475,700 0.3
------------ ------------ -----
1,386,026 1,459,550 0.8
- -----------------------------------------------------------------------------------------------------------------------
LASER SYSTEMS & COMPONENTS 5,650 +Uniphase Corporation....... 563,039 937,900 0.5
- -----------------------------------------------------------------------------------------------------------------------
MACHINERY 7,800 Case Corporation............ 222,134 375,375 0.2
4,400 Caterpillar Inc. ........... 244,174 264,000 0.1
37,000 Ingersoll-Rand Company...... 1,265,961 2,391,125 1.4
------------ ------------ -----
1,732,269 3,030,500 1.7
- -----------------------------------------------------------------------------------------------------------------------
MANUFACTURING 20,700 Tyco International Ltd. .... 1,105,429 1,961,325 1.1
- -----------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 13,550 Johnson & Johnson........... 1,077,394 1,327,900 0.7
- -----------------------------------------------------------------------------------------------------------------------
METAL 10,800 Alcoa Inc. ................. 418,712 668,250 0.4
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS 27,400 Enron Corp. ................ 1,317,942 2,239,950 1.3
- -----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 13,500 Mobil Corporation........... 1,076,841 1,336,500 0.7
28,900 Shell Transport & Trading
Company (ADR)(a).......... 1,052,565 1,340,237 0.8
------------ ------------ -----
2,129,406 2,676,737 1.5
- -----------------------------------------------------------------------------------------------------------------------
OIL SERVICES 15,900 Schlumberger Limited........ 1,134,511 1,012,631 0.6
- -----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 10,600 International Paper
Company................... 514,463 535,300 0.3
- -----------------------------------------------------------------------------------------------------------------------
PETROLEUM 32,000 Unocal Corporation.......... 1,218,447 1,268,000 0.7
- -----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 28,500 American Home Products
Corporation............... 1,670,610 1,638,750 0.9
42,400 Bristol-Myers Squibb
Company................... 2,037,333 2,986,550 1.7
21,000 Cardinal Health, Inc. ...... 1,454,366 1,346,625 0.7
6,400 Merck & Co., Inc. .......... 448,384 473,600 0.3
13,100 Pfizer Inc. ................ 1,707,348 1,437,725 0.8
7,600 Pharmacia & Upjohn, Inc. ... 480,322 431,775 0.2
------------ ------------ -----
7,798,363 8,315,025 4.6
- -----------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 77,700 +Capstar Broadcasting
Corporation (Class A)..... 1,476,300 2,127,038 1.2
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RETAIL 5,200 +Best Buy Co., Inc. ........ $ 244,556 $ 351,000 0.2%
15,600 Dayton Hudson Corporation... 1,082,887 1,014,000 0.6
4,200 +Federated Department
Stores, Inc. ............. 222,852 222,338 0.1
18,000 Lowe's Companies, Inc. ..... 661,091 1,020,375 0.6
25,900 +Safeway Inc................ 823,804 1,282,050 0.7
33,800 Wal-Mart Stores, Inc. ...... 711,804 1,630,850 0.9
------------ ------------ -----
3,746,994 5,520,613 3.1
- -----------------------------------------------------------------------------------------------------------------------
SAVINGS & LOAN ASSOCIATIONS 26,700 GreenPoint Financial
Corp. .................... 1,071,338 876,094 0.5
- -----------------------------------------------------------------------------------------------------------------------
SCIENTIFIC EQUIPMENT 14,100 Millipore Corporation....... 293,188 571,931 0.3
- -----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 7,100 +Applied Materials, Inc. ... 454,338 524,513 0.3
- -----------------------------------------------------------------------------------------------------------------------
SOFTWARE 40,500 +Microsoft Corporation...... 3,018,279 3,650,062 2.1
- -----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 39,408 AT&T Corp. ................. 642,274 2,199,440 1.2
31,100 Ameritech Corporation....... 1,492,120 2,285,850 1.3
29,000 GTE Corporation............. 1,465,251 2,196,750 1.2
16,500 Lucent Technologies Inc. ... 909,880 1,112,719 0.6
------------ ------------ -----
4,509,525 7,794,759 4.3
- -----------------------------------------------------------------------------------------------------------------------
TOBACCO 12,750 Philip Morris Companies
Inc. ..................... 584,781 512,391 0.3
- -----------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 11,000 Royal Caribbean Cruises
Ltd. ..................... 265,017 481,250 0.3
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 21,500 Public Service Enterprise
Group Incorporated........ 835,420 878,812 0.5
- -----------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 26,000 Waste Management, Inc. ..... 1,110,949 1,397,500 0.8
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 67,651,236 92,899,400 52.4
- -----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT FIXED-INCOME INVESTMENTS
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES $ 3,000,000 General Electric Capital
Corp., 8.75% due
5/21/2007................. 3,431,200 3,401,460 1.9
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 1,581,514 Federal Home Loan Mortgage
MORTGAGE-BACKED Corporation Participation
OBLIGATIONS** Certificates--Gold Program
#10036, 7.50% due
6/01/2007................. 1,611,662 1,608,832 0.9
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY Federal National Mortgage
OBLIGATIONS Association:
7,760,000 5.625% due 3/15/2001........ 7,783,338 7,746,653 4.4
8,110,000 5.125% due 2/13/2004........ 7,954,856 7,775,463 4.4
10,470,000 5.75% due 2/15/2008......... 10,418,393 10,010,262 5.7
9,550,000 5.25% due 1/15/2009......... 8,938,800 8,723,352 4.9
24,000,000 6.375% due 6/15/2009........ 23,962,512 23,797,440 13.4
13,975,000 US Treasury Bonds, 6.625%
due 2/15/2027............. 15,885,634 14,758,858 8.3
------------ ------------ -----
74,943,533 72,812,028 41.1
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS 79,986,395 77,822,320 43.9
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $ 4,879,000 General Motors Acceptance
Corp., 5.63% due
7/01/1999................. $ 4,878,237 $ 4,878,237 2.8%
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 4,878,237 4,878,237 2.8
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $152,515,868 175,599,957 99.1
============
OTHER ASSETS LESS
LIABILITIES............... 1,575,095 0.9
------------ -----
NET ASSETS.................. $177,175,052 100.0%
============ =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate 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 the original maturity.
+ Non-income producing security.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
6
<PAGE> 8
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$152,515,868) (Note
1a)....................................................... $175,599,957
Cash........................................................ 36
Receivables:
Securities sold........................................... $1,504,148
Interest.................................................. 1,226,195
Dividends................................................. 63,208
Capital shares sold....................................... 6,005 2,799,556
----------
Prepaid expenses and other assets........................... 14,571
------------
Total assets................................................ 178,414,120
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,042,114
Investment adviser (Note 2)............................... 86,532
Capital shares redeemed................................... 81,859 1,210,505
----------
Accrued expenses and other liabilities...................... 28,563
------------
Total liabilities........................................... 1,239,068
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $177,175,052
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 1,137,531
Paid-in capital in excess of par............................ 142,909,514
Undistributed investment income--net........................ 2,296,460
Undistributed realized capital gains on investments--net.... 7,747,458
Unrealized appreciation on investments--net................. 23,084,089
------------
NET ASSETS.................................................. $177,175,052
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $177,175,052 and 11,375,315
shares outstanding........................................ $ 15.58
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
7
<PAGE> 9
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Interest and discount earned................................ $ 2,382,150
Dividends (net of $2,551 foreign withholding tax)........... 458,344
-----------
Total income................................................ 2,840,494
-----------
- ------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $491,596
Accounting services (Note 2)................................ 17,692
Custodian fees.............................................. 12,558
Professional fees........................................... 9,049
Printing and shareholder reports............................ 7,216
Transfer agent fees (Note 2)................................ 2,513
Directors' fees and expenses................................ 1,989
Pricing services............................................ 277
Other....................................................... 1,140
--------
Total expenses.............................................. 544,030
-----------
Investment income--net...................................... 2,296,464
-----------
- ------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES
1b, 1d & 3):
Realized gain on investments--net........................... 7,870,247
Change in unrealized appreciation on investments--net....... (2,268,590)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 7,898,121
===========
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE> 10
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 2,296,464 $ 4,504,403
Realized gain on investments--net........................... 7,870,247 16,072,309
Change in unrealized appreciation on investments--net....... (2,268,590) 3,510,679
------------ ------------
Net increase in net assets resulting from operations........ 7,898,121 24,087,391
------------ ------------
- -----------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (4,504,398) (6,345,486)
Realized gain on investments--net:
Class A................................................... (15,975,712) (15,410,418)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (20,480,110) (21,755,904)
------------ ------------
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital
share transactions........................................ 2,672,570 (9,994,020)
------------ ------------
- -----------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (9,909,419) (7,662,533)
Beginning of period......................................... 187,084,471 194,747,004
------------ ------------
End of period*.............................................. $177,175,052 $187,084,471
============ ============
- -----------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 2,296,460 $ 4,504,394
============ ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE> 11
- --------------------------------------------------------------------------------
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, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 16.74 $ 16.59 $ 16.01 $ 15.17 $ 13.08
-------- -------- -------- -------- --------
Investment income--net............................... .20 .40 .54 .53 .59
Realized and unrealized gain on investments--net..... .47 1.60 1.87 .89 2.06
-------- -------- -------- -------- --------
Total from investment operations..................... .67 2.00 2.41 1.42 2.65
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................. (.40) (.54) (.27) (.56) (.56)
Realized gain on investments--net.................. (1.43) (1.31) (1.56) (.02) --
-------- -------- -------- -------- --------
Total dividends and distributions.................... (1.83) (1.85) (1.83) (.58) (.56)
-------- -------- -------- -------- --------
Net asset value, end of period....................... $ 15.58 $ 16.74 $ 16.59 $ 16.01 $ 15.17
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 4.56%++ 13.56% 17.11% 9.73% 20.81%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .61%* .62% .60% .60% .61%
======== ======== ======== ======== ========
Investment income--net............................... 2.57%* 2.37% 3.17% 3.39% 4.22%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $177,175 $187,084 $194,747 $212,047 $212,912
======== ======== ======== ======== ========
Portfolio turnover................................... 52.52% 102.47% 136.71% 236.50% 38.40%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
++ Aggregate total investment return.
See Notes to Financial Statements.
10
<PAGE> 12
- --------------------------------------------------------------------------------
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.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(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.
11
<PAGE> 13
- --------------------------------------------------------------------------------
("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 0.55% 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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $5,748 in commissions
on the execution of portfolio security transactions
For the six months ended June 30, 1999, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $222 for providing security price
quotations to compute the Fund's net asset value.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $111,304,052 and $103,814,413, respectively.
Net realized gains for the six months ended June 30, 1999 and net unrealized
gains as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $7,870,247 $23,084,089
---------- -----------
Total.................................. $7,870,247 $23,084,089
========== ===========
- ------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $23,084,089, of which $26,394,455 related to appreciated securities
and $3,310,366 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $152,515,868.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $2,672,570 and ($9,994,020) for the six months ended June 30, 1999 and the
year ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 56,017 $ 845,322
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 1,380,061 20,480,110
---------- ------------
Total issued.......................... 1,436,078 21,325,432
Shares redeemed....................... (1,236,153) (18,652,862)
---------- ------------
Net increase.......................... 199,925 $ 2,672,570
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 107,140 $ 1,675,752
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,472,980 21,755,904
---------- ------------
Total issued......................... 1,580,120 23,431,656
Shares redeemed...................... (2,146,975) (33,425,676)
---------- ------------
Net decrease......................... (566,855) $ (9,994,020)
========== ============
- -----------------------------------------------------------------
</TABLE>
12
<PAGE> 14
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 1999, the US stock market gained
11.7% as measured by the unmanaged Standard & Poor's 500 Index (S&P 500). This
rise reflected a continuation of robust economic growth coupled with low
inflation. As 1999 progressed, investors set their sights on the outlook for
improvement in the world economies. An interest rate cut in Europe fueled hopes
for recovery in global economies, and Japan experienced gross domestic product
growth in the first quarter. Moreover, oil prices surged in response to the
Organization of Petroleum Exporting Countries' (OPEC) agreement to sharply
reduce supply.
Against this backdrop, for the six-month period ended June 30, 1999, Basic
Value Focus Fund's Class A and Class B Shares had total returns of +22.17% and
+22.11%, respectively, nearly twice the return of the S&P 500. The Fund's
disciplined value approach to investing rewarded shareholders during the
six-month period with returns exceeding most major market indexes as well as the
Lipper Growth and Income Index and a peer group of funds that employ a similar
philosophy. Our value-driven, bottom-up approach continued to dictate our stock
selection activities during the period. We remain confident that the Fund is
positioned to benefit from our strategy as we continue to identify what we
believe to be quality companies at bargain prices.
During the six-month period ended June 30, 1999, our stock selection process
led to overweight positions in technology, energy, capital goods and basic
materials sectors. This positioning was largely responsible for the impressive
gain posted by the Fund at June 30, 1999. Stocks in these sectors responded
favorably to the notion of global economic recovery given that their earnings
are closely linked with economic activity. Long-term shareholders may recall
that when oil prices were sliding toward $11 per barrel last year, we sizably
increased our holdings based on our belief that OPEC would take a disciplined
approach to production. That position rewarded shareholders well as oil
rebounded to $19 per barrel and holdings of Unocal Corporation, Diamond Offshore
Drilling, Inc. and Halliburton Company all gained more than 30%. Significant
gains were also achieved by our investments in Royal Dutch Petroleum Company,
which rose almost 20%, and Rowan Companies, Inc., which nearly doubled during
the first six months of 1999. Investors may further recall that technology
stocks were also an area of increased emphasis last year when they suffered from
a slowdown in demand from Asia and overcapacity. With an improved outlook for
the Asian economies and in some cases company-specific improvements, holdings of
Hewlett-Packard Company (+47%), International Business Machines Corporation
(+38%), Silicon Graphics, Inc. (+30%), Integrated Device Technology, Inc.
(+81%), Novell, Inc. (+47%) and Motorola, Inc. (+55%) all proved to be
profitable investments for shareholders. Finally, the bottoming in Asian
economies during the period translated into strong stock price performance for
low-valuation cyclical stocks whose earnings are closely tied to economic
cycles. Chemical producers E.I. du Pont de Nemours and Company and Hercules
Incorporated gained 21% and 44%, respectively, while paper producer Champion
International Corporation gained 25% during the six-month period. Copper
producer ASARCO Incorporated also rebounded during the period, generating a 24%
return for shareholders. Capital goods stocks The Boeing Company (+37%), Eaton
Corporation (+31%), Caterpillar, Inc. (+32%) and Deere & Company (+25%) also
benefited from prospects for earnings acceleration.
One notable area of weakness during the six-month period was the financial
sector, including banks and insurance companies. The operating environment for
insurance companies in particular has been difficult given continued
overcapacity, which has put downward pressure on premiums. This has been an area
of increased focus for the Fund during the past six months given the depressed
stock prices and valuation parameters of many seemingly high-quality insurance
companies. We added several new companies to the Fund including Ace Limited, The
Allstate Corporation, Hartford Financial Services Group, Inc. (which was
subsequently sold within the six-month period) and The St. Paul Companies, Inc.
We remain committed to these companies that we believe to be undervalued, which
are growing through acquisitions and cost cutting programs. Another area of
emphasis during the period was defense. Specifically, we added TRW Inc.,
Northrup Grumman Corporation and Lockheed Martin Corporation. With a US budget
surplus and higher defense spending by the US Government, we believe these
out-of-favor stocks may begin to show upward earnings momentum in the future.
During the six-month period ended June 30, 1999, we eliminated several
positions from the portfolio as improved investor enthusiasm led to extended
valuation levels and solid profits for shareholders. The most notable examples
were
13
<PAGE> 15
- --------------------------------------------------------------------------------
Burlington Resources Inc. (+25.5%), LSI Logic
Corporation (+54%), Mentor Graphics Corporation (+39%), Mirage Resorts,
Incorporated (+45%), NCR Corporation (+60%) and Seagate Technology, Inc. (+35%).
IN CONCLUSION
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/ Terry K. Glenn
Terry K. Glenn
President
/s/ Kevin M. Rendino
Kevin M. Rendino
Senior Vice President and Portfolio Manager
July 28, 1999
14
<PAGE> 16
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +17.60%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +20.96
- --------------------------------------------------------------------------------
Inception (7/01/93) to 6/30/99 +18.29
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +17.46%
- --------------------------------------------------------------------------------
Inception (11/03/97) to 6/30/99 +18.82
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +17.60% +22.17%
- ------------------------------------------------------------------------------------------
Class B Shares +17.46 +22.11
- ------------------------------------------------------------------------------------------
</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.
15
<PAGE> 17
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOW PRICE TO BOOK VALUE
- ----------------------------------------------------------------------------------------------------------------------
METALS--NON-FERROUS 800,000 ASARCO Incorporated......... $ 18,857,826 $ 15,050,000 1.7%
INSURANCE 675,000 Ace Limited................. 20,242,374 19,068,750 2.1
BANKING & FINANCIALS 700,000 The Bank Of Tokyo
Mitsubishi, Ltd. (ADR)*... 8,735,778 10,193,750 1.1
BANKING & FINANCIALS 600,000 The CIT Group, Inc. (Class
A)........................ 16,310,937 17,325,000 1.9
PAPER & FOREST PRODUCTS 300,000 Champion International
Corporation............... 12,415,516 14,362,500 1.6
TECHNOLOGY 1,353,200 +Exabyte Corporation(a)..... 13,337,164 5,159,075 0.6
TELECOMMUNICATIONS 2,000,000 +Glenayre Technologies,
Inc. ..................... 15,123,055 7,125,000 0.8
SEMICONDUCTORS 2,587,100 +Integrated Device
Technology, Inc. ......... 18,516,629 27,973,019 3.1
AEROSPACE & DEFENSE 200,000 Lockheed Martin
Corporation............... 6,993,783 7,450,000 0.8
AEROSPACE & DEFENSE 250,000 Northrop Grumman
Corporation............... 17,533,730 16,578,125 1.8
RETAIL 300,000 Rite Aid Corporation........ 7,813,500 7,387,500 0.8
COMPUTER SERVICES 1,400,000 +Scitex Corporation Ltd.
(Ordinary)................ 13,846,229 14,000,000 1.5
BEVERAGE & ENTERTAINMENT 400,000 The Seagram Company Ltd. ... 16,351,719 20,150,000 2.2
INFORMATION PROCESSING 800,000 +Silicon Graphics, Inc. .... 9,941,682 13,100,000 1.5
INSURANCE 650,000 The St. Paul Companies,
Inc. ..................... 21,808,446 20,678,125 2.3
STEEL 665,800 +WHX Corporation............ 6,527,015 4,369,312 0.5
------------ ------------ -----
224,355,383 219,970,156 24.3
- ----------------------------------------------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO
- ----------------------------------------------------------------------------------------------------------------------
INSURANCE 450,000 The Allstate Corporation.... 16,482,715 16,143,750 1.8
BANKING & FINANCIALS 225,000 Bank One Corporation........ 13,126,505 13,401,563 1.5
BANKING & FINANCIALS 150,000 The Chase Manhattan
Corporation............... 6,790,880 12,993,750 1.4
INFORMATION PROCESSING 400,000 Compaq Computer
Corporation............... 9,996,805 9,475,000 1.1
AUTOMOTIVE 300,000 Dana Corporation............ 11,450,814 13,818,750 1.5
FARMING & CONSTRUCTION 250,000 Deere & Company............. 10,944,950 9,906,250 1.1
EQUIPMENT
AUTOMOTIVE 499,999 Delphi Automotive Systems
Corporation............... 9,157,395 9,281,231 1.0
OIL SERVICES 533,600 Diamond Offshore Drilling,
Inc. ..................... 18,368,962 15,140,900 1.7
CHEMICALS 250,000 E.I. du Pont de Nemours and
Company................... 14,819,280 17,078,125 1.9
CAPITAL EQUIPMENT 150,000 Eaton Corporation........... 10,184,407 13,800,000 1.5
ELECTRICAL EQUIPMENT 200,000 Emerson Electric Co......... 11,347,500 12,575,000 1.4
AUTOMOTIVE 150,000 General Motors Corporation.. 8,655,778 9,900,000 1.1
OIL SERVICES 300,000 Halliburton Company......... 10,698,748 13,575,000 1.5
CHEMICALS 600,000 Hercules Incorporated....... 24,863,126 23,587,500 2.6
PUBLISHING 375,000 Knight Ridder, Inc. ........ 20,092,398 20,601,562 2.3
ELECTRICAL EQUIPMENT 138,000 Koninklijke (Royal) Philips
Electronics NV (NY
Registered Shares)........ 9,563,969 13,920,750 1.5
BANKING & FINANCIALS 400,000 Mellon Bank Corporation..... 13,375,889 14,550,000 1.6
TOBACCO 300,000 Philip Morris Companies
Inc. ..................... 12,072,930 12,056,250 1.3
FARMING & CONSTRUCTION 250,000 Potash Corporation of
EQUIPMENT Saskatchewan Inc. ........ 16,684,357 12,937,500 1.4
OIL SERVICES 1,000,000 +Rowan Companies, Inc. ..... 12,566,982 18,437,500 2.0
RETAIL 300,000 Sears, Roebuck & Co......... 13,921,070 13,368,750 1.5
AUTOMOTIVE 200,000 TRW Inc. ................... 8,563,323 10,975,000 1.2
RAILROADS 400,000 Union Pacific Corporation... 21,028,502 23,325,000 2.6
RETAIL 1,200,000 +Venator Group, Inc. ....... 16,706,448 12,525,000 1.4
------------ ------------ -----
321,463,733 343,374,131 37.9
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 225,000 AT&T Corp. ................. $ 6,560,565 $ 12,557,813 1.4%
TELECOMMUNICATIONS 600,000 Alcatel (ADR)*.............. 14,047,598 17,025,000 1.9
UTILITIES 500,000 Cinergy Corp. .............. 16,677,968 16,000,000 1.8
BANKING & FINANCIALS 200,000 First Union Corporation..... 8,717,600 9,400,000 1.0
TELECOMMUNICATIONS 250,000 GTE Corporation............. 17,273,143 18,937,500 2.1
FOODS 200,000 General Mills, Inc. ........ 13,504,829 16,075,000 1.8
BANKING & FINANCIALS 200,000 National City Corporation... 13,659,427 13,100,000 1.4
OIL--INTERNATIONAL 200,000 Royal Dutch Petroleum
Company (NY Registered
Shares)................... 11,216,175 12,050,000 1.3
REAL ESTATE INVESTMENT TRUST 400,000 Simon Property Group,
Inc. ..................... 10,004,000 10,150,000 1.1
ELECTRICAL EQUIPMENT 400,000 Thomas & Betts
Corporation............... 17,260,743 18,900,000 2.1
OIL--DOMESTIC 600,000 Unocal Corporation.......... 23,024,283 23,775,000 2.6
------------ ------------ -----
151,946,331 167,970,313 18.5
- ----------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS
- ----------------------------------------------------------------------------------------------------------------------
BANKING & FINANCIALS 400,000 Associates First Capital
Corporation (Class A)..... 15,514,716 17,725,000 1.9
AEROSPACE & DEFENSE 500,000 The Boeing Company.......... 17,244,150 22,093,750 2.4
COMPUTER SERVICES 200,000 Hewlett-Packard Company..... 12,606,289 20,100,000 2.2
INFORMATION PROCESSING 120,000 International Business
Machines Corporation...... 8,228,842 15,510,000 1.7
COSMETICS & TOILETRIES 300,000 Kimberly-Clark
Corporation............... 14,470,155 17,100,000 1.9
TELECOMMUNICATIONS 200,000 Motorola, Inc. ............. 11,664,272 18,950,000 2.1
SOFTWARE 500,000 +Novell, Inc. .............. 8,439,608 13,250,000 1.5
------------ ------------ -----
88,168,032 124,728,750 13.7
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS 785,933,479 856,043,350 94.4
- ----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $20,000,000 Ford Motor Credit Company,
4.80% due 7/08/1999....... 19,978,667 19,978,667 2.2
5,751,000 General Electric Capital
Corp.,
5.75% due 7/01/1999....... 5,750,081 5,750,081 0.7
------------ ------------ -----
25,728,748 25,728,748 2.9
- ----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 21,200,000 Federal Home Loan Mortgage
OBLIGATIONS** Corporation, 4.80% due
7/14/1999................. 21,160,427 21,160,427 2.3
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 46,889,175 46,889,175 5.2
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........... $832,822,654 902,932,525 99.6
============
OTHER ASSETS LESS
LIABILITIES............... 3,656,277 0.4
------------ -----
NET ASSETS.................. $906,588,802 100.0%
============ =====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* American Depositary Receipts (ADR).
** Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at the
time of purchase by the Fund.
(a)
Investments 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>
- ----------------------------------------------------------------
Technology Exabyte Corporation 53,200 $272,275 +
- ----------------------------------------------------------------
</TABLE>
+ Non-income producing security.
See Notes to Financial Statements.
17
<PAGE> 19
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$832,822,654) (Note
1a)....................................................... $902,932,525
Receivables:
Securities sold........................................... $9,181,179
Dividends................................................. 1,276,358
Capital shares sold....................................... 386,093 10,843,630
----------
Prepaid expenses and other assets........................... 59,470
------------
Total assets................................................ 913,835,625
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 6,562,135
Investment adviser (Note 2)............................... 477,348
Capital shares redeemed................................... 52,443
Distributor (Note 2)...................................... 1,070 7,092,996
----------
Accrued expenses and other liabilities...................... 153,827
------------
Total liabilities........................................... 7,246,823
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $906,588,802
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... $ 6,016,947
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... 58,240
Paid-in capital in excess of par............................ 766,700,250
Undistributed investment income--net........................ 5,959,428
Undistributed realized capital gains on investments--net.... 57,744,066
Unrealized appreciation on investments--net................. 70,109,871
------------
NET ASSETS.................................................. $906,588,802
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $897,910,429 and 60,169,466
shares outstanding........................................ $ 14.92
============
Class B--Based on net assets of $8,678,373 and 582,398
shares outstanding........................................ $ 14.90
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 20
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Dividends (net of $245,143 foreign withholding tax)......... $ 6,346,726
Interest and discount earned................................ 2,265,107
------------
Total income................................................ 8,611,833
------------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $2,421,212
Accounting services (Note 2)................................ 85,353
Printing and shareholder reports............................ 41,578
Professional fees........................................... 37,119
Custodian fees.............................................. 36,946
Registration fees........................................... 10,390
Directors' fees and expenses................................ 8,894
Distribution fees--Class B (Note 2)......................... 3,929
Transfer agent fees (Note 2)................................ 2,594
Pricing services............................................ 594
Other....................................................... 3,749
----------
Expenses.................................................... 2,652,358
------------
Investment income--net...................................... 5,959,475
------------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1d
& 3):
Realized gain on investments--net........................... 59,342,381
Change in unrealized appreciation/depreciation on
investments--net.......................................... 96,903,268
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $162,205,124
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE> 21
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 5,959,475 $ 9,493,627
Realized gain on investments--net........................... 59,342,381 118,772,730
Change in unrealized appreciation/depreciation on
investments--net.......................................... 96,903,268 (68,783,241)
------------- -------------
Net increase in net assets resulting from operations........ 162,205,124 59,483,116
------------- -------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (9,453,459) (7,893,414)
Class B................................................... (40,212) (4,057)
Realized gain on investments--net:
Class A................................................... (118,784,385) (96,299,982)
Class B................................................... (533,519) (49,914)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (128,811,575) (104,247,367)
------------- -------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 115,291,020 130,995,545
------------- -------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 148,684,569 86,231,294
Beginning of period......................................... 757,904,233 671,672,939
------------- -------------
End of period*.............................................. $906,588,802 $ 757,904,233
============= =============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 5,959,428 $ 9,493,624
============= =============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 22
- --------------------------------------------------------------------------------
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, 1999+ 1998+ 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 14.67 $ 15.84 $ 14.74 $ 13.10 $ 11.10
-------- -------- -------- -------- --------
Investment income--net.............................. .10 .19 .19 .17 .18
Realized and unrealized gain on investments--net.... 2.64 1.10 2.52 2.37 2.49
-------- -------- -------- -------- --------
Total from investment operations.................... 2.74 1.29 2.71 2.54 2.67
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.18) (.19) (.09) (.18) (.19)
Realized gain on investments--net................. (2.31) (2.27) (1.52) (.72) (.48)
-------- -------- -------- -------- --------
Total dividends and distributions................... (2.49) (2.46) (1.61) (.90) (.67)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 14.92 $ 14.67 $ 15.84 $ 14.74 $ 13.10
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 22.17%++ 9.44% 20.62% 20.69% 25.49%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .66%* .66% .65% .66% .66%
======== ======== ======== ======== ========
Investment income--net.............................. 1.48%* 1.26% 1.36% 1.37% 1.68%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $897,911 $754,519 $671,325 $524,930 $306,463
======== ======== ======== ======== ========
Portfolio turnover.................................. 56.25% 113.44% 95.52% 68.41% 74.10%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
21
<PAGE> 23
- --------------------------------------------------------------------------------
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 YEAR FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED ENDED NOV. 3, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999++ DEC. 31, 1998++ TO DEC. 31, 1997
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $14.65 $ 15.84 $ 15.89
------ -------- -------
Investment income--net...................................... .09 .16 .01
Realized and unrealized gain (loss) on investments--net..... 2.64 1.10 (.06)
------ -------- -------
Total from investment operations............................ 2.73 1.26 (.05)
------ -------- -------
Less dividends and distributions:
Investment income--net.................................... (.17) (.18) --
Realized gain on investments--net......................... (2.31) (2.27) --
------ -------- -------
Total dividends and distributions........................... (2.48) (2.45) --
------ -------- -------
Net asset value, end of period.............................. $14.90 $ 14.65 $ 15.84
====== ======== =======
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 22.11%++ 9.28% (0.31%)++
====== ======== =======
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .80%* .82% .82%*
====== ======== =======
Investment income--net...................................... 1.35%* 1.12% 1.27%*
====== ======== =======
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $8,678 $ 3,385 $ 348
====== ======== =======
Portfolio turnover.......................................... 56.25% 113.44% 95.52%
====== ======== =======
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Aggregate total investment return.
++ Based on average shares outstanding.
See Notes to Financial Statements.
22
<PAGE> 24
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 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.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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. In the case of options traded in the over-the-counter
market, valuation is the last asked price. Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(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 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.
23
<PAGE> 25
- --------------------------------------------------------------------------------
("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 the
"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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $36,534 in commissions on the
execution of portfolio security transactions.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $455,569,128 and $405,896,048, respectively.
Net realized gains for the six months ended June 30, 1999 and net unrealized
gains as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $59,341,912 $70,109,871
Short-term investments................ 469 --
----------- -----------
Total................................. $59,342,381 $70,109,871
=========== ===========
- ------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $70,109,871, of which $112,074,952 related to appreciated securities
and $41,965,081 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $832,822,654.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$115,291,020 and $130,995,545 for the six months ended June 30, 1999 and the
year ended December 31, 1998, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 2,642,928 $ 37,606,991
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 10,350,109 128,237,844
---------- ------------
Total issued.......................... 12,993,037 165,844,835
Shares redeemed....................... (4,248,299) (55,420,471)
---------- ------------
Net increase.......................... 8,744,738 $110,424,364
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 7,186,093 $105,551,625
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 7,700,916 104,193,396
---------- ------------
Total issued......................... 14,887,009 209,745,021
Shares redeemed...................... (5,839,387) (81,723,213)
---------- ------------
Net increase......................... 9,047,622 $128,021,808
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class B Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 323,977 $ 4,547,129
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 46,343 573,731
---------- ------------
Total issued.......................... 370,320 5,120,860
Shares redeemed....................... (18,896) (254,204)
---------- ------------
Net increase.......................... 351,424 $ 4,866,656
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class B Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 215,927 $ 3,077,684
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 3,989 53,970
---------- ------------
Total issued......................... 219,916 3,131,654
Shares redeemed...................... (10,907) (157,917)
---------- ------------
Net increase......................... 209,009 $ 2,973,737
========== ============
- -----------------------------------------------------------------
</TABLE>
24
<PAGE> 26
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
INVESTMENT ENVIRONMENT
The US stock market continued its powerful advance during the six months ended
June 30, 1999 with the broad market averages reaching new highs at the end of
June. In the early months of the year, accelerating financial market liquidity,
continued respectable levels of domestic economic activity and a growing belief
that the worst of the emerging market challenges had passed, propelled the
market higher.
With the money supply growing greater than 11% on an annualized basis while
the economy experienced much slower nominal growth, these excess fund flows were
redirected to financial assets.
Real consumer spending remained robust, supporting continued strong housing
and auto sales and solid fourth quarter economic growth. Furthermore, some
evidence of improvement in economic conditions emerged in select developing
countries like South Korea, lessening the threat from this volatile region.
Meanwhile, inflationary pressures remained benign with the implicit price
deflator rising at a mere 0.8% annual rate in the fourth quarter, the lowest
increase since 1959. Finally, strong fourth quarter earnings reports from many
prominent large-capitalization companies helped drive the stock market higher.
However, by spring concerns over the sustained rapid pace of economic growth and
its implications for higher inflation produced rising interest rates and falling
stock prices. The continued strength in the consumer sector of the US economy
was augmented by improved conditions in the industrial sector, led by renewed
export market opportunities. This broader growth platform, combined with the
rapid increase in energy prices during 1999, engendered fears of accelerating
inflation and encouraged the Federal Reserve Board to adopt a tightening
monetary policy bias at its Federal Open Market Committee meeting, driving long-
term interest rates to their highest levels in over a year.
Since rising interest rates typically compress equity valuations, stock prices
declined accordingly, particularly in those market sectors most sensitive to
interest rate movements such as financials, technology and growth. In early
summer, positive Federal Reserve Board actions, further evidence of resurgent
global growth and rising expectations for second-quarter profits renewed the
market's advance and propelled the broad market averages to record high levels.
The Federal Reserve Board's decision to increase the Federal Funds rate by a
mere 25 basis points (0.25%) and to change its bias regarding its future course
of action from tightening to neutral suggested that there would not be any
further short-term interest rate hikes for the balance of 1999. This favorable
confluence of events drove the unmanaged Standard & Poor's 500 (S&P 500) Index
to a +12.38% total return for the six-month period ended June 30, 1999. In
contrast, fixed-income investors, fearing the inflationary implications of
strong economic growth, drove long-term interest rates above the 6% level,
resulting in a -1.50% total return for the unmanaged Merrill Lynch Domestic Bond
Master Index for the six-month period ended June 30, 1999. Cash equivalents
provided a +2.24% total return for the same period, as measured by the Merrill
Lynch 91-day Treasury Bill Index.
PORTFOLIO MATTERS
While these favorable developments could suggest a positive near-term outlook
for equities, we remain concerned about the market's ability to provide
significant appreciation from current levels. Robust fundamental conditions have
driven overall stock market valuations to record high levels, which we believe
could constrain the market's further advance. While market valuations could
certainly expand further, we believe it is not appropriate to base investment
decisions on such a view.
On the other hand, bonds currently appear to offer good value with
inflation-adjusted interest rates at historically high levels and the
possibility that inflationary pressures may moderate. We believe the Federal
Reserve Board's proactive posture could slow economic growth and keep inflation
in check, potentially offering attractive total return opportunities in the
fixed-income market. As a result, we maintained a significant weighting in
fixed-income securities, with 64.2% of net assets invested in equities, 32.0% in
fixed-income securities and 3.8% in cash equivalents at June 30, 1999.
Within the equity component of the Fund, we continued to adjust our holdings
to seek to enhance quality and better control risk during the period. We added
nine new investments, increased positions in 26 holdings, reduced positions in
10 holdings, and eliminated eight stocks from the portfolio. Notable among the
new positions was Mellon Bank Corporation, the Pittsburgh-based regional banking
concern, which has dramatically restructured over the last several years and now
generates over 50% of its income from high value, fiduciary businesses
25
<PAGE> 27
- --------------------------------------------------------------------------------
such as asset management, custody and benefits consulting. The company has moved
into an excess capital position and currently is generating approximately $600
million per year in free capital. All this time, the company enjoys
industry-leading cash returns of 23%-25% on equity with potential opportunities
for further improvement driven by changes in its business mix and capital
structure. Selling at 18 times estimated 1999 cash earnings per share of $4.05
and 16 times estimated 2000 cash earnings of $4.50 per share, we believe this
represents an attractive entry price for the shares of this company. Therefore,
we believe the stock represents a very attractive addition to the Fund.
We also established a position in Xerox Corporation, the document/copier
company, which has committed to transforming itself from a traditional,
stand-alone black and white copier company to a digital, network, color,
services and solutions company for corporate printing and copying needs. Xerox
currently enjoys a solid financial position with a 36.5% return on equity, a
trend in return on capital that has been improving and interest coverage in
excess of 7 times. Currently selling at 19 times estimated year 2000 earnings
per share of $3.20, we believe Xerox offers an attractive risk/reward profile
and represents an attractive addition to the Fund.
Despite the stock market's record high levels, we continue to identify and
invest in what we perceive as above-average companies whose stocks sell at
below-average valuation levels. We define an above-average company as one which
maintains a strong competitive position, earns consistently high returns on
capital, is financially sound, generates cash in excess of its internal
reinvestment requirements and is managed by individuals motivated to create
value for shareholders. We define a below-average valuation as one that does not
adequately or accurately reflect what we believe to be the company's underlying
intrinsic value. On average, the stocks held in Capital Focus Fund have up to
now generated comparable returns on shareholders' equity and have had stronger
balance sheets while offering potentially faster earnings growth than the
average company, as measured by the S&P 500. However, these same stocks sell at
an average price to earnings ratio of 25.1 times estimated 1999 earnings per
share versus 32.1 times for the S&P 500, at 5.7 times current book value per
share versus 7.2 times for the S&P 500, and provide an above-average dividend
yield.
We eliminated our position in YPF, Sociedad Anonima, the Argentine oil
company, which received a $45 per share take-over offer from Repsol, SA, the
Spanish oil company, which had purchased the Argentine government's 20% stake in
YPF earlier in 1998. We believe that this was a fair and full price for YPF, so
we decided to eliminate our position. We also sold our position in Tenet
Healthcare Corporation, the hospital management company. Reimbursement rate
pressures from both the government-sponsored Medicare program and private sector
health maintenance organizations have not abated, leading to what we believe to
be reduced revenue projections and a slower rate of expected earnings growth for
the company. Consequently, Tenet's ability to create shareholder value appears
constrained. We decided these proceeds would be more profitably invested in
alternative investment opportunities.
Within the fixed-income portion of the portfolio, our decision to maintain a
relatively short average duration of our bonds, ranging from 5.0 years to 5.4
years, proved beneficial as domestic interest rates rose sharply during the
period. We continued to enhance the liquidity of our holdings by substantially
reducing our position in foreign government securities from 11.6% of
fixed-income assets at December 31, 1998 to 3.1% at June 30, 1999. We also
reduced high-yield corporate bonds from 10.7% of fixed-income assets to 8.7%,
while investment-grade corporate bonds increased from 47.5% to 55.7%. US
Government securities also rose from 30.2% of fixed-income assets to 32.5%. As a
result of these transactions, the average quality of our bonds rose from A3/A-
to A2/A, while the average yield to maturity increased by 26 basis points to
7.26%.
IN CONCLUSION
We appreciate your investment in Capital Focus Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our
26
<PAGE> 28
- --------------------------------------------------------------------------------
investment outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Kurt Schansinger
Kurt Schansinger
Senior Vice President and Senior Portfolio Manager
July 28, 1999
27
<PAGE> 29
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +7.86%
- --------------------------------------------------------------------------------
Inception (6/05/98) through 6/30/99 +6.84
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +7.86% +9.96%
</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.
28
<PAGE> 30
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
INDUSTRY AMOUNT BONDS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHEMICALS $ 500,000 Airgas Inc., 7.14% due
3/08/2004................... $ 500,935 $ 500,720 1.5%
500,000 Monsanto Company, 5.75% due
12/01/2005(a)............... 498,675 471,336 1.5
----------- ----------- -----
999,610 972,056 3.0
- -----------------------------------------------------------------------------------------------------------------------
FINANCE 500,000 Household Finance Corp.,
6% due 5/01/2004............ 499,890 484,451 1.5
1,000,000 International Lease Finance
Corp., 5.64% due
4/01/2002................... 995,970 976,200 3.0
----------- ----------- -----
1,495,860 1,460,651 4.5
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT 400,000 Republic of Argentina,
OBLIGATIONS 8.75% due 7/10/2002(a)...... 352,000 326,000 1.0
- -----------------------------------------------------------------------------------------------------------------------
INDUSTRIALS 500,000 Triton Energy Ltd./Corp.,
9.25% due 4/15/2005......... 491,250 488,190 1.5
- -----------------------------------------------------------------------------------------------------------------------
INFORMATION SYSTEMS 250,000 Reynolds & Reynolds Company,
6.12% due 3/02/2001......... 250,000 245,000 0.7
- -----------------------------------------------------------------------------------------------------------------------
MEDIA/PUBLISHING 500,000 News America Inc., 6.75% due
1/09/2038................... 513,250 466,065 1.4
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 500,000 The Coastal Corporation,
6.50% due 6/02/2008......... 498,340 478,330 1.5
- -----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 250,000 R & B Falcon Corporation,
6.75% due 4/15/2005......... 245,687 202,500 0.6
- -----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 500,000 Occidental Petroleum Corp.,
6.50% due 4/01/2005......... 492,547 482,580 1.5
- -----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 335,000 Kansas City Southern
Industries, Inc., 7% due
12/15/2025.................. 322,437 292,277 0.9
250,000 Northwest Airlines, Inc.,
7.875% due 3/15/2008........ 223,685 217,502 0.6
----------- ----------- -----
546,122 509,779 1.5
- -----------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 500,000 Royal Caribbean Cruises Ltd.,
7.25% due 8/15/2006......... 522,790 493,980 1.5
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Notes & Bonds:
OBLIGATIONS 500,000 4.25% due 11/15/2003........ 483,516 472,110 1.4
1,000,000 5.875% due 11/15/2005....... 1,060,625 1,000,000 3.1
750,000 5.625% due 2/15/2006........ 760,410 738,750 2.3
500,000 3.625% due 1/15/2008........ 497,942 499,792 1.5
250,000 6% due 2/15/2026............ 254,297 243,945 0.7
500,000 5.50% due 8/15/2028......... 467,402 457,810 1.4
----------- ----------- -----
3,524,192 3,412,407 10.4
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATION 500,000 Worldcom Inc., 6.40% due
8/15/2005................... 501,645 489,150 1.5
- -----------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES*** 500,000 Enersis SA, 6.60% due
12/01/2026(1)............... 479,003 467,655 1.4
- -----------------------------------------------------------------------------------------------------------------------
TOTAL BONDS 10,912,296 10,494,343 32.0
- -----------------------------------------------------------------------------------------------------------------------
SHARES
HELD COMMON STOCKS
- -----------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 10,000 Federal-Mogul Corporation..... 549,487 520,000 1.6
- -----------------------------------------------------------------------------------------------------------------------
BANKING 6,000 The Chase Manhattan
Corporation................. 306,970 519,750 1.6
14,000 Mellon Bank Corporation....... 508,067 509,250 1.5
----------- ----------- -----
815,037 1,029,000 3.1
- -----------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 16,500 Masco Corporation............. 459,862 476,438 1.5
15,500 The Sherwin-Williams
Company..................... 381,631 430,125 1.3
----------- ----------- -----
841,493 906,563 2.8
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 31
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHEMICALS 7,000 E.I. du Pont de Nemours and
Company..................... $ 445,068 $ 478,187 1.5%
11,500 Monsanto Company.............. 490,979 453,531 1.4
----------- ----------- -----
936,047 931,718 2.9
- -----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES 7,500 Corning Incorporated.......... 258,739 525,937 1.6
13,000 GenCorp Inc. ................. 320,114 328,250 1.0
8,000 Rockwell International
Corporation................. 317,411 486,000 1.5
8,000 United Technologies
Corporation................. 384,264 573,500 1.7
----------- ----------- -----
1,280,528 1,913,687 5.8
- -----------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 4,300 General Electric Company...... 384,120 485,900 1.5
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 7,500 Federal National Mortgage
Association................. 487,859 512,813 1.6
- -----------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 10,000 Diageo PLC (ADR)*............. 453,252 430,000 1.3
- -----------------------------------------------------------------------------------------------------------------------
FOOTWEAR 7,500 Nike, Inc. (Class B).......... 330,170 474,844 1.4
- -----------------------------------------------------------------------------------------------------------------------
INFORMATION PROCESSING 8,000 Xerox Corporation............. 482,559 472,500 1.4
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE 11,000 The Allstate Corporation...... 475,613 394,625 1.2
4,100 American International Group,
Inc. ....................... 375,579 479,956 1.5
12,000 Citigroup Inc. ............... 411,159 570,000 1.7
14,900 Fremont General Corporation... 352,174 281,238 0.8
14,100 Horace Mann Educators
Corporation................. 398,630 383,344 1.2
12,000 ITT Industries, Inc. ......... 452,219 457,500 1.4
12,500 Provident Companies, Inc. .... 432,855 500,000 1.5
8,000 XL Capital Ltd. (Class A)..... 554,086 452,000 1.4
----------- ----------- -----
3,452,315 3,518,663 10.7
- -----------------------------------------------------------------------------------------------------------------------
LEISURE/HOTELS 11,000 Carnival Corporation.......... 406,553 533,500 1.6
20,000 +Harrah's Entertainment,
Inc. ....................... 390,629 440,000 1.4
9,500 +Sun International Hotels
Ltd, ....................... 402,032 425,125 1.3
----------- ----------- -----
1,199,214 1,398,625 4.3
- -----------------------------------------------------------------------------------------------------------------------
MULTIMEDIA 6,000 Reuters Group PLC (ADR)*...... 509,609 486,000 1.5
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 12,500 The Coastal Corporation....... 428,743 500,000 1.5
13,000 El Paso Energy Corporation.... 443,483 457,438 1.4
12,000 The Williams Companies,
Inc. ....................... 393,842 510,750 1.6
----------- ----------- -----
1,266,068 1,468,188 4.5
- -----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 11,000 Halliburton Company........... 378,394 497,750 1.5
14,000 McCormick & Company
Incorporated................ 395,819 441,875 1.3
----------- ----------- -----
774,213 939,625 2.8
- -----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 12,000 Unocal Corporation............ 419,442 475,500 1.4
- -----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 9,000 Kimberly-Clark Corporation.... 431,522 513,000 1.6
- -----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 7,000 Glaxo Wellcome PLC (ADR)*..... 437,424 396,375 1.2
- -----------------------------------------------------------------------------------------------------------------------
RAILROADS 9,000 Kansas City Southern
Industries, Inc. ........... 378,652 574,313 1.8
8,000 Union Pacific Corporation..... 356,765 466,500 1.4
----------- ----------- -----
735,417 1,040,813 3.2
- -----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 10,500 McDonald's Corporation........ 358,752 433,781 1.3
- -----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 6,000 Motorola, Inc. ............... 318,504 568,500 1.7
- -----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 1,700 Frontier Corporation.......... 68,743 100,300 0.3
16,000 Telefonaktiebolaget LM
Ericsson (ADR)*............. 403,719 526,000 1.6
----------- ----------- -----
472,462 626,300 1.9
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 32
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOBACCO 11,000 Fortune Brands, Inc. ......... $ 473,285 $ 455,125 1.4%
- -----------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 9,000 Waste Management, Inc. ....... 439,590 483,750 1.5
- -----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 12,000 +Nextel Communications, Inc.
DOMESTIC PAGING & CELLULAR (Class A)................... 245,652 602,250 1.8
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 18,094,021 21,083,520 64.2
- -----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $ 837,000 General Motors Acceptance
Corp., 5.63% due
7/01/1999................... 836,869 836,869 2.5
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 836,869 836,869 2.5
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............. $29,843,186 32,414,732 98.7
===========
OTHER ASSETS LESS
LIABILITIES................. 415,340 1.3
----------- -----
NET ASSETS.................... $32,830,072 100.0%
=========== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
*** Corresponding industry groups for foreign securities, which are denominated
in US dollars: (1) Industrial.
+ Non-income producing security.
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
See Notes to Financial Statements.
31
<PAGE> 33
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$29,843,186) (Note
1a)....................................................... $32,414,732
Cash........................................................ 759
Receivables:
Securities sold........................................... $374,563
Interest.................................................. 182,129
Dividends................................................. 17,156
Capital shares sold....................................... 2,565 576,413
--------
Deferred organization expenses (Note 1f).................... 7,067
Prepaid expenses and other assets........................... 1,744
-----------
Total assets................................................ 33,000,715
-----------
- ------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 139,398
Investment adviser (Note 2)............................... 17,418
Capital shares redeemed................................... 460 157,276
--------
Accrued expenses and other liabilities...................... 13,367
-----------
Total liabilities........................................... 170,643
-----------
- ------------------------------------------------------------------------------------
NET ASSETS.................................................. $32,830,072
===========
- ------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 308,783
Paid-in capital in excess of par............................ 29,394,046
Undistributed investment income--net........................ 362,489
Undistributed realized capital gains on investments--net
(Note 5).................................................. 193,121
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 2,571,633
-----------
NET ASSETS.................................................. $32,830,072
===========
- ------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $32,830,072 and 3,087,831
shares outstanding........................................ $ 10.63
===========
- ------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
32
<PAGE> 34
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned................................ $ 348,803
Dividends (net of $1,368 foreign withholding tax)........... 118,831
----------
Total income................................................ 467,634
----------
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 87,426
Custodian fees.............................................. 7,617
Accounting services (Note 2)................................ 4,807
Transfer agent fees (Note 2)................................ 2,404
Printing and shareholders reports........................... 1,182
Amortization of organization expenses (Note 1f)............. 966
Professional fees........................................... 392
Directors' fees and expenses................................ 350
----------
Total expenses.............................................. 105,144
----------
Investment income--net...................................... 362,490
----------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain on investments--net........................... 628,679
Change in unrealized appreciation on:
Investments--net.......................................... 1,792,744
Foreign currency transactions--net........................ 73 1,792,817
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,783,986
==========
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
33
<PAGE> 35
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1999 TO DEC. 31, 1998
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 362,490 $ 259,215
Realized gain (loss) on investments--net.................... 628,679 (435,558)
Change in unrealized appreciation on investments and foreign
currency transactions--net................................ 1,792,817 778,816
----------- -----------
Net increase in net assets resulting from operations........ 2,783,986 602,473
----------- -----------
- -------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (259,216) --
----------- -----------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (259,216) --
----------- -----------
- -------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 3,240,573 17,462,256
----------- -----------
- -------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 5,765,343 18,064,729
Beginning of period......................................... 27,064,729 9,000,000
----------- -----------
End of period*.............................................. $32,830,072 $27,064,729
=========== ===========
- -------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 362,489 $ 259,215
=========== ===========
- -------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
34
<PAGE> 36
- --------------------------------------------------------------------------------
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 SIX FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999 TO DEC. 31, 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 9.76 $ 10.00
------- -------
Investment income--net...................................... .12 .09
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ .84 (.33)
------- -------
Total from investment operations............................ .96 (.24)
------- -------
Less dividends from investment income--net.................. (.09) --
------- -------
Net asset value, end of period.............................. $ 10.63 $ 9.76
======= =======
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 9.96%++ (2.40%)++
======= =======
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .72%* .86%*
======= =======
Investment income--net...................................... 2.49%* 2.54%*
======= =======
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $32,830 $27,065
======= =======
Portfolio turnover.......................................... 28.23% 29.48%
======= =======
- -----------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
35
<PAGE> 37
- --------------------------------------------------------------------------------
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. 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. The Fund's financial statements are prepared in accordance with
generally accepted accounting principles, which may require the use of
management accruals and estimates. 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 that 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 that
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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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
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 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.
(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 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 investment companies and to
distribute substantially all of its taxable income to its shareholders.
36
<PAGE> 38
- --------------------------------------------------------------------------------
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 to shareholders--Dividends and distributions
paid by the Fund are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $336 in commissions on
the execution of portfolio security transactions.
During the six months ended June 30, 1999, Merrill Lynch Security Pricing
Service, and affiliate of MLPF&S, earned $500 for providing security price
quotations to compute the Fund's net asset value.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $11,886,807 and $7,997,971, respectively.
Net realized gains for the six months ended June 30, 1999 and net unrealized
gains as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Realized Unrealized
Gains Gains
- -----------------------------------------------------------------
<S> <C> <C>
Long-term investments.................... $628,668 $2,571,546
Short-term investments................... 11 --
Foreign currency transactions............ -- 87
-------- ----------
Total.................................... $628,679 $2,571,633
======== ==========
- -----------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $2,571,546, of which $3,443,709 related to appreciated securities and
$872,163 related to depreciated securities. At June 30, 1999, the aggregate cost
of investments for Federal income tax purposes was $29,843,186.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$3,240,573 and $17,462,256 for the six months ended June 30, 1999 and the period
June 5, 1998 to December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 730,966 $ 7,396,745
Shares issued to shareholders in
reinvestment of dividends.............. 26,723 259,216
-------- -----------
Total issued............................ 757,689 7,655,961
Shares redeemed......................... (441,482) (4,415,388)
-------- -----------
Net increase............................ 316,207 $ 3,240,573
======== ===========
- -----------------------------------------------------------------
</TABLE>
37
<PAGE> 39
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Class A Shares for the Period June 5, 1998+ to Dollar
December 31, 1998 Shares Amount
- ------------------------------------------------------------------------
<S> <C> <C>
Shares sold............................... 1,915,432 $17,861,244
Shares redeemed........................... (43,808) (398,988)
--------- -----------
Net increase.............................. 1,871,624 $17,462,256
========= ===========
- ------------------------------------------------------------------------
</TABLE>
+ Prior to June 5, 1998 (commencement of operations), the Fund issued 900,000
shares to MLLIC for $9,000,000.
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1998, the Fund had a net capital loss carryforward of
approximately $368,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
38
<PAGE> 40
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 1999, total returns for the Fund's
Class A and Class B Shares were +36.08% and +36.18%, respectively. The unmanaged
Morgan Stanley Capital International Emerging Markets Free Index rose 39.87%
during the same period. Hurting performance were the Fund's overweighted
position in Hungary, which had a return of -8.77%, and underweighted positions
in Russia and South Africa, whose markets had returns of +133.67% and +30.18%,
respectively. Beneficial to performance were the Fund's overweighted positions
in Mexico and Thailand, up 52.31% and 58.26%, respectively, during the period.
(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,
1999.)
INVESTMENT OVERVIEW
The recovery in emerging markets continued in the six-month period ended June
30, 1999. Overall, emerging markets enjoyed a broad-based rally driven primarily
by the perception that these economies had seen their worst and were on the road
to recovery. This perception, which we partly share, was supported by evidence
such as rising industrial production in South Korea, a pickup in consumer
spending in Thailand and the recovery in the prices of some commodities such as
pulp and oil.
Bolstering the case for emerging markets recovery were reflationary efforts in
the major economies of the United States, Japan and the European Union. This was
indicated by the neutral monetary stance of the US Federal Reserve Board through
most of the period, the fiscal stimulus and the possibility of monetization in
Japan, and the decline in interest rates in the European Union. In addition,
investors regained confidence in these markets as countries, such as Brazil,
Malaysia, South Korea and Thailand, were successful in raising capital in the
foreign markets.
To add balance to this positive assessment of the developing markets, we note
that the evidence of recovery has so far been limited to relatively few
countries. In our view, the necessary structural reforms in countries such as
Indonesia and Brazil are still works in progress. Developing economies and their
emerging markets appear to be recovering, but progress can easily be slowed by
external events.
These events could include a curtailment of capital flows to the developing
markets if there is a sharp rising trend in US interest rates or a prolonged
decline in the US stock market. Cyclical stocks and the Mexican, Brazilian and
South African stock markets in general could be particularly vulnerable to a
collapse in commodity prices if the European and Japanese economies fail to
reflate. Some Israeli, South Korean and Taiwanese technology shares could be
hurt by a decline in prices of US technology stock prices. Nonetheless, assuming
the investment environments continue to improve, we believe the case for
investing in these countries with a long-term view is very much intact.
South Korea was one of the best-performing markets during the six months ended
June 30, 1999, rising 77.88%. South Korea is a prime example of an incomplete
restructuring. Although the country has made progress in areas such as
recapitalizing and restructuring the banking sector and increasing transparency
in corporate financial disclosures, little has been achieved in reforming the
giant conglomerates, or chaebols. However, the stock market has rewarded the
South Korean government's stated desire to make the necessary improvements to
the economy.
Evidence of the seriousness of the South Korean government's intention to
reform will be the deregulation of state companies such as Korea Electric Power
Corporation (KEPCO). KEPCO is the state monopoly for generation and distribution
of electricity. In the past, the company has had to shoulder the burden of
subsidizing the industrial sectors for the sake of economic development. We
believe that the South Korean government is committed to deregulating the
pricing of electricity. South Korea had the largest country weighting in the
Fund, comprising 15.8% of net assets.
In Thailand, recovery and restructuring continued during the six-month period
ended June 30, 1999. The auctioning of bad loans taken from the finance
companies has been proceeding slowly. The three largest banks--including two
Fund investments, Bangkok Bank Public Company Limited and Thai Farmers Bank
Public Company Limited--appear to be successfully recapitalizing themselves. One
of the largest conglomerates in Thailand, The Siam Cement Public Company
Limited, which is also a holding in the Fund, disposed of subsidiaries and joint
venture stakes in non-core businesses. The stock price of the foreign shares of
Siam Cement quadrupled from its lowest level last year.
39
<PAGE> 41
- --------------------------------------------------------------------------------
Growth prospects for the South African economy improved during the six-month
period ended June 30, 1999. The beginning of a commodity cycle upturn has been
extremely positive for exports of commodities including platinum, diamonds and
coal, which comprise one-third of South Africa's exports. In addition, interest
rates have been declining and may decline further, particularly since the
currency has been relatively stable. Our investments in South Africa comprised
8.5% of net assets.
Corporate earnings in South Africa were a positive surprise. For example,
Impala Platinum Holdings Limited reported first-half fiscal year earnings per
share up 127%. This was a strong result, despite the flat prices for its metals.
The substantial rise in earnings was driven by the company's cost containment
program, which limited the rise in cash costs to 2.5% for the six-month period,
and by fees from refining other platinum producers' concentrate. In addition to
this, the depreciation of the South African currency during the six-month period
ended June 30, 1999 also benefited the company, since its costs are primarily
rand-based, while its revenues US dollar-based prices for platinum, palladium
and rhodium.
The two most prominent companies engaged in these restructuring activities are
Anglo American PLC and South African Breweries PLC. Both companies have recently
moved their domiciles to London in an effort to facilitate raising capital and
to potentially lower their costs of capital by diversifying their asset bases.
In anticipation of the changes in domicile, both companies streamlined their
operations, sold off non-core assets, and were developing strategies intended to
drive their future growth prospects, both within and outside of South Africa.
Restructuring is also an ongoing theme in other countries. In Israel, Koor
Industries Limited continued to enhance its shareholder value through the
disposition of non-core assets in the food and ammunition industries and
consolidation of its positions in the telecommunications industry through
increased holdings in ECI and in the agrochemical industry through increased
ownership of MA Industries.
In Poland, Elektrim Spolka Akcyjna SA--one of the country's largest industrial
conglomerates and a long-term holding of the Fund--is transforming rapidly under
new management. The company was a post-Soviet era behemoth that inherited a
broad and unrelated array of activities, many of which operated at a loss.
Through divestments and acquisitions, it is focusing on what the Company's
management deems to be businesses that are attractive in Poland and could
increase in value. These are telecommunications services, including wireless and
wired line telephone and cable television, and power, including engineering
services and generation equipment.
Our equity investments in Brazil comprised 12.1% of the Fund's net assets. As
noted above, fiscal reforms are still pending and their postponement is causing
some concern in the markets. However, there are investments that we believe can
make a positive contribution to the Fund's performance because of their
defensive qualities as well as attractive valuations. One example is the
diversified mining company Companhia Vale do Rio Doce (CVRD). CVRD benefits from
the weaker Brazilian real, as its revenue stream is primarily US dollar-based,
while the majority of its costs are in local currency. As the world's largest
producer of iron ore, the company stands to benefit from improving conditions in
the global steel market. We believe that values such as those in CVRD are
compelling enough to justify taking a long-term position in Brazil,
notwithstanding the near-term market volatility which we expect.
There has been value in emerging market investments for some time.
Nevertheless, the stock markets declined. We believe that aside from compelling
stock valuations, there are several drivers that could improve the performance
of these stock markets. These include the improving outlook for earnings and
economic growth, the scope for interest rate declines as perceived risk
subsides, and what we believe to be the bottoming out of the global economic
cycle and commodity prices.
40
<PAGE> 42
- --------------------------------------------------------------------------------
IN CONCLUSION
We thank you for your ongoing interest in Developing Capital Markets Focus Fund
of Merrill Lynch Variable Series Funds, Inc., and we look forward to reviewing
our strategy with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Christopher G. Ayoub
Grace Pineda
Senior Vice President and Portfolio Manager
July 28, 1999
41
<PAGE> 43
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +16.20%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 - 0.77
- --------------------------------------------------------------------------------
Inception (5/02/94) through 6/30/99 - 1.31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +16.11%
- --------------------------------------------------------------------------------
Inception (11/03/97) through 6/30/99 - 2.95
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +16.20% +36.08%
- ------------------------------------------------------------------------------------------
Class B Shares +16.11 +36.18
- ------------------------------------------------------------------------------------------
</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 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.
42
<PAGE> 44
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
AFRICA INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH AFRICA BANKING 37,802 Nedcor Limited............... $ 777,047 $ 855,776 1.0%
------------------------------------------------------------------------------------------------------
BEVERAGE & TOBACCO 46,962 +South African Breweries
PLC........................ 363,353 407,824 0.5
16 +South African Breweries PLC
(ADR)(a)................... 136 139 0.0
----------- ----------- -----
363,489 407,963 0.5
------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 223,456 Nampak Limited............... 352,967 618,448 0.7
------------------------------------------------------------------------------------------------------
GOLD MINES 20,283 AngloGold Limited (ADR)(a)... 443,124 436,084 0.5
------------------------------------------------------------------------------------------------------
HEALTH INSURANCE 139,395 +Sanlam Limited.............. 148,401 165,176 0.2
------------------------------------------------------------------------------------------------------
HOLDING COMPANY 25,320 Impala Platinum Holdings
Limited.................... 597,105 636,986 0.7
------------------------------------------------------------------------------------------------------
INSURANCE 17,376 De Beers (ADR)(a)............ 400,092 414,852 0.5
888,675 FirstRand Limited............ 1,451,675 1,016,218 1.2
5,051 +Liberty International PLC... 34,978 33,442 0.0
10,834 Liberty Life Association of
Africa Limited............. 154,183 138,792 0.2
----------- ----------- -----
2,040,928 1,603,304 1.9
------------------------------------------------------------------------------------------------------
METALS-- 240,903 Gencor Limited............... 493,309 662,743 0.8
NON-FERROUS
------------------------------------------------------------------------------------------------------
MINING 20,883 +Anglo American PLC.......... 997,754 975,971 1.2
------------------------------------------------------------------------------------------------------
RETAIL 7,091 Edgars Consolidated Stores
Limited.................... 30,286 55,116 0.1
538,900 Metro Cash and Carry
Limited.................... 405,788 446,553 0.5
80,556 Pepkor Limited............... 281,871 324,413 0.4
----------- ----------- -----
717,945 826,082 1.0
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA 6,932,069 7,188,533 8.5
- -------------------------------------------------------------------------------------------------------------------------
EUROPE
- -------------------------------------------------------------------------------------------------------------------------
CZECH REPUBLIC TELEPHONE NETWORKS 26,589 +SPT Telecom AS.............. 357,243 431,310 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
CZECH REPUBLIC 357,243 431,310 0.5
- -------------------------------------------------------------------------------------------------------------------------
GREECE BANKING 2,790 Alpha Credit Bank............ 173,396 179,766 0.2
------------------------------------------------------------------------------------------------------
BEVERAGE 9,473 Hellenic Bottling Co. ....... 308,802 228,812 0.3
------------------------------------------------------------------------------------------------------
BUILDING & 9,217 Titan Cement Company......... 794,392 848,388 1.0
CONSTRUCTION
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GREECE 1,276,590 1,256,966 1.5
- -------------------------------------------------------------------------------------------------------------------------
HUNGARY BANKING 8,249 OTP Bank Rt. (GDR)(b)........ 371,528 338,209 0.4
------------------------------------------------------------------------------------------------------
OIL & GAS 29,104 +MOL Magyar Olaj-es Gazipari
PRODUCERS Rt. (GDR)(b)............... 691,599 691,220 0.8
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 195,358 Magyar Tavkozlesi Rt......... 1,153,779 1,057,256 1.3
403 Magyar Tavkozlesi Rt.
(ADR)(a)................... 10,629 11,082 0.0
----------- ----------- -----
1,164,408 1,068,338 1.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY 2,227,535 2,097,767 2.5
- -------------------------------------------------------------------------------------------------------------------------
POLAND BANKING 30,749 Wielkopolski Bank Kredytowy
SA......................... 262,836 180,369 0.2
------------------------------------------------------------------------------------------------------
COMPUTERS 39,302 +ComputerLand SA............. 837,484 746,748 0.9
------------------------------------------------------------------------------------------------------
ELECTRICAL & 86,231 Elektrim Spolka Akcyjna SA... 1,034,424 1,220,561 1.4
ELECTRONICS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND 2,134,744 2,147,678 2.5
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 45
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPE SHARES HELD/ VALUE PERCENT OF
(CONCLUDED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RUSSIA ELECTRICAL 32,000 +Lenenergo................... $ 31,680 $ 2,624 0.0%
COMPONENTS &
DISTRIBUTION
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 275,000 Irkutskenergo................ 34,733 27,500 0.0
------------------------------------------------------------------------------------------------------
NATURAL GAS 13,480 +Gazprom (ADR)(a)............ 212,310 148,280 0.2
------------------------------------------------------------------------------------------------------
OIL & RELATED 10,458 LUKoil Holding (ADR)(a)...... 361,483 414,137 0.5
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 493,800 +Bashinformsvyaz............. 220,980 34,566 0.1
31,142 Nizhnovsvyazinform........... 164,974 30,208 0.0
6,000 +Tyumentelecom............... 40,770 6,600 0.0
----------- ----------- -----
426,724 71,374 0.1
------------------------------------------------------------------------------------------------------
UTILITIES-- 199,692 Bashkirenergo................ 117,784 14,178 0.0
ELECTRICAL & GAS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN RUSSIA 1,184,714 678,093 0.8
- -------------------------------------------------------------------------------------------------------------------------
TURKEY BANKING 58,693,830 +Turkiye Garanti Bankasi
AS......................... 486,926 438,315 0.5
20,399,351 Yapi ve Kredi Bankasi AS..... 232,366 295,005 0.4
16,319,480 Yapi ve Kredi Bankasi AS
(Receipts)................. 118,618 236,004 0.3
----------- ----------- -----
837,910 969,324 1.2
------------------------------------------------------------------------------------------------------
BEVERAGE 1,206,081 Ege Biracilik Ve Malt Sanayii
AS......................... 128,584 90,068 0.1
------------------------------------------------------------------------------------------------------
RETAIL STORES 282,136 Migros Turk T.A.S. .......... 374,741 351,157 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TURKEY 1,341,235 1,410,549 1.7
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EUROPE 8,522,061 8,022,363 9.5
- -------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
- -------------------------------------------------------------------------------------------------------------------------
ARGENTINA OIL & RELATED 79,483 Perez Companc SA 'B'......... 408,874 457,091 0.5
------------------------------------------------------------------------------------------------------
REAL ESTATE 13,148 +IRSA Inversiones y
Representaciones SA
(GDR)(b)................... 366,972 405,944 0.5
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 3,461 Telecom Argentina Stet-France
Telecom SA (ADR)(a)(c)..... 118,194 92,582 0.1
2,998 Telefonica de Argentina SA
(ADR)(a)................... 111,477 94,062 0.1
----------- ----------- -----
229,671 186,644 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ARGENTINA 1,005,517 1,049,679 1.2
- -------------------------------------------------------------------------------------------------------------------------
BRAZIL BANKING 517,340 Banco Itau SA (Preferred).... 284,959 265,677 0.3
31,594 Uniao de Bancos Brasileiros
SA (Unibanco) (GDR)(b)..... 486,095 760,231 0.9
----------- ----------- -----
771,054 1,025,908 1.2
------------------------------------------------------------------------------------------------------
BEVERAGE 1,194,959 Companhia Cervejaria Brahma
(Preferred)................ 645,147 672,333 0.8
4,633 Companhia Cervejaria Brahma
SA PN (Preferred)
(ADR)(a)................... 48,286 52,411 0.1
----------- ----------- -----
693,433 724,744 0.9
------------------------------------------------------------------------------------------------------
METALS--STEEL 72,494 Companhia Vale do Rio Doce
'A' (Preferred)............ 1,382,360 1,423,697 1.7
Brl 10,296 Companhia Vale do Rio Doce,
0% due 12/31/2049(d)....... 0 0 0.0
----------- ----------- -----
1,382,360 1,423,697 1.7
------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BRAZIL OIL & RELATED 3,429,308 Petroleo Brasileiro SA--
(CONCLUDED) Petrobras (Preferred)...... $ 239,634 $ 530,265 0.6%
------------------------------------------------------------------------------------------------------
RETAIL 2,600 Companhia Brasileira de
Distribuicao Grupo Pao de
Acucar SA (ADR)(a)......... 41,217 48,588 0.1
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 22,515,000 +Tele Celular Sul
Participacoes SA........... 25,229 33,417 0.0
41,813,201 +Tele Norte Leste
Participacoes SA........... 385,465 375,186 0.4
106,955 +Tele Norte Leste
Participacoes SA (ADR)(a).. 1,625,360 1,985,352 2.4
14,523 +Telecomunicacoes Brasileiras
SA--Telebras (ADR)(a)...... 1,143 908 0.0
16,161 Telecomunicacoes Brasileiras
SA--Telebras (Preferred
Block) (ADR)(a)............ 1,290,954 1,457,520 1.7
8,277,700 Telerj Celular SA (Preferred
'B')....................... 203,373 270,006 0.3
28,944,015 +Telesp Participacoes SA..... 399,953 375,684 0.4
17,496 Telesp Participacoes SA
(ADR)(a)................... 383,043 400,221 0.5
----------- ----------- -----
4,314,520 4,898,294 5.7
------------------------------------------------------------------------------------------------------
UTILITIES-- 48,413,325 +Centrais Eletricas
ELECTRICAL & GAS Basileiras
SA--Eletrobras............. 1,254,901 915,263 1.1
30,642,608 Companhia Energetica de Minas
Gerais SA--CEMIG
(Preferred)................ 790,833 643,287 0.8
90 Companhia Paranaense de
Energia--Copel (ADR)(a).... 917 754 0.0
----------- ----------- -----
2,046,651 1,559,304 1.9
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 9,488,869 10,210,800 12.1
- -------------------------------------------------------------------------------------------------------------------------
CHILE UTILITIES-- 5,806 Enersis SA (ADR)(a).......... 139,968 132,812 0.2
ELECTRICAL & GAS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHILE 139,968 132,812 0.2
- -------------------------------------------------------------------------------------------------------------------------
MEXICO BEVERAGE 42,943 Panamerican Beverages, Inc.
'A' (US Registered
Shares).................... 1,063,344 1,022,580 1.2
------------------------------------------------------------------------------------------------------
BEVERAGE & TOBACCO 11,027 Fomento Economico Mexicano,
SA de CV (ADR)(a).......... 392,282 439,702 0.5
------------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 47,969 +Grupo Televisa SA (GDR)(b).. 1,102,277 2,149,611 2.5
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 1,258 Cemex, SA de CV (ADR)(a)..... 12,435 12,383 0.0
63,125 Cemex, SA de CV 'B'.......... 293,380 312,447 0.4
45,524 Cemex, SA de CV 'B'
(ADR)(a)................... 389,777 450,050 0.6
6,284 Cemex, SA de CV--CPO......... 25,872 31,037 0.0
----------- ----------- -----
721,464 805,917 1.0
------------------------------------------------------------------------------------------------------
DIVERSIFIED 18,431 +Grupo Sanborns SA 'B1'...... 33,358 34,772 0.1
COMPANIES
------------------------------------------------------------------------------------------------------
FOOD 217,200 Grupo Industrial Bimbo, SA de
CV 'A'..................... 463,922 481,132 0.6
------------------------------------------------------------------------------------------------------
HEALTH/PERSONAL 310,342 Kimberly-Clark de Mexico, SA
CARE de CV 'A'.................. 1,163,218 1,276,234 1.5
------------------------------------------------------------------------------------------------------
LEISURE 184,910 +Grupo Carso, SA de CV
'A1'....................... 600,351 856,446 1.0
------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MEXICO TELECOMMUNICATIONS 29,649 Telefonos de Mexico SA
(CONCLUDED) (ADR)(a)................... $ 1,390,503 $ 2,396,010 2.8%
------------------------------------------------------------------------------------------------------
TELEVISION 46,231 +TV Azteca, SA de CV
(ADR)(a)................... 315,352 239,823 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 7,246,071 9,702,227 11.5
- -------------------------------------------------------------------------------------------------------------------------
VENEZUELA TELECOMMUNICATIONS 19,051 Compania Anonima Nacional
Telefonos de Venezuela
(CANTV) (ADR)(a)........... 312,636 519,140 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
VENEZUELA 312,636 519,140 0.6
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN
AMERICA 18,193,061 21,614,658 25.6
- -------------------------------------------------------------------------------------------------------------------------
MIDDLE
EAST
- -------------------------------------------------------------------------------------------------------------------------
EGYPT BANKING 10,363 Commercial International Bank
(GDR)(b)................... 78,408 92,231 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EGYPT 78,408 92,231 0.1
- -------------------------------------------------------------------------------------------------------------------------
ISRAEL BANKING 164,429 Bank Hapoalim................ 454,073 422,657 0.5
214,654 Bank Leumi Le-Israel......... 410,873 406,448 0.5
----------- ----------- -----
864,946 829,105 1.0
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 13,370 Koor Industries Limited
(ADR)(a)................... 324,836 312,524 0.4
------------------------------------------------------------------------------------------------------
TELEPHONE 190,599 +Bezeq Israeli
COMMUNICATIONS Telecommunication
Corporation Ltd. .......... 799,003 769,016 0.9
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ISRAEL 1,988,785 1,910,645 2.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
MIDDLE EAST 2,067,193 2,002,876 2.4
- -------------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN/ASIA
- -------------------------------------------------------------------------------------------------------------------------
CHINA AUTOMOBILES 1,243,000 Qingling Motor Company 'H'... 523,764 299,591 0.4
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 208,000 Eastern Communication Co.,
Ltd. (Class B)............. 78,241 212,160 0.2
------------------------------------------------------------------------------------------------------
UTILITIES-- 780,000 Beijing Datang Power
ELECTRICAL & GAS Generation Company Limited
'H'........................ 333,344 251,334 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHINA 935,349 763,085 0.9
- -------------------------------------------------------------------------------------------------------------------------
HONG KONG CEMENT 4,359,370 +Anhui Conch Cement Co. Ltd.
'H'........................ 643,441 741,676 0.9
------------------------------------------------------------------------------------------------------
INSURANCE--MULTILINE 287,900 +Pacific Century Insurance
Holdings Limited........... 235,389 233,033 0.3
------------------------------------------------------------------------------------------------------
TRANSPORTATION 3,420,000 Sichuan Expressway Co. 'H'... 361,979 357,049 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG
KONG 1,240,809 1,331,758 1.6
- -------------------------------------------------------------------------------------------------------------------------
INDIA ALUMINUM 45,000 Hindalco Industries Ltd. .... 456,088 653,024 0.8
------------------------------------------------------------------------------------------------------
BANKING 35,030 State Bank of India.......... 169,856 191,569 0.2
------------------------------------------------------------------------------------------------------
CHEMICALS 65,180 Reliance Industries Ltd. .... 238,420 265,927 0.3
------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 48
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDIA COMPUTER SOFTWARE 24,525 +Pentafour Software & Exports
(CONCLUDED) Ltd. ...................... $ 460,484 $ 645,544 0.8%
9,993 +Satyam Computer Services
Limited.................... 348,729 292,557 0.3
----------- ----------- -----
809,213 938,101 1.1
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 395,000 ICICI Ltd. .................. 672,268 670,342 0.8
31,275 ICICI Ltd. (GDR)(b).......... 316,496 312,750 0.4
----------- ----------- -----
988,764 983,092 1.2
------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 25,975 +Hindustan Lever Limited..... 1,087,910 1,427,396 1.7
PRODUCTS
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 23,168 Videsh Sanchar Nigam Ltd.
(GDR)(b)................... 298,119 286,125 0.3
------------------------------------------------------------------------------------------------------
UTILITIES-- 35,938 +BSES Ltd. (GDR)(b).......... 456,415 350,395 0.4
ELECTRICAL & GAS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDIA 4,504,785 5,095,629 6.0
- -------------------------------------------------------------------------------------------------------------------------
INDONESIA CEMENT 413,500 PT Semen Gresik (Persero)
Tbk........................ 377,171 898,262 1.0
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 47,526 PT Indosat (Persero) Tbk
(ADR)(a)................... 612,969 926,757 1.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDONESIA 990,140 1,825,019 2.1
- -------------------------------------------------------------------------------------------------------------------------
MALAYSIA++ BANKING 179,600 Malayan Banking BHD.......... 369,215 538,800 0.6
------------------------------------------------------------------------------------------------------
NATURAL GAS 276,000 Petronas Gas BHD............. 876,329 653,684 0.8
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 697,000 Telekom Malaysia BHD......... 1,739,935 2,604,579 3.1
------------------------------------------------------------------------------------------------------
TOBACCO 242,000 Rothmans of Pall Mall
(Malaysia) BHD............. 1,575,276 1,830,921 2.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MALAYSIA 4,560,755 5,627,984 6.6
- -------------------------------------------------------------------------------------------------------------------------
PHILIPPINES BANKING 66,860 Metropolitan Bank & Trust
Company.................... 549,325 668,600 0.8
------------------------------------------------------------------------------------------------------
UTILITIES-- 235,960 Manila Electric Company
ELECTRICAL & GAS 'B'........................ 817,022 850,698 1.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PHILIPPINES 1,366,347 1,519,298 1.8
- -------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA AUTO & TRUCK 17,918 +Hyundai Motor Company
Ltd. ...................... 311,251 424,924 0.5
------------------------------------------------------------------------------------------------------
BANKING & 18,340 Housing & Commercial Bank,
FINANCIAL Korea...................... 326,281 578,324 0.7
------------------------------------------------------------------------------------------------------
CHEMICALS 5,200 Honam Petrochemical
Corporation................ 83,124 121,296 0.2
13,370 L.G. Chemical Limited........ 172,134 363,849 0.4
----------- ----------- -----
255,258 485,145 0.6
------------------------------------------------------------------------------------------------------
COSMETICS 4,070 Pacific Corporation.......... 78,531 98,454 0.1
------------------------------------------------------------------------------------------------------
ELECTRONIC 18,793 Samsung Display Devices Co.,
COMPONENT Ltd. ...................... 678,868 1,022,859 1.2
------------------------------------------------------------------------------------------------------
ELECTRONIC 27,499 Samsung Electronics.......... 1,238,678 3,017,169 3.6
INSTRUMENTS
------------------------------------------------------------------------------------------------------
FINANCIAL 28,570 Kookmin Bank................. 270,963 580,039 0.7
SERVICES--
COMMERCIAL
------------------------------------------------------------------------------------------------------
RETAIL STORES 9,170 +Keumkang Development Ind.
Company.................... 83,564 121,606 0.1
------------------------------------------------------------------------------------------------------
STEEL 12,806 Pohang Iron & Steel Company,
Ltd.(ADR)(a)............... 201,609 430,602 0.5
------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH KOREA TELECOMMUNICATIONS 43,038 +Korea Telecom Corporation
(CONCLUDED) (ADR)(a)................... $ 1,189,824 $ 1,721,520 2.0%
------------------------------------------------------------------------------------------------------
UTILITIES-- 61,790 Korea Electric Power
ELECTRICAL & GAS Corporation................ 1,589,460 2,567,688 3.1
112,391 Korea Electric Power
Corporation (ADR)(a)....... 1,513,632 2,304,015 2.7
----------- ----------- -----
3,103,092 4,871,703 5.8
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH
KOREA 7,737,919 13,352,345 15.8
- -------------------------------------------------------------------------------------------------------------------------
TAIWAN BANKING 1,255,800 +E. Sun Commercial Bank...... 862,741 700,043 0.8
------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 215,000 Asia Cement Corporation...... 186,566 193,094 0.2
------------------------------------------------------------------------------------------------------
CEMENT 233,000 Taiwan Cement Corporation.... 200,684 180,396 0.2
------------------------------------------------------------------------------------------------------
ELECTRONIC 174,600 +Mosel Vitelic, Inc. ........ 181,768 122,744 0.2
COMPONENT
------------------------------------------------------------------------------------------------------
HEALTH INSURANCE 180,000 Cathay Life Insurance Co.,
Ltd. ...................... 617,333 646,640 0.8
------------------------------------------------------------------------------------------------------
PLASTICS 527,209 +Formosa Plastic
Corporation................ 926,394 1,110,257 1.3
------------------------------------------------------------------------------------------------------
SECURITIES 513,000 +Grand Cathay Securities
Corporation................ 411,005 405,125 0.5
------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 477,240 +Taiwan Semiconductor
Manufacturing Company...... 865,857 1,825,306 2.2
------------------------------------------------------------------------------------------------------
STEEL 779,100 China Steel Corporation...... 489,754 588,728 0.7
------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 238,964 +Yang Ming Marine Transport
Corp. ..................... 177,089 155,412 0.2
------------------------------------------------------------------------------------------------------
VENTURE CAPITAL 149,000 +China Development Industrial
Bank Inc. ................. 295,234 371,462 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TAIWAN 5,214,425 6,299,207 7.5
- -------------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 219,000 +Bangkok Bank Public Company
Limited 'Foreign'.......... 494,714 820,136 0.9
457,000 Siam Commercial Bank Public
Company Limited
(Warrants)(e).............. 0 294,539 0.4
376,900 +Thai Farmers Bank Public
Company Limited 'Foreign'.. 1,093,899 1,165,986 1.4
----------- ----------- -----
1,588,613 2,280,661 2.7
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 9,126 +The Siam Cement Public
Company Limited............ 228,596 277,371 0.3
------------------------------------------------------------------------------------------------------
TELEVISION 142,140 BEC World Public Company
Limited 'Foreign'.......... 812,927 887,170 1.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THAILAND 2,630,136 3,445,202 4.1
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN/ASIA 29,180,665 39,259,527 46.4
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE VALUE PERCENT OF
SECURITIES AMOUNT ISSUE COST (NOTE 1a) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US GOVERNMENT AGENCY OBLIGATIONS* US$ 4,844,000 Federal Home Loan Banks,
4.60% due 7/01/1999........ $ 4,843,381 $ 4,843,381 5.7%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 4,843,381 4,843,381 5.7
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............ $69,738,430 82,931,338 98.1
===========
UNREALIZED DEPRECIATION ON
FORWARD FOREIGN EXCHANGE
CONTRACTS**................ (156,278) (0.2)
OTHER ASSETS LESS
LIABILITIES................ 1,753,363 2.1
----------- -----
NET ASSETS................... $84,528,423 100.0%
=========== =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Effective February 16, 1999, the Company's Board of Directors adopted a
change in valuation for Malaysian securities. The Company will utilize a
Malaysian exchange rate of 3.80 and record an estimated exit tax on the value
of any investments made before February 15, 1999, based upon its value as of
August 31, 1998, in the amount of 30% through March 31, 1999, 20% from April
1, 1999 through May 31, 1999 and 10% from June 1, 1999 through August 31,
1999. These changes are due to the capital controls implemented by the
Malaysian government, which froze the Malaysian ringgit at 3.80 until
September 1, 1999 and initiated a tax at various rates, as described above,
on any funds repatriated from Malaysia.
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(d) Received through a bonus issue from Companhia Vale do Rio Doce. As of June
30, 1999, the bonds have not commenced trading and the coupon rate has not
been determined.
(e) 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.
* US Government Agency Obligations are traded on a discount basis; the interest
rate shown reflects the discount rate paid at the time of purchase by the
Fund.
** Forward foreign exchange contracts as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
UNREALIZED
DEPRECIATION
FOREIGN CURRENCY SOLD EXPIRATION DATE (NOTE 1b)
- -----------------------------------------------------
<S> <C> <C>
KRW 6,000,000 April 2000 $(156,278)
- -----------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS--NET
(US$
COMMITMENT--$5,000,000) $(156,278)
=========
- -----------------------------------------------------
</TABLE>
See Notes to Financial Statements.
49
<PAGE> 51
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$69,738,430) (Note
1a)....................................................... $ 82,931,338
Cash........................................................ 37,025
Foreign cash (Note 1c)...................................... 1,155,141
Receivables:
Securities sold........................................... $810,754
Capital shares sold....................................... 474,427
Dividends................................................. 337,794 1,622,975
--------
Prepaid expenses and other assets........................... 23,428
------------
Total assets................................................ 85,769,907
------------
- -------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts (Note 1b)....................................... 156,278
Payables:
Securities purchased...................................... 661,398
Investment adviser (Note 2)............................... 71,810
Capital shares redeemed................................... 12,254
Distributor............................................... 46 745,508
--------
Accrued expenses and other liabilities...................... 339,698
------------
Total liabilities........................................... 1,241,484
------------
- -------------------------------------------------------------------------------------
NET ASSETS.................................................. $ 84,528,423
============
- -------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... $ 983,750
Class B Shares Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... 4,632
Paid-in capital in excess of par............................ 120,758,407
Undistributed investment income--net........................ 950,354
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 5)............... (51,010,906)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 12,842,186
------------
NET ASSETS.................................................. $ 84,528,423
============
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $84,132,574 and 9,837,499
shares outstanding........................................ $ 8.55
============
Class B--Based on net assets of $395,849 and 46,324 shares
outstanding............................................... $ 8.55
============
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
50
<PAGE> 52
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $57,833 withholding tax on foreign
dividends)................................................ $ 841,411
Interest and discount earned................................ 625,656
-----------
Total income................................................ 1,467,067
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 340,728
Custodian fees.............................................. 110,477
Commissions................................................. 35,178
Accounting services (Note 2)................................ 5,687
Professional fees........................................... 5,036
Printing and shareholder reports............................ 4,791
Pricing services............................................ 4,581
Transfer agent fees (Note 2)................................ 2,203
Directors' fees and expenses................................ 1,130
Distribution fees--Class B (Note 2)......................... 206
-----------
Total expenses before reimbursement......................... 510,017
Reimbursement of expenses (Note 2).......................... (83,901)
-----------
Total expenses after reimbursement.......................... 426,116
-----------
Investment income--net...................................... 1,040,951
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized loss from:
Investments--net.......................................... (2,596,607)
Foreign currency transactions--net........................ (492,805) (3,089,412)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 23,924,449
Foreign currency transactions--net........................ (347,646) 23,576,803
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 20,487,391
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $21,528,342
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
51
<PAGE> 53
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 1,040,951 $ 2,591,669
Realized loss on investments and foreign currency
transactions--net......................................... (3,089,412) (43,748,177)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 23,576,803 (1,681,821)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ 21,528,342 (42,838,329)
----------- ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (1,501,826) (1,752,375)
Class B................................................... (5,427) (388)
----------- ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (1,507,253) (1,752,763)
----------- ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (45,313) (32,339,010)
----------- ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 19,975,776 (76,930,102)
Beginning of period......................................... 64,552,647 141,482,749
----------- ------------
End of period*.............................................. $84,528,423 $ 64,552,647
=========== ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 950,354 $ 1,416,656
=========== ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
52
<PAGE> 54
- --------------------------------------------------------------------------------
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 SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999+ 1998+ 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 6.43 $ 9.22 $ 10.05 $ 9.32 $ 9.51
------- -------- -------- ------- -------
Investment income--net................................. .11 .18 .11 .20 .20
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net................... 2.16 (2.86) (.75) .76 (.30)
------- -------- -------- ------- -------
Total from investment operations....................... 2.27 (2.68) (.64) .96 (.10)
------- -------- -------- ------- -------
Less dividends from investment income--net............. (.15) (.11) (.19) (.23) (.09)
------- -------- -------- ------- -------
Net asset value, end of period......................... $ 8.55 $ 6.43 $ 9.22 $ 10.05 $ 9.32
======= ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..................... 36.08%++ (29.39%) (6.53%) 10.59% (1.08%)
======= ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......................... 1.25%* 1.25% 1.25% 1.25% 1.25%
======= ======== ======== ======= =======
Expenses............................................... 1.50%* 1.42% 1.42% 1.31% 1.36%
======= ======== ======== ======= =======
Investment income--net................................. 3.06%* 2.30% 1.15% 2.42% 2.73%
======= ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $84,132 $ 64,312 $141,451 $95,599 $55,209
======= ======== ======== ======= =======
Portfolio turnover..................................... 65.20% 121.06% 93.62% 87.33% 62.53%
======= ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
53
<PAGE> 55
- --------------------------------------------------------------------------------
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 FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED YEAR ENDED NOV. 3, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999++ DECEMBER 31, 1998++ TO DEC. 31, 1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 6.42 $ 9.22 $ 9.30
------- -------- -------
Investment income--net.................................. .10 .17 .01
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net.................... 2.17 (2.86) (.09)
------- -------- -------
Total from investment operations........................ 2.27 (2.69) (.08)
------- -------- -------
Less dividends from investment income--net.............. (.14) (.11) --
------- -------- -------
Net asset value, end of period.......................... $ 8.55 $ 6.42 $ 9.22
======= ======== =======
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................... 36.18%++ (29.51%) (.86%)++
======= ======== =======
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................... 1.40%* 1.40% 1.39%*
======= ======== =======
Expenses................................................ 1.65%* 1.72% 1.58%*
======= ======== =======
Investment income--net.................................. 2.86%* 2.37% 1.16%*
======= ======== =======
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $ 396 $ 241 $ 32
======= ======== =======
Portfolio turnover...................................... 65.20% 121.06% 93.62%
======= ======== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment return excludes insurance-related fees and expenses.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
54
<PAGE> 56
- --------------------------------------------------------------------------------
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. The Fund's financial statements are prepared in accordance with
generally accepted accounting principles, which may require the use of
management accruals and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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.
- - 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
55
<PAGE> 57
- --------------------------------------------------------------------------------
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
the "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, 1999, MLAM earned fees of $340,728, of which
$83,901 was voluntarily waived.
For the six months ended June 30, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $41,821 in commissions on the
execution of portfolio security transactions.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
56
<PAGE> 58
- --------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $41,502,278 and $42,205,130, respectively.
Net realized losses for the six months ended June 30, 1999 and net unrealized
gains (losses) as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
- -------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $(2,375,384) $13,192,908
Short-term Investments.............. (221,223) --
Foreign currency transactions....... (492,805) (194,444)
Forward foreign exchange contracts.. -- (156,278)
----------- -----------
Total............................... $(3,089,412) $12,842,186
=========== ===========
- -------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $13,192,908, of which $16,499,133 related to appreciated securities
and $3,306,225 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $69,738,430.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were $45,313
and $32,339,010 for the six months ended June 30, 1999 and the year ended
December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 1,707,554 $ 13,077,464
Shares redeemed....................... (1,878,292) (13,194,689)
---------- ------------
Net decrease.......................... (170,738) $ (117,225)
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 1,743,089 $ 14,442,991
Shares issued to shareholders in
reinvestment of dividends........... 192,358 1,752,375
---------- ------------
Total issued......................... 1,935,447 16,195,366
Shares redeemed...................... (7,267,433) (48,795,775)
---------- ------------
Net decrease......................... (5,331,986) $(32,600,409)
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class B Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 10,116 $ 83,049
Shares redeemed....................... (1,351) (11,137)
---------- ------------
Net increase.......................... 8,765 $ 71,912
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class B Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 38,950 $ 290,926
Shares issued to shareholders in
reinvestment of dividends........... 43 388
---------- ------------
Total issued......................... 38,993 291,314
Shares redeemed...................... (4,882) (29,915)
---------- ------------
Net increase......................... 34,111 $ 261,399
========== ============
- -----------------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1998, the Fund had a net capital loss carryforward of
approximately $41,479,000, of which $2,024,000 expires in 2003, $90,000 expires
in 2004 and $39,365,000 expires in 2006. This amount will be available to offset
like amounts of any future taxable gains.
6. COMMITMENTS:
At June 30, 1999, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed in the Schedule of Investments, under which it
agreed to purchase and sell various foreign currencies with approximate values
of $235,000 and $1,367,000, respectively.
57
<PAGE> 59
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 1999, Domestic Money Market Fund's net
annualized yield for Class A Shares was 4.52%. The Fund's 7-day yield as of June
30, 1999 was 4.51%. The average portfolio maturity was 73 days at June 30, 1999,
compared to 69 days at December 31, 1998.
THE ENVIRONMENT
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. Meanwhile, Japan reported its first quarter of
positive economic growth in more than a year. Some other emerging economies
(most notably South Korea and Mexico) are also showing some signs of
improvement, although concerns remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
We continue to concentrate Fund investments in one-month commercial paper,
10-month--12-month medium-term notes and floating rate money market instruments.
We believe that this barbell strategy, coupled with one third of the Fund's
assets in floating rate paper, is appropriate at this time. This strategy was
employed as we consider the possibility of an additional Federal Reserve Board
tightening in the near term but with what we believe to be a low probability of
significant intervention as the year 2000 approaches.
Longer term, we believe that current yields have sufficiently discounted
negative news. In the near term, we will continue to evaluate economic data as
it becomes available, and we are prepared to shift our strategy, if necessary.
The Fund's composition at the end of June and as of our last report is
detailed below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Issue 6/30/99 12/31/98
- ----------------------------------------------------------------
<S> <C> <C>
Bank Notes................................ 11.7% 14.7%
Certificates of Deposit................... 1.6 --
Commercial Paper.......................... 40.7 39.8
Corporate Notes........................... 31.0 17.7
Funding Agreements........................ 3.7 2.8
Master Notes.............................. 1.8 2.0
Repurchase Agreements..................... -- 0.6
US Government, Agency & Instrumentality
Obligations--Discount.................... 2.5 7.1
US Government, Agency & Instrumentality
Obligations--Non-Discount................ 9.4 14.9
Other Assets Less Liabilities............. -- 0.4
Liabilities in Excess of Other Assets..... (2.4) --
----- -----
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Jacqueline Rogers
Jacqueline L. Rogers
Vice President and Portfolio Manager
July 28, 1999
58
<PAGE> 60
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (Note 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--11.7% $ 600,000 First USA Bank, NA.................. 6.50 % 12/23/99 $ 601,603
4,750,000 First USA Bank, NA+................. 5.35 1/21/00 4,760,482
4,500,000 First Union National Bank+.......... 4.78 8/20/99 4,498,997
1,700,000 First Union National Bank+.......... 5.15 8/30/99 1,700,000
4,000,000 First Union National Bank+.......... 5.15 9/01/99 4,000,000
1,000,000 First Union National Bank+.......... 5.30 3/01/00 993,614
10,000,000 Harris Trust & Savings+............. 4.91 4/06/00 9,996,985
2,000,000 LaSalle National Bank............... 5.11 4/24/00 1,978,292
9,000,000 NationsBank NA+..................... 4.83 8/24/99 8,999,480
4,000,000 NationsBank NA+..................... 4.92 3/16/00 3,999,168
5,000,000 NationsBank NA+..................... 4.91 4/05/00 4,998,499
6,200,000 PNC Bank NA+........................ 5.01 11/03/99 6,197,812
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$52,756,348) 52,724,932
- -------------------------------------------------------------------------------------------------------------------------
CERTIFICATE OF 7,000,000 Fleet National Bank................. 4.90 4/17/00 6,997,354
DEPOSIT--1.6%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATE OF DEPOSIT (COST--$6,997,355) 6,997,354
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--40.7% 4,500,000 Apreco, Inc. ....................... 4.90 7/28/99 4,483,463
10,000,000 Clipper Receivables Corp. .......... 5.90 7/01/99 10,000,000
4,000,000 Concord Minutemen Capital Co. LLC... 4.83 9/20/99 3,951,548
2,800,000 Corporate Asset Funding Co.,
Inc. ............................. 5.05 7/19/99 2,792,930
350,000 Corporate Asset Funding Co.,
Inc. ............................. 5.07 8/18/99 347,634
9,321,000 Countrywide Home Loans, Inc. ....... 5.05 7/07/99 9,313,155
4,745,000 Countrywide Home Loans, Inc. ....... 4.93 7/08/99 4,740,451
4,019,000 Edison Asset Securitization, LLC.... 5.85 7/01/99 4,019,000
2,000,000 Eureka Securitization Inc. ......... 4.97 7/07/99 1,998,343
550,000 Eureka Securitization Inc. ......... 5.07 7/09/99 549,380
5,000,000 Eureka Securitization Inc. ......... 5.06 8/27/99 4,959,768
1,750,000 Falcon Asset Securitization
Corp. ............................ 4.92 7/02/99 1,749,761
3,000,000 Finova Capital Corp. ............... 4.98 8/20/99 2,979,234
1,000,000 Finova Capital Corp. ............... 4.89 8/27/99 991,954
1,550,000 Finova Capital Corp. ............... 5.15 9/13/99 1,532,900
500,000 Finova Capital Corp. ............... 4.87 9/24/99 493,633
1,400,000 Finova Capital Corp. ............... 4.90 10/07/99 1,379,375
7,450,000 Finova Capital Corp. ............... 4.88 10/15/99 7,331,195
5,000,000 Grand Funding Corp. ................ 4.82 7/06/99 4,996,653
5,000,000 Grand Funding Corp. ................ 4.82 7/08/99 4,995,314
5,000,000 Grand Funding Corp. ................ 4.83 7/09/99 4,994,633
3,771,000 Grand Funding Corp. ................ 4.88 7/09/99 3,766,911
2,000,000 Grand Funding Corp. ................ 5.00 7/21/99 1,994,444
1,850,000 International Lease Finance
Corporation....................... 5.05 7/19/99 1,845,329
655,000 International Securitization
Corp. ............................ 4.95 7/01/99 655,000
5,390,000 International Securitization
Corp. ............................ 5.05 7/12/99 5,381,683
3,532,000 International Securitization
Corp. ............................ 5.05 7/15/99 3,525,063
1,112,000 International Securitization
Corp. ............................ 5.07 7/16/99 1,109,651
2,745,000 International Securitization
Corp. ............................ 5.05 7/21/99 2,737,299
1,973,000 International Securitization
Corp. ............................ 5.35 8/02/99 1,963,617
10,000,000 Lehman Brothers Holdings Inc. ...... 4.97 7/07/99 9,991,717
1,000,000 Lehman Brothers Holdings Inc. ...... 4.98 7/23/99 996,957
1,320,000 Lehman Brothers Holdings Inc. ...... 5.08 9/08/99 1,306,450
730,000 Lexington Parker Capital Company,
LLC............................... 4.82 10/07/99 719,245
4,186,000 Lexington Parker Capital Company,
LLC............................... 4.84 10/07/99 4,124,332
7,500,000 Park Avenue Receivables Corp. ...... 4.93 7/01/99 7,500,000
3,500,000 Park Avenue Receivables Corp. ...... 4.97 7/02/99 3,499,517
10,000,000 Park Avenue Receivables Corp. ...... 5.06 7/08/99 9,990,161
975,000 Park Avenue Receivables Corp. ...... 5.05 7/15/99 973,085
</TABLE>
59
<PAGE> 61
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (Note 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER $ 4,790,000 Preferred Receivables Funding
(CONCLUDED) Corp. ............................ 4.82 % 7/06/99 $ 4,786,793
5,000,000 Thames Asset Global
Securitization.................... 4.83 7/06/99 4,996,646
3,027,000 Thames Asset Global
Securitization.................... 4.83 7/07/99 3,024,563
2,800,000 Thames Asset Global
Securitization.................... 5.05 7/19/99 2,792,930
7,132,000 Thames Asset Global
Securitization.................... 4.92 8/11/99 7,092,282
4,500,000 Thames Asset Global
Securitization.................... 4.90 8/20/99 4,468,851
14,000,000 Toys 'R' Us, Inc. .................. 5.05 7/06/99 13,990,180
714,000 Variable Funding Capital Corp. ..... 5.00 7/20/99 712,116
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$182,574,520) 182,545,146
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--31.0% 4,000,000 Asset-Backed Securities Investment
Trust 1997-F(ABSIT)+++............ 4.948 9/15/99 4,000,000
500,000 Associates Corporation of North
America........................... 7.35 7/06/99 500,160
2,000,000 Associates Corporation of North
America........................... 6.625 7/15/99 2,001,052
1,498,000 Associates Corporation of North
America........................... 6.75 10/15/99 1,502,114
1,150,000 Associates Corporation of North
America........................... 6.00 6/15/00 1,149,983
850,000 Associates Corporation of North
America........................... 6.375 6/15/00 853,709
5,000,000 Avco Financial Services Inc. ....... 7.25 7/15/99 5,003,692
3,500,000 BankAmerica Corporation............. 5.04 10/15/99 3,501,236
3,850,000 Bear Stearns Companies, Inc. ....... 5.124 1/20/00 3,850,239
3,030,000 Beneficial Corp. ................... 8.375 12/29/99 3,066,793
5,400,000 CIT Group Holdings, Inc. (The)...... 6.10 8/09/99 5,402,997
5,000,000 CIT Group Holdings, Inc. (The)...... 6.70 5/02/00 5,025,085
2,000,000 CIT Group Holdings, Inc. (The)...... 4.905 5/30/00 1,999,016
5,500,000 Caterpillar Inc. ................... 5.03 1/20/00 5,499,747
1,305,000 Chase Manhattan Corp. .............. 7.75 11/01/99 1,312,260
3,000,000 Citicorp............................ 5.248 11/23/99 3,002,223
2,000,000 E.I. du Pont de Nemours and
Company........................... 5.079 4/03/00 1,986,434
3,000,000 First Data Corporation.............. 6.44 8/09/99 3,002,760
6,850,000 Ford Motor Credit Company........... 8.375 1/15/00 6,938,845
3,500,000 Ford Motor Credit Company........... 7.60 3/29/00 3,540,586
3,000,000 Ford Motor Credit Company........... 6.375 4/15/00 3,008,949
1,000,000 Ford Motor Credit Company........... 4.95 5/05/00 1,000,000
2,000,000 General Electric Capital Corp. ..... 5.069 9/03/99 1,999,364
750,000 General Electric Capital Corp. ..... 4.945 5/03/00 749,721
900,000 General Electric Capital Corp. ..... 4.95 5/12/00 899,492
1,000,000 General Motors Acceptance Corp. .... 5.75 1/05/00 999,508
2,000,000 General Motors Acceptance Corp. .... 4.975 2/03/00 2,000,270
2,000,000 General Motors Acceptance Corp. .... 8.125 2/23/00 2,026,900
2,000,000 General Motors Acceptance Corp. .... 7.00 3/01/00 2,011,894
1,000,000 General Motors Acceptance Corp. .... 7.625 3/17/00 1,011,166
750,000 General Motors Acceptance Corp. .... 9.375 4/01/00 767,147
1,000,000 General Motors Acceptance Corp. .... 6.65 5/24/00 1,005,146
1,460,000 General Motors Acceptance Corp. .... 6.875 6/07/00 1,470,494
2,000,000 General Motors Acceptance Corp. .... 6.875 7/17/00 2,019,960
3,850,000 General Motors Acceptance Corp. .... 4.96 7/20/00 3,844,510
1,400,000 General Motors Acceptance Corp.+.... 5.201 12/01/00 1,399,329
900,000 General Motors Acceptance Corp.+.... 5.077 2/27/01 900,848
700,000 Goldman Sachs Group, L.P. .......... 5.00 7/12/00 700,000
1,000,000 Household Finance Corp.+............ 4.95 9/13/99 999,733
4,000,000 Household Finance Corp. ............ 6.75 6/01/00 4,022,600
2,000,000 IBM Credit Corp. ................... 5.61 7/30/99 2,000,737
7,000,000 Liberty Lighthouse US Capital Co.
LLC+.............................. 4.98 10/08/99 6,999,006
4,000,000 National Rural Utilities Cooperative
Finance Corp.+.................... 4.969 9/21/99 3,999,468
5,000,000 PepsiCo, Inc.+...................... 4.838 8/19/99 4,999,328
</TABLE>
60
<PAGE> 62
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (Note 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE NOTES $ 800,000 PepsiCo, Inc. ...................... 5.875% 6/01/00 $ 798,510
(CONCLUDED)
10,000,000 Sara Lee Corporation................ 6.70 9/09/99 10,016,620
3,000,000 Wells Fargo & Co. .................. 5.31 3/31/00 2,987,010
3,500,000 Wells Fargo & Co. .................. 7.125 4/01/00 3,531,070
2,000,000 Wells Fargo & Co. .................. 5.225 4/10/00 1,989,598
900,000 Xerox Capital (Europe) Plc+......... 4.92 8/20/99 899,766
2,500,000 Xerox Credit Corp. ................. 4.87 4/06/00 2,498,500
2,500,000 Xerox Credit Corp. ................. 5.70 7/26/00 2,494,590
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$139,438,784) 139,190,165
- -------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--3.7% 5,000,000 Allstate Life Insurance Co.+........ 5.074 7/03/00 5,000,000
5,000,000 Jackson National Life Insurance
Co.+.............................. 4.95 5/01/00 5,000,000
5,000,000 Metropolitan Life Insurance
Company+.......................... 4.98 5/01/00 5,000,000
1,500,000 Security Life of Denver+............ 5.141 3/23/00 1,500,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$16,500,000) 16,500,000
- -------------------------------------------------------------------------------------------------------------------------
MASTER NOTES--1.8% 8,000,000 Goldman Sachs Group, L.P.+.......... 4.93 10/15/99 8,000,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (COST--$8,000,000) 8,000,000
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY &
INSTRUMENTALITY
OBLIGATIONS--
DISCOUNT--2.5%
4,000,000 Federal National Mortgage
Association....................... 4.59 7/08/99 3,996,329
2,000,000 Federal National Mortgage
Association....................... 4.54 9/09/99 1,981,060
4,800,000 US Treasury Bills................... 3.80 10/14/99 4,735,037
375,000 US Treasury Bills................... 3.81 10/14/99 369,925
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--DISCOUNT (COST--$11,096,407) 11,082,351
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY &
INSTRUMENTALITY
OBLIGATIONS--
NON-DISCOUNT--9.4%
11,400,000 Federal Home Loan Banks+............ 5.419 9/02/99 11,399,016
3,000,000 Federal Home Loan Banks............. 4.95 2/22/00 2,989,686
1,300,000 Federal Home Loan Mortgage
Corporation....................... 5.18 11/24/00 1,289,603
2,000,000 Federal Home Loan Mortgage
Corporation....................... 5.25 1/19/01 1,983,324
4,000,000 Federal National Mortgage
Association+...................... 5.294 7/30/99 3,999,736
5,000,000 Federal National Mortgage
Association+...................... 5.354 8/19/99 4,999,507
2,300,000 Federal National Mortgage
Association+...................... 5.389 10/27/99 2,299,650
1,000,000 Federal National Mortgage
Association....................... 5.07 12/14/00 989,538
1,425,000 Federal National Mortgage
Association....................... 5.21 1/26/01 1,411,256
1,900,000 Student Loan Marketing
Association....................... 4.50 8/02/99 1,898,881
4,000,000 Student Loan Marketing
Association+...................... 5.334 2/04/00 3,999,427
600,000 US Treasury Notes................... 4.50 9/30/00 593,062
600,000 US Treasury Notes................... 4.625 11/30/00 593,250
2,000,000 US Treasury Notes................... 4.625 12/31/00 1,975,624
1,900,000 US Treasury Notes................... 4.50 1/31/01 1,871,500
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$42,422,930) 42,293,060
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 63
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE (Note 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REPURCHASE $ 154,000 Lehman Brothers Inc., purchased on
AGREEMENTS**--0.0% 6/30/1999 to yield 4.90% to
7/01/1999......................... $ 154,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(COST--$154,000) 154,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$459,940,344)--102.4%...... 459,487,008
LIABILITIES IN EXCESS OF OTHER
ASSETS--(2.4%).................... (10,785,599)
------------
NET ASSETS--100.0%.................. $448,701,409
============
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government & Agency Obligations are traded on
a discount basis; the interest rates shown reflect 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, 1999.
** Repurchase Agreements are fully collateralized by US Government Agency
Obligations.
+ Variable Rate Notes.
++ Subject to principal paydowns.
See Notes to Financial Statements.
62
<PAGE> 64
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$459,940,344*) (Note
1a)....................................................... $459,487,008
Cash........................................................ 627
Receivables:
Interest.................................................. $ 2,982,814
Capital shares sold....................................... 127,311 3,110,125
-----------
Prepaid expenses and other assets........................... 31,718
------------
Total assets................................................ 462,629,478
------------
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 10,685,593
Capital shares redeemed................................... 2,999,638
Investment adviser (Note 2)............................... 181,722
Dividends to shareholders (Note 1e)....................... 967 13,867,920
-----------
Accrued expenses and other liabilities...................... 60,149
------------
Total liabilities........................................... 13,928,069
------------
- ----------------------------------------------------------------------------------------
NET ASSETS.................................................. $448,701,409
============
- ----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value,
1,300,000,000 shares authorized+.......................... $ 44,915,475
Paid-in capital in excess of par............................ 404,239,270
Unrealized depreciation on investments--net................. (453,336)
------------
NET ASSETS.................................................. $448,701,409
============
- ----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $448,701,409 and 449,154,746
shares outstanding........................................ $ 1.00
============
- ----------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. As of June 30, 1999, net unrealized
depreciation for Federal income tax purposes amounted to $453,336, of which
$3,779 related to appreciated securities and $457,115 related to depreciated
securities.
+ The Fund is also authorized to issue 1,300,000,000 Class B Shares.
See Notes to Financial Statements.
63
<PAGE> 65
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and discount earned................................ $10,507,688
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $1,037,661
Accounting services (Note 2)................................ 42,108
Professional fees........................................... 16,582
Printing and shareholder reports............................ 15,012
Custodian fees.............................................. 12,905
Directors' fees and expenses................................ 4,097
Transfer agent fees (Note 2)................................ 2,241
Registration fees........................................... 952
Pricing services............................................ 141
Other....................................................... 1,552
----------
Total expenses.............................................. 1,133,251
-----------
Investment income--net...................................... 9,374,437
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTE
1d):
Realized gain on investments--net........................... 16,939
Change in unrealized depreciation on investments--net....... (443,462)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 8,947,914
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
64
<PAGE> 66
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 9,374,437 $ 17,729,772
Realized gain on investments--net........................... 16,939 47,278
Change in unrealized appreciation/depreciation on
investments--net.......................................... (443,462) (19,258)
------------- -------------
Net increase in net assets resulting from operations........ 8,947,914 17,757,792
------------- -------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (9,374,437) (17,729,772)
Realized gain on investments--net:
Class A................................................... (16,939) (47,278)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (9,391,376) (17,777,050)
------------- -------------
- --------------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares............................ 135,992,564 289,645,200
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions (Note 1e)..... 9,389,219 17,785,712
------------- -------------
145,381,783 307,430,912
Cost of shares redeemed..................................... (104,754,152) (216,946,151)
------------- -------------
Net increase in net assets derived from Class A capital
share transactions........................................ 40,627,631 90,484,761
------------- -------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 40,184,169 90,465,503
Beginning of period......................................... 408,517,240 318,051,737
------------- -------------
End of period............................................... $448,701,409 $ 408,517,240
============= =============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
65
<PAGE> 67
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET 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, 1999 1998 1997 1996 1995
<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................................ .0220 .0506 .0511 .0504 .0547
Realized and unrealized gain (loss) on
investments--net.................................... (.0010) --+ .0001 (.0005) .0012
-------- -------- -------- -------- --------
Total from investment operations...................... .0210 .0506 .0512 .0499 .0559
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.............................. (.0220) (.0508) (.0511) (.0504) (.0547)
Realized gain on investments--net................... --+ --+ --+ (.0001) (.0002)
-------- -------- -------- -------- --------
Total dividends and distributions..................... (.0220) (.0508) (.0511) (.0505) (.0549)
-------- -------- -------- -------- --------
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.................... 4.56%* 5.20% 5.24% 5.13% 5.64%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................. .55%* .56% .54% .54% .55%
======== ======== ======== ======== ========
Investment income--net, and realized gain on
investments--net.................................... 4.53%* 5.03% 5.12% 4.97% 5.50%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $448,701 $408,517 $318,052 $274,756 $303,912
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.0001 per share.
See Notes to Financial Statements.
66
<PAGE> 68
- --------------------------------------------------------------------------------
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.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 with remaining maturities
of greater than sixty days are valued at the most recent bid price or yield
equivalent as obtained from dealers that make markets in such securities. As
securities transition from sixty-one to sixty days 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. Securities
maturing sixty days or less from their date of acquisition are valued at
amortized cost, which approximates market value. For the purposes of valuation,
the maturity of variable rate security is deemed to be the next coupon date on
which the interest rate is to be adjusted. Other investments for which market
quotations are not readily available are valued at their fair value as
determined in good faith by or under the direction of the Company's Board of
Directors.
(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 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.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Company's transfer agent.
67
<PAGE> 69
- --------------------------------------------------------------------------------
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, FDS, PFD, and/or ML & Co.
3. CAPITAL SHARE TRANSACTIONS:
The number of shares sold and redeemed during the years 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.
68
<PAGE> 70
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were conflicting signals regarding the future direction of the US
economy during the six-month period ended June 30, 1999. However, based on
concerns that the domestic economy was growing at a pace sufficient to spark
inflation, the Federal Reserve Board shifted its neutral bias toward one of
tightening. On June 30, 1999, the Federal Reserve Board raised interest rates 25
basis points (0.25%).
Compared to the United States, Canada's growth was less robust, and inflation
showed no signs of accelerating. In fact, Canada's inflation had fallen below
the Bank of Canada's target range. As a result of low inflation and a strong
currency, the Bank of Canada cut its benchmark bank rate by 25 basis points on
March 31 and May 4. Interest rates overall in Canada have risen given their
close correlation to US interest rates. During this period, interest rates rose
by 57 basis points for the ten-year Canadian sovereign bond as compared to a 113
basis point increase for the ten-year US Government bond.
In Europe, the convergence of the 11 European countries into the European
Monetary Union (EMU) was successfully completed on January 1, but the euro did
not fair very well. With a stagnant Germany, political infighting, low interest
rates and a war in Kosovo, the euro traded down. Germany's Finance Minister
LaFontaine's resignation temporarily inspired the prospects for the euro, but an
aggressive cut in interest rates in April and the protracted war in Kosovo sent
the euro on a downward slide. Interest rates during the period were mostly down
except for the 10-year and 30-year German bonds.
In non-EMU countries, we continue to see improvement in our UK, Greek, Danish
and Norwegian positions. We are overweight in our holdings in these countries
relative to the unmanaged J.P. Morgan European Bond Index because we believe
these countries are on track for the second wave of convergence into EMU and we
believe their bonds are relatively inexpensive. In the United Kingdom, most of
the improvement in yield has been in Gilts with maturities of less than two
years. This is a direct result of the interest rate cuts by the Bank of England
during this period. On the other hand, ten-year Gilts have risen. The Greek bond
market appreciated across the maturity spectrum. The drachma has remained
somewhat stable relative to the euro. In Denmark, most of the decline has
occurred in sovereign debt with maturities of less than five years. Our new
position during the six-month period was Norway, the world's second-largest
exporter of oil. Norwegian interest rates have fallen, particularly in the under
one-year maturities.
The yen gained strength as 1999 began, then proceeded to trade lower as
Finance Minister Miyazawa said he would tolerate a lower yen. In addition there
were signs that the Bank of Japan (BOJ) might consider monetizing the debt to
lower interest rates. More fiscal stimulus packages are needed, but they could
impact the debt structure of Japan and lead to a downgrade of the sovereign
debt. This, in turn, could lead to higher interest rates. During the period,
ten-year Japanese government bonds experienced significant volatility.
In April, the International Monetary Fund (IMF) forecast that Japan's GDP
would contract in 1999, a view at odds with consensus expectations that the
Japanese economy may be bottoming. On June 30, Bank of Japan Governor Hayami
disturbed the Japanese government bond market investors by saying that a quick,
self-sustaining recovery in private demand cannot be expected soon. Our view is
that the Japanese economy may have bottomed, but there are still too many
concerns to allow for a smooth recovery. Until we see signs of slow growth and a
weak yen improving, we will stay underweight in Japan and long US dollars.
PORTFOLIO MATTERS
The six-month period ended June 30, 1999 was characterized by interest rates
worldwide. Therefore, we reduced the overall duration of the Fund. We maintained
our short duration in Japan and moved to a neutral position in the United States
and dollar-bloc countries relative to the unmanaged J.P. Morgan European Bond
Index. We also reduced our duration in EMU countries and increased the duration
of non-EMU countries.
IN CONCLUSION
We appreciate your investment in Global Bond Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to
69
<PAGE> 71
- --------------------------------------------------------------------------------
sharing our investment outlook and strategies with you in our next report to
shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Harry Escobar
Harry Escobar
Senior Vice President and Portfolio Manager
July 28, 1999
70
<PAGE> 72
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 -0.45%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +6.15
- --------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/99 +5.29
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 -0.45% -7.21%
- ------------------------------------------------------------------------------------------
</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.
71
<PAGE> 73
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 AFRICA SUPRANATIONAL Y 315,000,000 African Development Bank,
6.20% due 6/18/2002.... $ 3,029,061 $ 3,021,938 5.7%
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AFRICA 3,029,061 3,021,938 5.7
- --------------------------------------------------------------------------------------------------------------------------
NORTH
AMERICA
- --------------------------------------------------------------------------------------------------------------------------
CANADA FOREIGN NZ$ 4,200,000 Canada Government Bond,
GOVERNMENT 6.625% due
OBLIGATIONS 10/03/2007............. 2,542,374 2,161,149 4.0
------------------------------------------------------------------------------------------------------
SUPRANATIONAL C$ 2,030,000 Inter-American
Development Bank, 7.25%
due
11/03/2003............. 1,432,602 1,431,622 2.7
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN CANADA 3,974,976 3,592,771 6.7
- --------------------------------------------------------------------------------------------------------------------------
UNITED STATES BANKING US$ 4,600,000 Comerica Bank, Detroit,
7.875% due 9/15/2026... 4,972,858 4,750,972 8.9
50,000 Mellon Capital II, 7.995%
due 1/15/2027.......... 49,192 50,330 0.1
----------- ----------- -----
5,022,050 4,801,302 9.0
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES DM 4,925,000... Ford Motor Credit Co.,
5.25% due 6/16/2008.... 2,788,401 2,604,954 4.9
E 1,130,857 KFW International
Finance, 7.50% due
1/24/2000.............. 1,239,809 1,192,500 2.2
----------- ----------- -----
4,028,210 3,797,454 7.1
------------------------------------------------------------------------------------------------------
GAMING Jazz Casino Co. LLC:
US$ 222,348 5.927% due
11/15/2009++........... 109,307 140,079 0.3
21,000 Contingent Notes due
11/15/2009+++.......... 0 0 0.0
----------- ----------- -----
109,307 140,079 0.3
------------------------------------------------------------------------------------------------------
INDUSTRIAL 2,500,000 Phelps Dodge Corporation,
7.125% due
11/01/2027............. 2,488,000 2,234,425 4.2
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE UNITED
STATES 11,647,567 10,973,260 20.6
- --------------------------------------------------------------------------------------------------------------------------
SHARES
HELD COMMON STOCKS & WARRANTS
- --------------------------------------------------------------------------------------------------------------------------
UNITED STATES BROADCASTING/CABLE 4,700 American Telecasting Inc.
(Warrants)***.......... 11,222 47 0.0
------------------------------------------------------------------------------------------------------
GAMING 6,089 +JCC Holding Company
(Class A).............. 24,356 47,190 0.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS &
WARRANTS IN THE UNITED
STATES 35,578 47,237 0.1
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA 15,658,121 14,613,268 27.4
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE> 74
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC FACE VALUE PERCENT OF
BASIN INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN FOREIGN Y 398,000,000 Japan Government Bond
GOVERNMENT #161, 4.70% due
OBLIGATIONS 9/22/2003.............. $ 3,836,090 $ 3,770,379 7.1%
------------------------------------------------------------------------------------------------------
SUPRANATIONAL 65,000,000 Asian Development Bank,
5.625% due 2/18/2002... 750,697 604,949 1.1
20,000,000 International Bank for
Reconstruction &
Development, 4.50% due
6/20/2000.............. 173,986 172,109 0.3
----------- ----------- -----
924,683 777,058 1.4
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 4,760,773 4,547,437 8.5
- --------------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- --------------------------------------------------------------------------------------------------------------------------
DENMARK BANKING US$ 2,100,000 Den Danske Bank, 7.40%**
due 6/15/2010*......... 2,172,030 2,099,611 3.9
------------------------------------------------------------------------------------------------------
FOREIGN Kingdom of Denmark:
GOVERNMENT Dkr 3,000,000 7% due 12/15/2004........ 478,193 468,871 0.9
OBLIGATIONS 9,100,000 6% due 11/15/2009........ 1,649,907 1,368,040 2.6
----------- ----------- -----
2,128,100 1,836,911 3.5
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN DENMARK 4,300,130 3,936,522 7.4
- --------------------------------------------------------------------------------------------------------------------------
FINLAND FOREIGN E 1,177,315 Finnish Government Bond,
GOVERNMENT 7.25% due 4/18/2006.... 1,459,146 1,413,622 2.6
OBLIGATIONS
Y 246,000,000 Republic of Finland, 6%
due 1/29/2002.......... 2,388,085 2,305,581 4.3
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN FINLAND 3,847,231 3,719,203 6.9
- --------------------------------------------------------------------------------------------------------------------------
FRANCE TELECOMMUNI- E 1,295,817 France Telecom, 5.75% due
CATIONS 4/25/2007.............. 1,519,598 1,426,427 2.7
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN FRANCE 1,519,598 1,426,427 2.7
- --------------------------------------------------------------------------------------------------------------------------
GERMANY ASSET-BACKED DM 3,150,000 European Credit Card
SECURITIES Office, 5.25% due
6/18/2008++............ 1,939,825 1,675,581 3.1
------------------------------------------------------------------------------------------------------
FOREIGN Bundesrepublic
GOVERNMENT Deutschland:
OBLIGATIONS E 319,557 7.50% due 11/11/2004..... 452,947 383,213 0.7
255,646 6.25% due 4/26/2006...... 337,334 293,397 0.6
1,917,345 Land Baden-Wuerttemberg,
5.75% due 1/19/2028.... 2,035,079 2,021,859 3.8
----------- ----------- -----
2,825,360 2,698,469 5.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN GERMANY 4,765,185 4,374,050 8.2
- --------------------------------------------------------------------------------------------------------------------------
GREECE FOREIGN GRD 684,000,000 Hellenic Republic, 8.60%
GOVERNMENT due 3/26/2008.......... 2,746,646 2,500,467 4.7
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN GREECE 2,746,646 2,500,467 4.7
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE> 75
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 E 3,121,976 Buoni Poliennali Del
GOVERNMENT Tesoro, 10% due
OBLIGATIONS 8/01/2003.............. $ 4,252,375 $ 3,939,736 7.4%
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN ITALY 4,252,375 3,939,736 7.4
- --------------------------------------------------------------------------------------------------------------------------
NORWAY FOREIGN Nok 11,700,000 Norwegian Government,
GOVERNMENT 5.50% due 5/15/2009.... 1,531,158 1,469,008 2.7
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN NORWAY 1,531,158 1,469,008 2.7
- --------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM CHEMICALS 320,000 BOC Group PLC, 7.25% due
6/07/2002.............. 531,453 512,698 1.0
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES L 1,500,000 Scottish Life Finance, 9%
due 11/29/2049......... 2,528,895 2,545,768 4.8
------------------------------------------------------------------------------------------------------
FOREIGN United Kingdom Gilt:
GOVERNMENT 400,000 7% due 11/06/2001........ 649,780 652,988 1.2
OBLIGATIONS 300,000 8% due 6/10/2003......... 490,794 514,417 1.0
530,000 8.50% due 12/07/2005..... 945,081 974,543 1.8
150,000 9% due 7/12/2011......... 252,237 317,724 0.6
----------- ----------- -----
2,337,892 2,459,672 4.6
------------------------------------------------------------------------------------------------------
INDUSTRIAL 1,000,000 BAA PLC, 7.875% due
2/10/2007.............. 1,758,300 1,712,460 3.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 400,000 Vodafone Group PLC,
7.875% due
11/06/2001............. 669,126 650,725 1.2
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE UNITED
KINGDOM 7,825,666 7,881,323 14.8
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPE 30,787,989 29,246,736 54.8
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
COMMERCIAL US$ 1,332,000 General Motors Acceptance
PAPER**** Corp., 5.63% due
7/01/1999.............. 1,332,000 1,332,000 2.5
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 1,332,000 1,332,000 2.5
- --------------------------------------------------------------------------------------------------------------------------
OPTIONS NOMINAL VALUE PREMIUMS
PURCHASED COVERED BY OPTIONS ISSUE PAID
- --------------------------------------------------------------------------------------------------------------------------
CURRENCY CALL 2,700,000 Japanese Yen, expiring
OPTIONS PURCHASED July 1999 at Y 119..... 5,535 3,780 0.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED 5,535 3,780 0.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS........ $55,573,479 52,765,159 98.9
===========
UNREALIZED DEPRECIATION
ON FORWARD FOREIGN
EXCHANGE
CONTRACTS--NET*****.... (33,732) (0.1)
OTHER ASSETS LESS
LIABILITIES............ 638,926 1.2
----------- -----
NET ASSETS............... $53,370,353 100.0%
=========== =====
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Represents a pay-in-kind security which may pay interest/dividends in
additional face amount/shares.
+++ Represents an obligation by Jazz Casino Co. LLC to pay a semi-annual amount
to the Fund through 11/15/2009. The payments are based upon varying interest
rates and the amounts, which may be paid-in-kind, are contingent upon the
earnings before income taxes, depreciation and amortization of Jazz Casino LLC
on a fiscal year basis.
++ Subject to principal paydowns.
74
<PAGE> 76
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
* The security may be offered and sold to "qualified institutional buyers" under
Rule 144A of the Securities Act of 1933.
** Floating rate note.
*** Warrants entitle the Fund to purchase a predetermined number of shares of
Common Stock and are non-income producing. The purchase price and number of
shares are subject to adjustment under certain conditions until the expiration
date.
**** Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
***** Forward foreign exchange contracts as of June 30, 1999 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
EXPIRATION (DEPRECIATION)
FOREIGN CURRENCY PURCHASED DATE (Note 1b)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NZ$ 3,339,951 July 1999 $(17,802)
Y 658,597,810 July 1999 3,148
- -----------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$7,227,633) (14,654)
--------
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- -----------------------------------------------------------------------------------------------------------------------
E 876,905 July 1999 798
L 2,583,770 July 1999 3,979
NZ$ 3,339,951 July 1999 18,086
Y 1,317,195,620 July 1999 (41,941)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$17,618,685) (19,078)
--------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE
CONTRACTS--NET $(33,732)
========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
75
<PAGE> 77
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$55,567,944) (Note
1a)....................................................... $52,761,379
Options purchased, at value (cost--$5,535) (Notes 1a &
1b)....................................................... 3,780
Cash........................................................ 787
Receivables:
Interest.................................................. $978,940
Dividends................................................. 10,954 989,894
--------
Prepaid expenses............................................ 5,292
-----------
Total assets................................................ 53,761,132
-----------
- ------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts (Note 1b)....................................... 33,732
Payables:
Capital shares redeemed................................... 318,263
Investment adviser (Note 2)............................... 30,308
Options purchased (Note 1b)............................... 5,535
Forward foreign exchange contracts (Note 1b).............. 671 354,777
--------
Accrued expenses............................................ 2,270
-----------
Total liabilities........................................... 390,779
-----------
- ------------------------------------------------------------------------------------
NET ASSETS.................................................. $53,370,353
===========
- ------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized+........................................ $ 596,362
Paid-in capital in excess of par............................ 58,439,437
Undistributed investment income--net........................ 60,682
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 5)............... (2,860,649)
Unrealized depreciation on investments and foreign currency
transactions--net......................................... (2,865,479)
-----------
NET ASSETS.................................................. $53,370,353
===========
- ------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $53,370,353 and 5,963,616
shares outstanding........................................ $ 8.95
===========
- ------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
76
<PAGE> 78
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned (net of $15,978 foreign
withholding tax).......................................... $ 1,857,235
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 185,462
Registration fees........................................... 16,062
Custodian fees.............................................. 15,094
Accounting services (Note 2)................................ 6,382
Professional fees........................................... 4,241
Printing and shareholder reports............................ 3,363
Transfer agent fees (Note 2)................................ 2,506
Directors' fees and expenses................................ 723
Pricing services............................................ 100
Other....................................................... 244
-----------
Total expenses.............................................. 234,177
-----------
Investment income--net...................................... 1,623,058
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized loss from:
Investments--net.......................................... (50,654)
Foreign currency transactions--net........................ (740,352) (791,006)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (5,827,072)
Foreign currency transactions--net........................ 376,355 (5,450,717)
----------- -----------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (6,241,723)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(4,618,665)
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
77
<PAGE> 79
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 1,623,058 $ 4,099,794
Realized gain (loss) on investments and foreign currency
transactions--net......................................... (791,006) 1,442,112
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (5,450,717) 2,964,166
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (4,618,665) 8,506,072
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (1,643,897) (3,660,200)
In excess of investment income--net:
Class A................................................... -- (540,914)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (1,643,897) (4,201,114)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (9,783,365) (10,995,882)
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (16,045,927) (6,690,924)
Beginning of period......................................... 69,416,280 76,107,204
------------ ------------
End of period*.............................................. $ 53,370,353 $ 69,416,280
============ ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 60,682 $ 81,521
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
78
<PAGE> 80
- --------------------------------------------------------------------------------
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 SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 9.90 $ 9.32 $ 9.76 $ 9.79 $ 9.17
------- -------- -------- -------- --------
Investment income--net.......................... .25 .55 .56 .78 .85
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net............................. (.95) .58 (.40) (.03) .61
------- -------- -------- -------- --------
Total from investment operations................ (.70) 1.13 .16 .75 1.46
------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................ (.25) (.47) (.29) (.78) (.84)
In excess of investment income--net........... -- (.08) (.03) -- --
Return of capital............................. -- -- (.28) -- --
------- -------- -------- -------- --------
Total dividends and distributions............... (.25) (.55) (.60) (.78) (.84)
------- -------- -------- -------- --------
Net asset value, end of period.................. $ 8.95 $ 9.90 $ 9.32 $ 9.76 $ 9.79
======= ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. (7.21%)++ 12.62% 1.95% 8.02% 16.69%
======= ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ .76%* .75% .73% .69% .68%
======= ======== ======== ======== ========
Investment income--net.......................... 5.25%* 5.72% 6.11% 7.95% 8.99%
======= ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $53,370 $ 69,416 $ 76,107 $ 93,790 $ 81,845
======= ======== ======== ======== ========
Portfolio turnover.............................. 44.22% 127.93% 568.76% 267.13% 132.57%
======= ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
79
<PAGE> 81
- --------------------------------------------------------------------------------
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. The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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.
- - 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.
80
<PAGE> 82
- --------------------------------------------------------------------------------
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 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.
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, 1999, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith,
Incorporated, $63 for providing security price quotations to compute the net
asset value of the Fund.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Company's transfer agent.
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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $26,241,494 and $33,751,081, respectively.
81
<PAGE> 83
- --------------------------------------------------------------------------------
Net realized gains (losses) for the six months ended June 30, 1999 and net
unrealized losses as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Realized Unrealized
Gains(Losses) Losses
- -------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $ (50,654) $(2,806,565)
Foreign currency options purchased.... (37,945) (1,755)
Foreign currency options written...... 15,370 --
Foreign currency transactions......... (904,276) (23,427)
Forward foreign exchange contracts.... 186,499 (33,732)
--------- -----------
Total................................. $(791,006) $(2,865,479)
========= ===========
- -------------------------------------------------------------------
</TABLE>
Transactions in options written for the six months ended June 30, 1999 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...................... 1,450,000 $ 15,370
Options expired...................... (1,450,000) (15,370)
---------- --------
Outstanding call options written, end
of period........................... -- $ --
========== ========
- --------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $2,806,565, of which $193,395 related to appreciated securities and
$2,999,960 related to depreciated securities. At June 30, 1999, the aggregate
cost of investments for Federal income tax purposes was $55,567,944.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$9,783,365 and $10,995,882 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 81,717 $ 797,936
Shares issued to shareholders in
reinvestment of dividends............ 173,211 1,643,892
---------- ------------
Total issued.......................... 254,928 2,441,828
Shares redeemed....................... (1,301,402) (12,225,193)
---------- ------------
Net decrease.......................... (1,046,474) $ (9,783,365)
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 626,457 $ 6,051,402
Shares issued to shareholders in
reinvestment of dividends........... 443,154 4,201,100
---------- ------------
Total issued......................... 1,069,611 10,252,502
Shares redeemed...................... (2,228,768) (21,248,384)
---------- ------------
Net decrease......................... (1,159,157) $(10,995,882)
========== ============
- -----------------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1998, the Fund had a net capital loss carryforward of
approximately $1,604,000, all of which expires in 2005. This amount will be
available to offset like amounts of any future taxable gains.
6. SUBSEQUENT EVENT:
On July 1, 1999, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.047320 per Class A Share, payable on July 1, 1999 to
shareholders of record as of June 30, 1999.
82
<PAGE> 84
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. Meanwhile, Japan reported its first quarter of
positive economic growth in more than one year. There were growing signs of
improvement in some emerging economies (most notably South Korea and Mexico),
although concerns remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
PORTFOLIO MATTERS
For the six months ended June 30, 1999, the Fund's Class A Shares had a total
return of +5.70%. The total return for the unmanaged Morgan Stanley Capital
International (MSCI) World Stock Index was +8.51% for the same period.
There were two reasons for the Fund's underperformance. First, we avoided
equity investments in Asia and Latin America because of our concerns about the
duration and breadth of the business and profit recovery in these regions.
During the first half of 1999, several of the major stock markets in Asia,
including the Japanese market, had total investment returns in US dollar terms
well in excess of +20%. Second, starting in April, investors shifted assets from
the relatively more stable earnings growth companies in telecommunications,
banking, insurance, pharmaceuticals and retailing to companies in the energy,
energy services, steel, paper, chemicals, industrial equipment and construction
equipment industries. The Fund had very modest exposure to these areas.
The Fund's largest industry weightings were in the banking and financial,
telecommunications, insurance and pharmaceuticals industries. In addition,
interest rates on long-term US Treasury securities rose significantly during the
first half of 1999, which may have caused the stock prices and valuations of
many of the Fund's stock holdings in these industries to decline. There appears
to have been a shift of investment funds into many stock market sectors
worldwide ranging from small and medium-sized companies to lower-quality
companies in both developed and emerging equity markets. We view this broadening
of investor focus as a positive development. It may reflect the substantial
increases in financial liquidity by central bankers around the world since
September 1998 when the US Federal Reserve Board started to increase liquidity
and reduce the Federal Funds rate.
The Fund's best-performing industry sector during the first half of 1999 was
the telecommunications industry, which represented 15.6% of net assets at June
30, 1999. Also, six of the companies among the Fund's largest equity holdings at
June 30, 1999 experienced stock price appreciation during the first half of 1999
in excess of the total investment return of the MSCI World Stock Index. Among
the individual equity holdings in the Fund at mid-year, over 45% of the
individual holdings had stock price appreciation during the first half of 1999
in excess of the total return of the MSCI World Stock Index.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Lawrence R. Fuller
Lawrence R. Fuller
Senior Vice President and Portfolio Manager
July 28, 1999
83
<PAGE> 85
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +12.57%
- --------------------------------------------------------------------------------
Inception (6/05/98) to 6/30/99 +13.39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 MONTH 6 MONTH
TOTAL RETURN TOTAL RETURN
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +12.57% +5.70%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset value for the
period 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.
84
<PAGE> 86
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<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 & 23,123 Bank of Montreal............. $ 971,772 $ 837,110 0.5%
FINANCIAL
63,750 Canadian Imperial Bank of
Commerce................... 1,544,240 1,514,160 1.0
31,107 National Bank of Canada...... 466,001 406,256 0.3
36,461 Royal Bank of Canada......... 1,710,054 1,603,712 1.1
------------ ------------ -----
4,692,067 4,361,238 2.9
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 1,149 Nortel Networks Corporation.. 67,181 97,966 0.0
EQUIPMENT
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 18,885 +AT&T Canada Inc. ........... 737,978 1,203,919 0.8
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 5,497,226 5,663,123 3.7
- --------------------------------------------------------------------------------------------------------------------------
UNITED STATES ADVERTISING 10,052 The Interpublic Group of
Companies, Inc. ........... 749,808 870,755 0.6
------------------------------------------------------------------------------------------------------
BANKING & 32,367 Bank of America
FINANCIAL Corporation................ 2,068,817 2,372,906 1.6
38,250 Bank One Corporation......... 1,947,592 2,278,266 1.5
46,500 Citigroup Inc. .............. 1,772,416 2,208,750 1.4
75,000 Mellon Bank Corporation...... 2,600,819 2,728,125 1.8
8,140 State Street Corporation..... 595,983 694,953 0.5
------------ ------------ -----
8,985,627 10,283,000 6.8
------------------------------------------------------------------------------------------------------
BEVERAGES 7,667 The Coca-Cola Company........ 487,814 479,187 0.3
------------------------------------------------------------------------------------------------------
BROADCASTING 10,650 +CBS Corporation............. 380,969 462,609 0.3
13,408 +Chancellor Media Corporation
(Class A).................. 615,370 738,278 0.5
19,125 +Clear Channel
Communications, Inc. ...... 1,099,258 1,318,430 0.8
19,125 +Infinity Broadcasting Corp.
(Class A).................. 474,808 568,969 0.4
------------ ------------ -----
2,570,405 3,088,286 2.0
------------------------------------------------------------------------------------------------------
CHEMICALS 28,285 E.I. du Pont de Nemours and
Company.................... 1,515,701 1,932,219 1.3
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 13,000 +3Com Corporation............ 364,840 346,125 0.2
EQUIPMENT
100,000 +Cisco Systems, Inc. ........ 5,131,669 6,443,750 4.2
1,530 Lucent Technologies Inc. .... 75,872 103,179 0.1
------------ ------------ -----
5,572,381 6,893,054 4.5
------------------------------------------------------------------------------------------------------
COMPUTERS 5,700 Compaq Computer
Corporation................ 204,730 135,019 0.1
4,950 +Dell Computer Corporation... 201,124 182,841 0.1
15,296 International Business
Machines Corporation....... 1,336,393 1,977,008 1.3
------------ ------------ -----
1,742,247 2,294,868 1.5
------------------------------------------------------------------------------------------------------
COSMETICS 7,655 The Gillette Company......... 405,859 313,855 0.2
------------------------------------------------------------------------------------------------------
DIVERSIFIED 19,000 Minnesota Mining and
Manufacturing Company
(3M)....................... 1,425,303 1,651,813 1.1
------------------------------------------------------------------------------------------------------
DRUGS 4,000 +Amgen Inc. ................. 251,316 243,250 0.2
------------------------------------------------------------------------------------------------------
ELECTRICAL 995 Emerson Electric Co. ........ 58,002 62,561 0.1
EQUIPMENT 31,231 General Electric Company..... 3,041,044 3,529,103 2.3
------------ ------------ -----
3,099,046 3,591,664 2.4
------------------------------------------------------------------------------------------------------
ELECTRONICS 2,876 Intel Corporation............ 183,036 170,942 0.1
1,355 Texas Instruments
Incorporated............... 132,307 196,475 0.1
------------ ------------ -----
315,343 367,417 0.2
------------------------------------------------------------------------------------------------------
</TABLE>
85
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICA SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED ENERGY 2,500 Duke Energy Corporation...... $ 150,426 $ 135,937 0.1%
STATES
(CONTINUED)
30,000 El Paso Energy Corporation... 1,092,631 1,055,625 0.7
3,700 Enron Corp. ................. 265,052 302,475 0.2
5,000 UtiliCorp United Inc. ....... 129,008 121,563 0.1
------------ ------------ -----
1,637,117 1,615,600 1.1
------------------------------------------------------------------------------------------------------
ENTERTAINMENT 41,310 The Walt Disney Company...... 1,426,892 1,272,864 0.9
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 1,530 American Express Company..... 162,205 199,091 0.1
7,855 Federal Home Loan Mortgage
Association................ 472,012 455,590 0.3
14,790 Federal National Mortgage
Association................ 1,022,933 1,011,266 0.7
2,823 Franklin Resources, Inc. .... 94,474 114,684 0.1
15,425 Morgan Stanley Dean Witter &
Co. ....................... 1,460,261 1,581,063 1.0
10,000 T. Rowe Price Associates,
Inc. ...................... 357,556 383,125 0.3
------------ ------------ -----
3,569,441 3,744,819 2.5
------------------------------------------------------------------------------------------------------
FOOD MERCHANDISING 3,010 Albertson's, Inc. ........... 157,548 155,203 0.1
5,626 +The Kroger Co. ............. 158,181 157,176 0.1
4,596 +Safeway Inc. ............... 257,329 227,502 0.2
------------ ------------ -----
573,058 539,881 0.4
------------------------------------------------------------------------------------------------------
FOODS 7,650 ConAgra, Inc. ............... 232,699 203,681 0.1
995 Wm. Wrigley Jr. Company
(Class B).................. 93,795 89,550 0.1
------------ ------------ -----
326,494 293,231 0.2
------------------------------------------------------------------------------------------------------
HOME FURNISHINGS 7,413 Ethan Allen Interiors,
Inc. ...................... 223,359 279,841 0.2
------------------------------------------------------------------------------------------------------
HOTELS 3,534 Marriott International, Inc.
(Class A).................. 127,015 132,083 0.1
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 995 Colgate-Palmolive Company.... 85,969 98,256 0.1
15,288 Kimberly-Clark Corporation... 741,440 871,416 0.6
12,890 The Procter & Gamble
Company.................... 1,139,992 1,150,433 0.7
------------ ------------ -----
1,967,401 2,120,105 1.4
------------------------------------------------------------------------------------------------------
INFORMATION 19,898 +America Online, Inc. ....... 1,569,621 2,198,729 1.5
PROCESSING
23,000 First Data Corporation....... 917,364 1,125,562 0.7
------------ ------------ -----
2,486,985 3,324,291 2.2
------------------------------------------------------------------------------------------------------
INSURANCE 8,646 Aetna Inc. .................. 677,931 773,277 0.5
19,240 American International Group,
Inc. ...................... 2,148,494 2,252,282 1.5
23,000 The Hartford Financial
Services Group, Inc. ...... 1,372,593 1,341,187 0.9
------------ ------------ -----
4,199,018 4,366,746 2.9
------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 17,000 Abbott Laboratories.......... 814,003 773,500 0.5
6,765 +Boston Scientific
Corporation................ 176,063 297,237 0.2
1,530 Guidant Corporation.......... 80,854 78,699 0.1
711 Johnson & Johnson............ 59,222 69,678 0.0
------------ ------------ -----
1,130,142 1,219,114 0.8
------------------------------------------------------------------------------------------------------
OIL SERVICES 2,295 Baker Hughes Incorporated.... 44,674 76,882 0.0
1,530 Diamond Offshore Drilling,
Inc. ...................... 36,232 43,414 0.0
1,558 Schlumberger Limited......... 81,035 99,225 0.1
------------ ------------ -----
161,941 219,521 0.1
------------------------------------------------------------------------------------------------------
</TABLE>
86
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 PHARMACEUTICALS 42,370 Bristol-Myers Squibb
STATES Company.................... $ 2,696,646 $ 2,984,437 2.0%
(CONCLUDED)
38,250 Merck & Co., Inc. ........... 2,978,872 2,830,500 1.8
21,994 Pfizer Inc. ................. 2,816,386 2,413,842 1.6
------------ ------------ -----
8,491,904 8,228,779 5.4
------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 849 Eastman Kodak Company........ 57,488 57,520 0.0
------------------------------------------------------------------------------------------------------
PUBLISHING 8,121 Gannett Co., Inc. ........... 533,985 579,636 0.4
------------------------------------------------------------------------------------------------------
RESTAURANTS 1,698 McDonald's Corporation....... 69,020 70,149 0.0
------------------------------------------------------------------------------------------------------
RETAIL STORES 14,650 The TJX Companies, Inc. ..... 434,442 488,028 0.3
25,000 Wal-Mart Stores, Inc. ....... 1,059,946 1,206,250 0.8
------------ ------------ -----
1,494,388 1,694,278 1.1
------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 1,759 +Applied Materials, Inc. .... 106,860 129,946 0.1
------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 2,000 +Microsoft Corporation....... 151,224 180,250 0.1
------------------------------------------------------------------------------------------------------
SPECIALTY 12,000 +Abercrombie & Fitch Co.
RETAILING (Class A).................. 470,681 576,000 0.4
27,895 CVS Corporation.............. 1,479,350 1,415,671 0.9
8,028 The Gap, Inc. ............... 317,378 404,410 0.3
15,820 Lowe's Companies, Inc. ...... 895,931 896,796 0.6
24,000 +Staples, Inc. .............. 720,000 741,000 0.5
3,400 +Tommy Hilfiger
Corporation................ 247,748 249,900 0.1
51,918 Walgreen Co. ................ 1,590,531 1,525,091 1.0
------------ ------------ -----
5,721,619 5,808,868 3.8
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 44,158 AT&T Corp.................... 2,458,681 2,464,568 1.6
9,175 Ameritech Corporation........ 578,143 674,362 0.4
31,425 GTE Corporation.............. 2,034,857 2,380,444 1.6
21,930 +MCI WorldCom Inc. .......... 1,735,037 1,885,980 1.2
49,040 Sprint Corp. (FON Group)..... 2,036,462 2,589,925 1.7
20,040 +Sprint Corp. (PCS Group).... 645,511 1,144,785 0.8
------------ ------------ -----
9,488,691 11,140,064 7.3
------------------------------------------------------------------------------------------------------
TOYS 5,646 Mattel, Inc. ................ 159,671 149,266 0.1
------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 23,715 Carnival Corporation......... 1,071,386 1,150,177 0.8
------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 3,825 Waste Management, Inc. ...... 187,515 205,594 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED STATES 72,483,464 80,531,991 53.1
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH
AMERICA 77,980,690 86,195,114 56.8
- --------------------------------------------------------------------------------------------------------------------------
PACIFIC BASIN
- --------------------------------------------------------------------------------------------------------------------------
AUSTRALIA TELECOMMUNICATIONS 275,000 Cable & Wireless Optus
Limited.................... 610,123 626,157 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 610,123 626,157 0.4
- --------------------------------------------------------------------------------------------------------------------------
JAPAN AUTOMOBILES 2,000 Honda Motor Co., Ltd. ....... 72,922 84,807 0.1
2,000 Toyota Motor Corporation..... 50,019 63,316 0.0
------------ ------------ -----
122,941 148,123 0.1
------------------------------------------------------------------------------------------------------
COMPUTERS 2,000 Fujitsu Limited.............. 21,902 40,255 0.0
------------------------------------------------------------------------------------------------------
LEISURE 300 Sony Corporation............. 28,941 32,361 0.0
------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 1,000 Fuji Photo Film.............. 38,187 37,858 0.0
------------------------------------------------------------------------------------------------------
</TABLE>
87
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN TELECOMMUNICATIONS 15 Nippon Telegraph & Telephone
(CONCLUDED) Corporation (NTT).......... $ 132,077 $ 174,822 0.2%
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 344,048 433,419 0.3
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 954,171 1,059,576 0.7
- --------------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- --------------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 21,420 Tele Danmark A/S............. 1,258,792 1,052,069 0.7
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 1,258,792 1,052,069 0.7
- --------------------------------------------------------------------------------------------------------------------------
FINLAND COMMUNICATIONS 4,590 Nokia Oyj (Class A).......... 293,995 402,089 0.3
EQUIPMENT
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 293,995 402,089 0.3
- --------------------------------------------------------------------------------------------------------------------------
FRANCE BROADCASTING & 574 Societe Television Francaise
PUBLISHING 1.......................... 105,360 133,694 0.1
------------------------------------------------------------------------------------------------------
COSMETICS 130 L'Oreal SA................... 81,604 87,823 0.1
------------------------------------------------------------------------------------------------------
FOODS 1,148 Groupe Danone SA............. 292,855 295,782 0.2
383 Promodes..................... 246,093 251,239 0.2
------------ ------------ -----
538,948 547,021 0.4
------------------------------------------------------------------------------------------------------
INFORMATION 3,825 Cap Gemini SA................ 656,330 600,768 0.4
PROCESSING
------------------------------------------------------------------------------------------------------
INSURANCE 13,005 Axa.......................... 1,680,005 1,585,569 1.0
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 3,060 Rhone-Poulenc SA............. 141,686 139,738 0.1
------------------------------------------------------------------------------------------------------
RETAIL STORES 4,590 Carrefour SA................. 521,194 674,090 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 3,725,127 3,768,703 2.5
- --------------------------------------------------------------------------------------------------------------------------
GERMANY APPAREL 1,408 Adidas-Salomon AG............ 150,287 139,667 0.1
------------------------------------------------------------------------------------------------------
AUTOMOBILES 11,529 +DaimlerChrysler AG.......... 1,076,680 998,070 0.6
------------------------------------------------------------------------------------------------------
BANKING & 43,988 Commerzbank AG............... 1,265,675 1,335,087 0.9
FINANCIAL
42,373 Deutsche Bank AG............. 2,307,105 2,583,058 1.7
34,935 Dresdner Bank AG............. 1,301,188 1,364,552 0.9
------------ ------------ -----
4,873,968 5,282,697 3.5
------------------------------------------------------------------------------------------------------
CHEMICALS 7,887 BASF AG...................... 280,331 348,299 0.2
8,155 Bayer AG..................... 292,390 339,544 0.2
10,450 Hoechst AG................... 488,544 472,793 0.3
------------ ------------ -----
1,061,265 1,160,636 0.7
------------------------------------------------------------------------------------------------------
ELECTRONICS 9,402 Siemens AG................... 609,347 724,790 0.5
------------------------------------------------------------------------------------------------------
INSURANCE 4,246 Allianz AG (Registered
Shares).................... 1,304,909 1,177,125 0.8
------------------------------------------------------------------------------------------------------
MULTI--INDUSTRY 7,751 Mannesmann AG................ 1,054,724 1,155,890 0.8
4,942 Veba AG...................... 280,194 290,314 0.2
------------ ------------ -----
1,334,918 1,446,204 1.0
------------------------------------------------------------------------------------------------------
RETAIL STORES 15,491 Metro AG..................... 1,084,053 961,094 0.6
------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 6,350 SAP AG (Systeme, Anwendungen,
Produkte in der
Datenverarbeitung)
(Preferred)................ 2,519,386 2,535,920 1.7
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 14,014,813 14,426,203 9.5
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
88
<PAGE> 90
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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>
IRELAND BANKING & 105,000 Allied Irish Banks PLC....... $ 1,814,709 $ 1,389,503 0.9%
FINANCIAL
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 5,738 +Esat Telecom Group PLC
(ADR)(a)................... 267,010 249,603 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN IRELAND 2,081,719 1,639,106 1.1
- --------------------------------------------------------------------------------------------------------------------------
ITALY BANKING & 306,000 +Banca di Roma............... 454,025 439,932 0.3
FINANCIAL
114,750 Unicredito Italiano SpA...... 583,026 503,793 0.3
------------ ------------ -----
1,037,051 943,725 0.6
------------------------------------------------------------------------------------------------------
INSURANCE 38,760 Assicurazioni Generali....... 1,489,811 1,342,187 0.9
355,725 Istituto Nazionale delle
Assicurazioni (INA)........ 837,279 824,873 0.6
------------ ------------ -----
2,327,090 2,167,060 1.5
------------------------------------------------------------------------------------------------------
REAL ESTATE 355,725 +Unione Immobiliare SpA...... 193,065 157,642 0.1
INVESTMENT TRUST
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 3,557,206 3,268,427 2.2
- --------------------------------------------------------------------------------------------------------------------------
NETHERLANDS HOUSEHOLD PRODUCTS 10,507 Unilever NV 'A'.............. 868,938 707,643 0.5
12,977 Unilever NV (NY Registered
Shares).................... 1,072,801 905,146 0.6
------------ ------------ -----
1,941,739 1,612,789 1.1
------------------------------------------------------------------------------------------------------
INSURANCE 23,392 AEGON NV..................... 2,349,513 1,695,983 1.1
16,282 ING Groep NV................. 888,403 880,962 0.6
------------ ------------ -----
3,237,916 2,576,945 1.7
------------------------------------------------------------------------------------------------------
LEISURE 1,396 Koninklijke (Royal) Philips
Electronics NV............. 104,155 137,613 0.1
------------------------------------------------------------------------------------------------------
RETAIL STORES 32,366 Koninklijke Ahold NV......... 1,196,640 1,114,104 0.7
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 9,945 +Equant...................... 685,927 916,289 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 7,166,377 6,357,740 4.2
- --------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING & 16,929 Banco Bilbao Vizcaya, SA..... 257,996 244,433 0.1
FINANCIAL
55,530 Banco Santander Central
Hispano, SA................ 545,957 578,015 0.4
------------ ------------ -----
803,953 822,448 0.5
------------------------------------------------------------------------------------------------------
INFORMATION 50,000 +Telefonica Publicidad e
PROCESSING Informacion, SA............ 943,281 997,106 0.7
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 1,747,234 1,819,554 1.2
- --------------------------------------------------------------------------------------------------------------------------
SWEDEN COMMUNICATIONS 765 Telefonaktiebolaget LM
EQUIPMENT Ericsson 'B'............... 20,834 24,590 0.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 20,834 24,590 0.0
- --------------------------------------------------------------------------------------------------------------------------
SWITZERLAND FOODS 816 Nestle SA (Registered
Shares).................... 1,550,595 1,472,027 1.0
------------------------------------------------------------------------------------------------------
INSURANCE 1,760 Zurich Allied AG............. 1,169,136 1,002,022 0.6
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 1,148 Novartis AG (Registered
Shares).................... 2,021,480 1,678,341 1.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWITZERLAND 4,741,211 4,152,390 2.7
- --------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM BANKING & 65,025 Barclays PLC................. 1,760,723 1,891,050 1.3
FINANCIAL
6,885 HSBC Holdings PLC............ 196,145 243,724 0.2
114,750 Lloyds TSB Group PLC......... 1,682,552 1,554,683 1.0
96,390 National Westminster Bank
PLC........................ 2,015,957 2,042,420 1.3
------------ ------------ -----
5,655,377 5,731,877 3.8
------------------------------------------------------------------------------------------------------
BROADCASTING 36,628 +British Sky Broadcasting
Group PLC ('Sky').......... 317,408 339,587 0.2
------------------------------------------------------------------------------------------------------
</TABLE>
89
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 CHEMICALS 2,295 Imperial Chemical Industries
KINGDOM PLC........................ $ 22,289 $ 22,669 0.0%
(CONCLUDED)
------------------------------------------------------------------------------------------------------
ELECTRICAL 7,650 Invensys PLC................. 32,465 36,186 0.0
EQUIPMENT
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 18,892 Unilever PLC................. 212,830 168,009 0.1
------------------------------------------------------------------------------------------------------
INSURANCE 61,965 CGU PLC...................... 968,874 894,684 0.6
107,100 Royal & Sun Alliance
Insurance Group PLC........ 1,034,344 960,047 0.6
4,860 Sun Life and Provincial
Holdings PLC............... 25,254 34,703 0.0
------------ ------------ -----
2,028,472 1,889,434 1.2
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 10,000 AstraZeneca Group PLC........ 421,791 386,603 0.3
23,550 Glaxo Wellcome PLC........... 768,318 654,085 0.4
69,776 SmithKline Beecham PLC....... 992,796 906,333 0.6
------------ ------------ -----
2,182,905 1,947,021 1.3
------------------------------------------------------------------------------------------------------
PUBLISHING 21,160 Pearson PLC.................. 458,714 429,694 0.3
------------------------------------------------------------------------------------------------------
RETAIL STORES 21,160 Boots Company PLC............ 338,613 251,183 0.2
7,650 J Sainsbury PLC.............. 48,501 48,207 0.0
55,386 Somerfield PLC............... 333,714 257,403 0.2
50,000 Tesco PLC.................... 141,652 128,592 0.1
------------ ------------ -----
862,480 685,385 0.5
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 161,071 +COLT Telecom Group PLC...... 2,888,947 3,377,429 2.2
41,800 +Cable & Wireless PLC........ 573,486 532,411 0.4
34,305 +Energis PLC................. 896,517 817,687 0.5
175,950 Vodafone Group PLC........... 3,165,250 3,464,895 2.3
------------ ------------ -----
7,524,200 8,192,422 5.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED KINGDOM 19,297,140 19,442,284 12.8
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN
EUROPE 57,904,448 56,353,155 37.2
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM FACE
SECURITIES AMOUNT ISSUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $5,980,000 General Motors Acceptance
Corp., 5.63% due
7/01/1999.................. 5,979,065 5,979,065 4.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 5,979,065 5,979,065 4.0
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............ $142,818,374 149,586,910 98.7
============
OTHER ASSETS LESS
LIABILITIES................ 2,024,767 1.3
------------ -----
NET ASSETS................... $151,611,677 100.0%
============ =====
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
+ Non-income producing security.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
90
<PAGE> 92
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$142,818,374) (Note
1a)....................................................... $149,586,910
Cash........................................................ 932,711
Foreign cash (Note 1c)...................................... 882,436
Receivables:
Securities sold........................................... $811,721
Dividends................................................. 217,384
Capital shares sold....................................... 201,170 1,230,275
--------
Deferred organization expenses (Note 1f).................... 9,275
Prepaid expenses and other assets........................... 2,324
------------
Total assets................................................ 152,643,931
------------
- -------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 862,512
Investment adviser (Note 2)............................... 102,084 964,596
--------
Accrued expenses and other liabilities...................... 67,658
------------
Total liabilities........................................... 1,032,254
------------
- -------------------------------------------------------------------------------------
NET ASSETS.................................................. $151,611,677
============
- -------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 1,328,617
Paid-in capital in excess of par............................ 141,728,085
Undistributed investment income--net........................ 1,038,435
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 754,642
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 6,761,898
------------
NET ASSETS.................................................. $151,611,677
============
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $151,611,677 and 13,286,168
shares outstanding........................................ $ 11.41
============
- -------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
91
<PAGE> 93
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $126,443 foreign withholding tax)......... $1,213,408
Interest and discount earned................................ 299,172
----------
Total income................................................ 1,512,580
----------
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 426,141
Custodian fees.............................................. 16,102
Registration fees........................................... 12,566
Accounting services (Note 2)................................ 10,794
Printing and shareholder reports............................ 3,325
Professional fees........................................... 2,216
Transfer agent fees (Note 2)................................ 1,646
Amortization of organization expenses (Note 1f)............. 754
Directors' fees and expenses................................ 439
Pricing services............................................ 160
----------
Total expenses.............................................. 474,143
----------
Investment income--net...................................... 1,038,437
----------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net.......................................... 832,236
Foreign currency transactions--net........................ (67,025) 765,211
----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 5,131,086
Foreign currency transactions--net........................ (6,677) 5,124,409
---------- ----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 5,889,620
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $6,928,057
==========
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
92
<PAGE> 94
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JUNE 5, 1998+ TO
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1999 DECEMBER 31, 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 1,038,437 $ 42,106
Realized gain (loss) on investments and foreign currency
transactions--net......................................... 765,211 (5,750)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 5,124,409 1,637,489
------------ -----------
Net increase in net assets resulting from operations........ 6,928,057 1,673,845
------------ -----------
- -----------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (43,958) --
Realized gain on investments--net:
Class A................................................... (2,969) --
------------ -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (46,927) --
------------ -----------
- -----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 125,073,215 14,983,487
------------ -----------
- -----------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 131,954,345 16,657,332
Beginning of period......................................... 19,657,332 3,000,000
------------ -----------
End of period*.............................................. $151,611,677 $19,657,332
============ ===========
- -----------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,038,435 $ 43,956
============ ===========
- -----------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
93
<PAGE> 95
- --------------------------------------------------------------------------------
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 SIX FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED JUNE 5, 1998+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999 DECEMBER 31, 1998
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.82 $ 10.00
-------- --------
Investment income--net...................................... .10 .03
Realized and unrealized gain on investments and foreign
currency transactions--net................................ .51 .79
-------- --------
Total from investment operations............................ .61 .82
-------- --------
Less dividends and distributions:
Investment income--net.................................... (.02) --
Realized gain on investments--net......................... --++++ --
-------- --------
Total dividends and distributions........................... (.02) --
-------- --------
Net asset value, end of period.............................. $ 11.41 $ 10.82
======== ========
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 5.70%++ 8.20%++
======== ========
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .83%* 1.03%*
======== ========
Investment income--net...................................... 1.83%* .63%*
======== ========
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $151,612 $ 19,657
======== ========
Portfolio turnover.......................................... 14.94% 15.25%
======== ========
- ------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
++++ Amount is less than $.01 per share.
See Notes to Financial Statements.
94
<PAGE> 96
- --------------------------------------------------------------------------------
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. 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. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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.
- - 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.
95
<PAGE> 97
- --------------------------------------------------------------------------------
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 organizations 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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $1,626 in commissions on the
execution of portfolio security transactions
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $135,940,480 and $15,217,629, respectively.
Net realized gains (losses) for the six months ended June 30, 1999 and net
unrealized gains (losses) as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains(Losses) Gains(Losses)
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $833,025 $6,768,536
Short-term investments............... (789) --
Foreign currency transactions........ (67,025) (6,638)
-------- ----------
Total................................ $765,211 $6,761,898
======== ==========
- --------------------------------------------------------------------
</TABLE>
96
<PAGE> 98
- --------------------------------------------------------------------------------
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $6,768,536, of which $12,402,897 related to appreciated securities
and $5,634,361 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $142,818,374.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$125,073,215 and $14,983,487 for the six months ended June 30, 1999 and for the
period June 5, 1998 to December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 13,106,636 $143,235,098
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 4,289 46,927
---------- ------------
Total issued......................... 13,110,925 143,282,025
Shares redeemed...................... (1,641,514) (18,208,810)
---------- ------------
Net increase......................... 11,469,411 $125,073,215
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Period Dollar
June 5, 1998+ to December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 1,598,261 $ 15,794,079
Shares redeemed...................... (81,504) (810,592)
---------- ------------
Net increase......................... 1,516,757 $ 14,983,487
========== ============
- -----------------------------------------------------------------
</TABLE>
+ Prior to June 5, 1998 (commencement of operations), the Fund issued 300,000
shares to MLLIC for $3,000,000.
97
<PAGE> 99
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SEMI-ANNUAL REPORT--JUNE 30, 1999
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. In Japan, there are not yet clear signs that
Japan's economy is improving. There were growing signs of improvement in some
emerging economies (most notably South Korea and Mexico), although concerns
remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
PORTFOLIO MATTERS
As of June 30, 1999, the Fund's asset allocation was: US stocks, 36% of net
assets; foreign stocks, 43%; US bonds, 6%; foreign bonds, 13%; and cash
reserves, 2%.
During the six months ended June 30, 1999, we enlarged the foreign common
stock sector from 28% of net assets to 43%. The largest portion of the foreign
equity expansion was undertaken by enlarging our commitment to Japanese
equities. This increase reflects our expectation that an increased number of
Japanese corporations would be undertaking significant restructuring that could
lead to improved profitability and earnings over the longer term. Our increased
optimism also reflected indications that monetary policy remained accommodative
and that the Japanese economy was showing signs of bottoming.
We also enlarged the Fund's commitment to emerging markets, including Brazil
and Asian markets outside of Japan, in response to increased evidence that the
problems associated with the 1997-1998 financial crisis were abating. We
established our commitments in Brazil in response to the improving
post-devaluation outlook. In Asia, we devoted assets to new positions in South
Korea, Singapore and Hong Kong. European equities remained our largest regional
commitment, although we reduced overall representation in recent months. Within
Europe, we maintained significant representation in financial services,
telecommunications services and equipment, and consumer staple goods.
We slightly reduced the Fund's allocation to US equities from 40% of net
assets to 36% during the six months ended June 30, 1999. We continued to believe
that investors would favor the shares of companies that offered a high degree of
earnings visibility in a steady growth/low inflation economy. On this basis,
technology has remained the largest single group represented among our US equity
commitments. Consumer staples, including healthcare and financial services, also
continued to account for a significant portion of US equity assets.
In the fixed-income component of the portfolio, we reduced the foreign bond
sector from 19% of net assets to 13% during first half of the six months ended
June 30, 1999. Seemingly attractive risk/reward relationships led us to
establish positions in Japanese and New Zealand bonds early in 1999. However,
during the second half of the period, we eliminated our position in Japanese
bonds following a decline in yields, which reduced potential for additional
appreciation. We also took advantage of the appreciation in the New Zealand
bonds and sold our position. We retained positions in German and UK bonds, where
we believe the risk/reward relationship has remained favorable.
Finally, we also reduced our US bond commitment from 13% of net assets to 6%
during the six-month period ended June 30, 1999. As a result, we increased the
average duration from 6.0 years to 6.8 years. Strength in the US economy
persisted during the first half of 1999.
IN CONCLUSION
We appreciate your investment in Global Strategy Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to
98
<PAGE> 100
- --------------------------------------------------------------------------------
sharing our investment outlook and strategies with you in our next report to
shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
July 28, 1999
99
<PAGE> 101
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +3.03%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +9.45
- --------------------------------------------------------------------------------
Inception (2/28/92) to 6/30/99 +9.56
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +3.03% +4.64%
- ------------------------------------------------------------------------------------------
</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.
100
<PAGE> 102
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE 38,802 United Technologies
Corporation.............. $ 1,447,916 $ 2,781,618 0.4%
- ------------------------------------------------------------------------------------------------------------------------
APPLICATION DEVELOPMENT 36,000 +Siebel Systems, Inc. ..... 1,329,188 2,385,000 0.3
SOFTWARE
- ------------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 82,000 Delphi Automotive Systems
Corporation.............. 1,394,000 1,522,125 0.2
- ------------------------------------------------------------------------------------------------------------------------
AUTO--RELATED 33,400 The Hertz Corporation
(Class A)................ 1,336,331 2,070,800 0.3
- ------------------------------------------------------------------------------------------------------------------------
BANKING 43,148 Bank of America
Corporation.............. 2,811,545 3,163,288 0.5
80,300 The Bank of New York
Company, Inc. ........... 697,896 2,946,006 0.4
27,200 Citigroup Inc. ............ 1,247,555 1,292,000 0.2
61,800 Wells Fargo Company........ 2,457,112 2,641,950 0.4
------------ ------------ -----
7,214,108 10,043,244 1.5
- ------------------------------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 134,400 Mellon Bank Corporation.... 4,257,915 4,888,800 0.7
9,950 Providian Financial
Corporation.............. 593,252 930,325 0.1
------------ ------------ -----
4,851,167 5,819,125 0.8
- ------------------------------------------------------------------------------------------------------------------------
BEVERAGES 26,700 PepsiCo, Inc. ............. 835,763 1,032,956 0.2
- ------------------------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 136,212 +AT&T Corp.--Liberty Media
Group (Class A).......... 1,638,496 5,005,791 0.7
16,300 +Clear Channel
Communications, Inc. .... 1,151,273 1,123,681 0.2
------------ ------------ -----
2,789,769 6,129,472 0.9
- ------------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 49,300 +American Tower
Corporation (Class A).... 1,232,500 1,183,200 0.2
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 11,400 Eaton Corporation.......... 767,991 1,048,800 0.2
9,700 Hewlett-Packard Company.... 711,959 974,850 0.1
------------ ------------ -----
1,479,950 2,023,650 0.3
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 33,700 E.I. du Pont de Nemours
and Company.............. 2,122,589 2,302,131 0.3
33,700 Rohm and Haas Company...... 1,239,530 1,444,887 0.2
------------ ------------ -----
3,362,119 3,747,018 0.5
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATION 93,400 +MCI WorldCom Inc. ........ 3,106,523 8,032,400 1.2
EQUIPMENT
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 11,300 +America Online, Inc. ..... 1,002,257 1,248,650 0.2
120,800 +Cisco Systems, Inc. ...... 2,627,137 7,784,050 1.1
54,400 International Business
Machines Corporation..... 2,776,491 7,031,200 1.0
------------ ------------ -----
6,405,885 16,063,900 2.3
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 15,600 +Transaction Systems
Architects, Inc.
(Class A)................ 626,535 608,400 0.1
- ------------------------------------------------------------------------------------------------------------------------
COMPUTERS 36,100 +EMC Corporation........... 1,298,162 1,985,500 0.3
10,200 +Sun Microsystems, Inc. ... 624,809 702,525 0.1
83,600 Tandy Corporation.......... 2,355,684 4,085,950 0.6
------------ ------------ -----
4,278,655 6,773,975 1.0
- ------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 139,600 The Dial Corporation....... 2,970,343 5,191,375 0.8
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER--ELECTRONICS 46,150 +Dell Computer
Corporation.............. 1,462,324 1,704,666 0.3
- ------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 30,850 PECO Energy Company........ 1,051,877 1,291,844 0.2
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 38,800 General Electric Company... 3,293,022 4,384,400 0.6
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONICS 58,800 Intel Corporation.......... 3,572,681 3,494,925 0.5
25,800 +Lattice Semiconductor
Corporation.............. 1,296,021 1,599,600 0.2
------------ ------------ -----
4,868,702 5,094,525 0.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
101
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ENTERTAINMENT 118,100 +Premier Parks Inc. ....... $ 3,072,141 $ 4,340,175 0.6%
37,000 Royal Caribbean Cruises
Ltd. .................... 932,359 1,618,750 0.2
20,200 The Walt Disney Company ... 706,511 622,412 0.1
------------ ------------ -----
4,711,011 6,581,337 0.9
- ------------------------------------------------------------------------------------------------------------------------
FINANCE 20,200 +The Goldman Sachs Group,
Inc...................... 1,070,600 1,459,450 0.2
76,650 +TD Waterhouse Group,
Inc. .................... 1,839,600 1,921,041 0.3
------------ ------------ -----
2,910,200 3,380,491 0.5
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 65,800 Associates First Capital
Corporation (Class A).... 2,438,027 2,915,762 0.4
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- 78,200 Household International,
CONSUMER Inc. .................... 3,388,873 3,704,725 0.5
- ------------------------------------------------------------------------------------------------------------------------
FOODS 110,700 +Keebler Foods Company..... 3,091,753 3,362,512 0.5
- ------------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 23,975 The Black & Decker
Corporation.............. 1,317,495 1,513,422 0.2
- ------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 23,900 Colgate-Palmolive
Company.................. 2,192,708 2,360,125 0.3
- ------------------------------------------------------------------------------------------------------------------------
INFORMATION PROCESSING 48,000 +Unisys Corporation........ 1,567,362 1,869,000 0.3
11,400 Xerox Corporation.......... 638,281 673,313 0.1
------------ ------------ -----
2,205,643 2,542,313 0.4
- ------------------------------------------------------------------------------------------------------------------------
INSURANCE 12,600 American International
Group, Inc. ............. 1,475,378 1,474,987 0.2
17,400 The Equitable Companies
Incorporated............. 889,479 1,165,800 0.2
------------ ------------ -----
2,364,857 2,640,787 0.4
- ------------------------------------------------------------------------------------------------------------------------
LASER SYSTEMS & 16,150 +JDS Uniphase
COMPONENTS Corporation.............. 1,612,711 2,680,900 0.4
- ------------------------------------------------------------------------------------------------------------------------
MACHINERY 22,350 Case Corporation........... 637,477 1,075,594 0.2
100,700 Ingersoll-Rand Company..... 3,440,369 6,507,737 0.9
------------ ------------ -----
4,077,846 7,583,331 1.1
- ------------------------------------------------------------------------------------------------------------------------
MACHINERY & EQUIPMENT 12,800 Caterpillar Inc. .......... 710,326 768,000 0.1
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING 31,200 Millipore Corporation...... 648,701 1,265,550 0.2
57,600 Tyco International
Ltd. .................... 3,037,928 5,457,600 0.8
------------ ------------ -----
3,686,629 6,723,150 1.0
- ------------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 32,150 Johnson & Johnson.......... 2,529,029 3,150,700 0.5
- ------------------------------------------------------------------------------------------------------------------------
METALS 42,500 Alcoa Inc. ................ 1,577,117 2,629,687 0.4
- ------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 55,300 Enron Corp. ............... 2,458,593 4,520,775 0.7
- ------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 39,000 Mobil Corporation.......... 3,110,742 3,861,000 0.6
- ------------------------------------------------------------------------------------------------------------------------
OIL SERVICES 50,000 Schlumberger Limited....... 3,098,508 3,184,375 0.5
- ------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 30,400 International Paper
Company.................. 1,475,441 1,535,200 0.2
- ------------------------------------------------------------------------------------------------------------------------
PETROLEUM 83,400 Unocal Corporation......... 2,983,006 3,304,725 0.5
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 83,150 American Home Products
DIVERSIFIED Corporation.............. 4,874,375 4,781,125 0.7
96,600 Bristol-Myers Squibb
Company.................. 4,721,506 6,804,262 1.0
------------ ------------ -----
9,595,881 11,585,387 1.7
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 21,900 Pharmacia & Upjohn,
PRESCRIPTION Inc. .................... 1,384,087 1,244,194 0.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
102
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PHARMACEUTICALS 53,500 Cardinal Health, Inc. ..... $ 3,673,508 $ 3,430,687 0.5%
17,700 Merck & Co., Inc. ......... 1,240,062 1,309,800 0.2
37,400 Pfizer Inc. ............... 4,871,413 4,104,650 0.6
------------ ------------ -----
9,784,983 8,845,137 1.3
- ------------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 183,000 +Capstar Broadcasting
Corporation (Class A).... 3,477,000 5,009,625 0.7
- ------------------------------------------------------------------------------------------------------------------------
RETAIL 14,800 +Best Buy Co., Inc. ....... 696,044 999,000 0.1
11,500 +Federated Department
Stores, Inc. ............ 610,190 608,781 0.1
51,700 Lowe's Companies, Inc. .... 1,851,745 2,930,744 0.4
74,900 +Safeway Inc. ............. 2,629,573 3,707,550 0.5
98,600 Wal-Mart Stores, Inc. ..... 2,218,334 4,757,450 0.7
------------ ------------ -----
8,005,886 13,003,525 1.8
- ------------------------------------------------------------------------------------------------------------------------
RETAIL--STORES 44,400 Dayton Hudson
Corporation.............. 3,082,098 2,886,000 0.4
- ------------------------------------------------------------------------------------------------------------------------
SAVINGS & LOAN 74,100 GreenPoint Financial
ASSOCIATIONS Corp. ................... 2,774,075 2,431,406 0.4
- ------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 11,050 +Applied Materials,
Inc. .................... 707,104 816,319 0.1
56,500 Motorola, Inc. ............ 3,103,454 5,353,375 0.8
------------ ------------ -----
3,810,558 6,169,694 0.9
- ------------------------------------------------------------------------------------------------------------------------
SERVICES 51,660 +Quintiles Transnational
Corp. ................... 2,416,200 2,166,491 0.3
- ------------------------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 144,400 +Microsoft Corporation..... 11,401,665 13,014,050 1.9
- ------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 53,900 AT&T Corp. ................ 1,421,617 3,008,294 0.4
66,600 GTE Corporation............ 3,449,929 5,044,950 0.7
40,600 Lucent Technologies
Inc. .................... 2,239,410 2,737,962 0.4
------------ ------------ -----
7,110,956 10,791,206 1.5
- ------------------------------------------------------------------------------------------------------------------------
TOBACCO 37,100 Philip Morris Companies
Inc. .................... 1,701,679 1,490,956 0.2
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 74,000 Ameritech Corporation...... 3,603,899 5,439,000 0.8
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 62,800 Public Service Enterprise
Group Incorporated....... 2,439,669 2,566,950 0.4
- ------------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 67,000 Waste Management, Inc. .... 2,935,981 3,601,250 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS 180,801,809 247,071,881 35.9
- ------------------------------------------------------------------------------------------------------------------------
COUNTRY FOREIGN STOCKS++
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA 260,300 Broken Hill Proprietary
Company Limited(18)...... 2,865,368 3,015,120 0.4
38,700 The News Corporation
Limited (Preferred)
(ADR)*(44)................. 1,298,823 1,221,469 0.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 4,164,191 4,236,589 0.6
- ------------------------------------------------------------------------------------------------------------------------
AUSTRIA 41,100 Mayr-Melnhof Karton
AG(40)................... 2,069,711 1,863,737 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRIA 2,069,711 1,863,737 0.3
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
103
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BRAZIL 92,600 Aracruz Celulose SA
(ADR)*(40)............... $ 1,298,541 $ 2,037,200 0.3%
84,800 Companhia Vale do Rio Doce
'A' (Preferred)(36)...... 1,212,680 1,665,372 0.2
71,400 Embratel Participacoes SA
(ADR)*(49)............... 1,180,531 990,675 0.2
15,600 +Telecomunicacoes
Brasileiras SA-Telebras
(ADR)*(49)............... 2,437 975 0.0
15,600 Telecomunicacoes
Brasileiras SA-Telebras
(Preferred Block)
(ADR)*(49)............... 1,229,783 1,406,925 0.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 4,923,972 6,101,147 0.9
- ------------------------------------------------------------------------------------------------------------------------
CANADA 76,400 +ATI Technologies
Inc.(21)................. 1,196,724 1,233,009 0.2
199,900 Domtar, Inc.(40)........... 1,613,171 1,880,234 0.3
22,100 Nortel Networks
Corporation(12).......... 1,205,776 1,918,556 0.3
123,400 Teleglobe Inc.(49)......... 3,419,523 3,671,150 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 7,435,194 8,702,949 1.3
- ------------------------------------------------------------------------------------------------------------------------
DENMARK 6,200 +ISS International Service
System A/S 'B'(27)....... 404,569 329,467 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
DENMARK 404,569 329,467 0.0
- ------------------------------------------------------------------------------------------------------------------------
FINLAND 154,500 Amer Group Ltd.(18)........ 2,865,185 2,221,226 0.3
45,200 Nokia Oyj(12).............. 2,378,846 3,959,565 0.6
80,000 Sampro Insurance Company
PLC 'A'(29).............. 3,698,893 2,316,789 0.3
109,960 Sponda Oyj(44)............. 796,861 555,291 0.1
57,400 UPM-Kymmene Oyj(40)........ 1,461,307 1,644,549 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FINLAND 11,201,092 10,697,420 1.6
- ------------------------------------------------------------------------------------------------------------------------
FRANCE 36,200 Axa(29).................... 4,392,403 4,413,503 0.6
6,250 Cap Gemini SA(28).......... 1,016,109 981,647 0.1
12,510 Carrefour SA(35)........... 1,593,908 1,837,225 0.3
9,000 Groupe Danone SA*(24)...... 2,362,876 2,318,850 0.3
27,600 Elf Aquitaine SA(38)....... 3,426,168 4,047,661 0.6
44,400 France Telecom SA(49)...... 3,448,650 3,351,820 0.5
132,800 Pechiney SA 'A'(36)........ 6,015,202 5,704,478 0.8
70,900 STMicroelectronics NV (NY
Registered Shares)(47)... 2,557,213 4,918,687 0.7
65,500 Scor SA(29)................ 2,353,312 3,246,957 0.5
6,025 Societe Generale 'A'(5).... 1,118,331 1,061,180 0.2
63,800 Thomson CSF SA(20)......... 2,398,301 2,215,852 0.3
11,000 +Total SA 'B'(38).......... 1,446,122 1,418,209 0.2
49,200 Vivendi(53)................ 3,384,984 3,982,919 0.6
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 35,513,579 39,498,988 5.7
- ------------------------------------------------------------------------------------------------------------------------
GERMANY 15,300 BASF AG(11)................ 686,553 675,667 0.1
42,100 DaimlerChrysler AG(2)...... 3,822,277 3,644,614 0.5
46,700 Henkel KGaA
(Preferred)(11).......... 1,990,485 3,186,141 0.5
20,000 Mannesmann AG(33).......... 3,007,482 2,982,556 0.4
18,200 RWE AG(18)................. 1,073,142 841,998 0.1
24,200 Siemens AG(22)............. 1,673,840 1,865,551 0.3
17,000 Veba AG(37)................ 1,094,274 998,651 0.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GERMANY 13,348,053 14,195,178 2.1
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
104
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HONG KONG 79,300 Hutchison Whampoa
Limited(37).............. $ 732,283 $ 718,019 0.1%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HONG KONG 732,283 718,019 0.1
- ------------------------------------------------------------------------------------------------------------------------
IRELAND 180,000 Bank of Ireland(5)......... 3,807,064 3,035,582 0.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
IRELAND 3,807,064 3,035,582 0.4
- ------------------------------------------------------------------------------------------------------------------------
ITALY 218,350 Mondadori (Arnoldo) Editore
SpA(44).................. 1,829,331 3,780,529 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 1,829,331 3,780,529 0.5
- ------------------------------------------------------------------------------------------------------------------------
JAPAN 188,000 The Bank of Tokyo-
Mitsubishi, Ltd.(6)...... 2,422,987 2,677,500 0.4
92,000 Bridgestone Corp.(50)...... 2,251,684 2,783,270 0.4
137,000 The Daimaru, Inc.(46)...... 629,698 670,392 0.1
92,000 Fuji Photo Film(43)........ 3,484,097 3,482,890 0.5
288,000 Fujitsu Limited(22)........ 3,976,907 5,796,661 0.9
84,000 Honda Motor Co., Ltd.(2)... 3,302,876 3,561,911 0.5
37,000 Ito-Yokado Co., Ltd.(46)... 2,152,410 2,477,269 0.4
134,000 Kao Corporation(16)........ 2,751,250 3,765,912 0.6
6,500 Keyence Corporation(22).... 872,062 1,137,957 0.2
168,000 Marui Co., Ltd.(35)........ 2,975,322 2,777,319 0.4
154,000 Matsushita Electric
Industrial Company,
Ltd.(22)................. 2,695,815 2,991,404 0.4
127,000 Minebea Company
Ltd.(32)................. 1,311,934 1,417,176 0.2
175,000 Mitsukoshi, Ltd.(46)....... 761,570 760,870 0.1
288,000 NEC Corporation(14)........ 2,853,244 3,582,741 0.5
320 +NTT Mobile Communications
Network, Inc.(49)........ 2,111,854 4,295,586 0.6
847,000 Nippon Sheet Glass Company,
Ltd.(25)................. 2,647,354 3,017,499 0.4
287 Nippon Telegraph &
Telephone Corporation
(NTT)(22)................ 2,437,593 3,344,933 0.5
121,000 Olympus Optical Co.,
Ltd.(18)................. 1,363,168 1,789,296 0.3
24,000 Orix Corporation(23)....... 1,742,250 2,142,503 0.3
24,000 Rohm Company Ltd.(22)...... 2,351,533 3,759,299 0.6
303,000 The Sanwa Bank, Ltd.(6).... 3,084,478 2,982,915 0.4
17,800 Softbank Corporation(17)... 2,763,010 3,606,199 0.5
33,600 Sony Corporation
(ADR)*(1)................ 2,796,896 3,708,600 0.5
241,000 The Sumitomo Bank,
Ltd.(5).................. 3,083,810 2,990,089 0.4
30,000 TDK Corporation(22)........ 2,327,053 2,745,082 0.4
64,000 Takeda Chemical
Industries(42)........... 2,313,037 2,967,763 0.4
212,000 The Tokio Marine & Fire
Insurance Co. Ltd.(29)... 2,409,999 2,304,348 0.3
523,000 Toshiba Corporation(22).... 3,466,455 3,730,774 0.6
127,000 Toyota Motor
Corporation(2)........... 3,469,225 4,020,582 0.6
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 70,809,571 85,288,740 12.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
105
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NETHERLANDS 48,500 ABN AMRO Holding
NV(5).................... $ 1,086,706 $ 1,049,666 0.2%
14,400 +ASM Lithography Holding
NV(21)................... 578,638 832,560 0.1
15,400 Akzo Nobel NV(11).......... 703,935 647,547 0.1
51,100 +Baan Company, NV(13)...... 802,809 789,955 0.1
54,000 CSM NV(24)................. 2,836,976 2,696,359 0.4
41,300 Koninklijke Ahold NV(24)... 1,609,781 1,421,630 0.2
28,928 Unilever NV 'A'(34)........ 2,324,221 1,948,292 0.3
75,600 Wolters Kluwer NV 'A'(8)... 2,888,738 3,007,456 0.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 12,831,804 12,393,465 1.8
- ------------------------------------------------------------------------------------------------------------------------
NORWAY 82,900 Bergesen d.y. ASA
'B'(51).................. 1,192,523 1,175,251 0.2
197,800 Merkantildata ASA(13)...... 1,677,077 1,911,354 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORWAY 2,869,600 3,086,605 0.5
- ------------------------------------------------------------------------------------------------------------------------
SINGAPORE 71,000 Development Bank of
Singapore Limited
'Foreign'(6)............. 734,474 867,940 0.1
55,300 +Flextronics International
Ltd.(21)................. 1,907,024 3,055,325 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SINGAPORE 2,641,498 3,923,265 0.6
- ------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA 46,700 Pohang Iron & Steel
Company, Ltd.
(ADR)*(48)............... 1,292,668 1,570,288 0.2
8,200 Samsung Electronics(22).... 613,832 899,698 0.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH
KOREA 1,906,500 2,469,986 0.4
- ------------------------------------------------------------------------------------------------------------------------
SPAIN 172,000 +Dinamia Capital Privado.
Sociedad de Capital
Riesgo, SA(54)........... 3,233,132 1,836,447 0.3
133,000 Endesa SA(52).............. 3,485,249 2,834,603 0.4
27,390 +Grupo Ferrovial, SA(15)... 666,631 663,361 0.1
89,100 Metrovacesa, SA(45)........ 2,777,112 1,738,275 0.3
74,000 Repsol SA(41).............. 1,436,323 1,510,035 0.2
79,600 +Telefonica SA(48)......... 3,468,790 3,831,890 0.5
273,600 Uralita, SA(9)............. 3,765,448 2,298,073 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 18,832,685 14,712,684 2.1
- ------------------------------------------------------------------------------------------------------------------------
SWEDEN 58,100 Autoliv, Inc.(4)........... 1,943,840 1,775,040 0.3
163,200 Castellum AB(45)........... 1,696,428 1,540,077 0.2
16,400 Custos AB 'A'(18).......... 422,398 353,052 0.0
65,500 Custos AB 'B'(18).......... 1,726,494 1,421,646 0.2
202,200 Fastighets AB Tornet(45)... 3,016,155 2,754,833 0.4
102,750 ForeningsSparbanken
AB(5).................... 875,497 1,454,438 0.2
161,500 Haldex AB(4)............... 2,872,989... 2,114,597 0.3
254,182 Investment AB Bure(30)..... 1,159,589 1,349,241 0.2
325,700 Nordbanken Holding
AB(5).................... 2,207,706 1,909,441 0.3
175,800 +Stora Enso Oyj 'R'(40).... 1,716,250 1,907,827 0.3
122,900 Telefonaktiebolaget LM
Ericsson (ADR)*(49)...... 3,036,253 4,040,338 0.6
42,700 Volvo AB 'B'(3)............ 1,190,588 1,241,587 0.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 21,864,187 21,862,117 3.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
106
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SWITZERLAND 6,223 Credit Suisse Group
(Registered Shares)(5)... $ 1,064,229 $ 1,078,114 0.2%
7,392 Swisscom AG (Registered
Shares)(49).............. 2,052,676 2,785,033 0.4
3,320 UBS AG (Registered
Shares)(6)............... 1,104,272 992,130 0.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWITZERLAND 4,221,177 4,855,277 0.7
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 87,600 AstraZeneca Group
PLC(19).................. 3,521,087 3,386,644 0.5
294,700 BP Amoco PLC(38)........... 4,867,067 5,278,754 0.8
128,600 Bank of Scotland(5)........ 1,491,540 1,701,810 0.3
958,200 Billiton PLC(18)........... 2,538,227 3,339,876 0.5
302,200 The British Land Company
PLC(45).................. 2,740,743 2,525,636 0.4
143,200 British Telecommunications
PLC(49).................. 2,326,096 2,398,099 0.4
161,400 +Cable & Wireless
PLC(50).................. 2,409,348 2,055,769 0.3
768,600 Devro PLC(24).............. 3,607,815 1,707,302 0.3
302,286 Diageo PLC(7).............. 3,411,071 3,154,967 0.4
127,700 Dixons Group PLC(46)....... 2,919,158 2,383,966 0.3
69,500 +Energis PLC(49)........... 1,881,764 1,656,588 0.2
107,000 Glaxo Wellcome PLC(42)..... 3,419,099 2,971,850 0.4
97,100 HSBC Holdings PLC(5)....... 2,595,897 3,437,266 0.5
551,500 Hilton Group PLC(31)....... 2,903,710 2,185,115 0.3
379,800 Lloyds TSB Group PLC(5).... 5,150,249 5,145,698 0.7
139,300 The Peninsular and Oriental
Steam Navigation
Company(51).............. 2,146,778 2,090,292 0.3
217,800 Reed International
PLC(44).................. 1,825,809 1,452,264 0.2
84,250 Shell Transport & Trading
Company (ADR)*(39)....... 3,068,309 3,907,094 0.6
296,300 +TeleWest Communications
PLC(10).................. 1,282,215 1,328,020 0.2
124,200 Vodafone Group PLC(49)..... 2,305,105 2,445,809 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED KINGDOM 56,411,087 54,552,819 7.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 277,817,148 296,304,563 43.1
- ------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT FOREIGN BONDS++
- ------------------------------------------------------------------------------------------------------------------------
GERMANY E 22,000,000 BundesObligation, 4.75% due
11/20/2001(26)........... 26,688,658 23,373,763 3.4
Bundesrepublik
Deutschland(26):
24,800,000 4.75% due 7/04/2008...... 29,575,091 25,980,180 3.8
13,250,000 4.75% due 7/04/2028...... 15,634,405 12,341,557 1.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GERMANY 71,898,154 61,695,500 9.0
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM L 16,383,000 United Kingdom Treasury
Gilt, 7.25% due
12/07/2007(26)........... 30,494,544 29,138,194 4.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED KINGDOM 30,494,544 29,138,194 4.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS 102,392,698 90,833,694 13.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
107
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE US GOVERNMENT & AGENCY VALUE PERCENT OF
AMOUNT OBLIGATIONS COST (NOTE 1a) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal National Mortgage
Association:
US$ 1,000,000 5.625% due 3/15/2001..... $ 1,004,300 $ 998,280 0.1%
10,080,000 5.125% due 2/13/2004..... 9,887,170 9,664,200 1.4
14,840,000 5.75% due 2/15/2008...... 14,782,419 14,188,376 2.0
3,250,000 6.375% due 6/15/2009..... 3,244,924 3,222,570 0.5
10,210,000 US Treasury Bonds, 6.625%
due 2/15/2027............ 11,704,166 10,782,679 1.6
2,000,000 US Treasury Notes, 4.25%
due 11/15/2003........... 1,893,594 1,888,440 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT &
AGENCY OBLIGATIONS 42,516,573 40,744,545 5.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.......... $603,528,228 674,954,683 98.1
============
UNREALIZED APPRECIATION ON
FORWARD FOREIGN EXCHANGE
CONTRACTS+++............. 118,314 0.0
OTHER ASSETS LESS
LIABILITIES.............. 12,824,624 1.9
------------ -----
NET ASSETS................. $687,897,621 100.0%
============ =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
+ Non-income producing security.
++ Corresponding industry groups for foreign stocks and bonds:
<TABLE>
<S> <C> <C>
(1) Appliances (19) Drugs (37) Multi-Industry
(2) Automobile (20) Electrical Equipment (38) Oil & Related
(3) Automobile & Equipment (21) Electronic Components (39) Oil--Integrated
(4) Auto--Parts (22) Electronics (40) Paper & Forest Products
(5) Banking (23) Finance (41) Petroleum
(6) Banking & Financial (24) Foods (42) Pharmaceutical
(7) Beverages (25) Glass (43) Photography
(8) Broadcasting & (26) Government (Bonds) (44) Printing & Publishing
Publishing (27) Industrial--Services (45) Real Estate
(9) Building Materials (28) Information Processing (46) Retail Stores
(10) Cable Television (29) Insurance (47) Semiconductor Capital
Services (30) Investment Management Equipment
(11) Chemicals (31) Leisure (48) Steel
(12) Communication Equipment (32) Machine Tools & Machinery (49) Telecommunications
(13) Computer Software (33) Machinery & Equipment (50) Tires & Rubber
(14) Computers (34) Manufacturing (51) Transport Services
(15) Construction (35) Merchandising (52) Utilities--Electric
(16) Cosmetics (36) Metals & Mining (53) Utilities--Water
(17) Distribution (54) Venture Capital
(18) Diversified
</TABLE>
+++ Forward foreign exchange contracts as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION
FOREIGN CURRENCY SOLD EXPIRATION DATE (Note 1b)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
C$ 11,600,000 July 1999 $118,314
- ---------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET
(US$ COMMITMENT--$7,970,317) $118,314
========
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
108
<PAGE> 110
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$603,528,228) (Note
1a)....................................................... $674,954,683
Unrealized appreciation on forward foreign exchange
contracts (Note 1b)....................................... 118,314
Receivables:
Securities sold........................................... $15,327,446
Interest.................................................. 3,447,941
Dividends................................................. 866,514
Forward foreign exchange contracts (Note 1b).............. 200,063
Capital shares sold....................................... 413 19,842,377
-----------
Prepaid expenses and other assets........................... 56,606
------------
Total assets................................................ 694,971,980
------------
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 5,165,851
Capital shares redeemed................................... 526,420
Custodian bank (Note 1g).................................. 448,089
Investment adviser (Note 2)............................... 401,502
Forward foreign exchange contracts (Note 1b).............. 282,993 6,824,855
-----------
Accrued expenses and other liabilities...................... 249,504
------------
Total liabilities........................................... 7,074,359
------------
- ----------------------------------------------------------------------------------------
NET ASSETS.................................................. $687,897,621
============
- ----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized+........................................ $ 4,943,854
Paid-in capital in excess of par............................ 558,605,559
Undistributed investment income--net........................ 3,894,279
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 49,121,865
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 71,332,064
------------
NET ASSETS.................................................. $687,897,621
============
- ----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $687,897,621 and 49,438,536
shares outstanding........................................ $ 13.91
============
- ----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
109
<PAGE> 111
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Interest and discount earned................................ $ 4,602,529
Dividends (net of $465,315 foreign withholding tax)......... 4,272,794
------------
Total income................................................ 8,875,323
------------
- -----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 2,321,022
Custodian fees.............................................. 131,671
Accounting services (Note 2)................................ 75,581
Printing and shareholder reports............................ 41,511
Professional fees........................................... 38,372
Directors' fees and expenses................................ 8,507
Transfer agent fees (Note 2)................................ 2,725
Other....................................................... 3,241
------------
Total expenses.............................................. 2,622,630
------------
Investment income--net...................................... 6,252,693
------------
- -----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain from:
Investments--net.......................................... 43,122,531
Foreign currency transactions--net........................ 2,466,198 45,588,729
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (18,911,333)
Foreign currency transactions--net........................ (324,293) (19,235,626)
------------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 26,353,103
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 32,605,796
============
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
110
<PAGE> 112
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 6,252,693 $ 19,776,143
Realized gain on investments and foreign currency
transactions--net......................................... 45,588,729 1,127,496
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (19,235,626) 47,215,144
------------- -------------
Net increase in net assets resulting from operations........ 32,605,796 68,118,783
------------- -------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (6,709,180) (32,818,349)
Realized gain on investments--net:
Class A................................................... -- (100,559,993)
In excess of realized gains on investments--net:
Class A................................................... -- (8,809,833)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (6,709,180) (142,188,175)
------------- -------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (104,024,807) (29,551,610)
------------- -------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (78,128,191) (103,621,002)
Beginning of period......................................... 766,025,812 869,646,814
------------- -------------
End of period*.............................................. $687,897,621 $ 766,025,812
============= =============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 3,894,279 $ 4,350,766
============= =============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
111
<PAGE> 113
- --------------------------------------------------------------------------------
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, 1999++ 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 13.41 $ 14.71 $ 13.87 $ 12.55 $ 11.73
-------- -------- -------- -------- --------
Investment income--net............................. .12 .34 .35 .28 .39
Realized and unrealized gain on investments and
foreign currency transactions--net............... .50 .76 1.21 1.33 .82
-------- -------- -------- -------- --------
Total from investment operations................... .62 1.10 1.56 1.61 1.21
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................... (.12) (.55) (.30) (.29) (.39)
Realized gain on investments--net................ -- (1.70) (.42) -- --+
In excess of realized gain on investments--net... -- (.15) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions.................. (.12) (2.40) (.72) (.29) (.39)
-------- -------- -------- -------- --------
Net asset value, end of period..................... $ 13.91 $ 13.41 $ 14.71 $ 13.87 $ 12.55
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. 4.64%++ 8.87% 11.94% 13.17% 10.60%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... .73%* .72% .73% .71% .72%
======== ======== ======== ======== ========
Investment income--net............................. 1.75%* 2.40% 2.33% 2.68% 3.33%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $687,898 $766,026 $869,647 $870,203 $540,242
======== ======== ======== ======== ========
Portfolio turnover................................. 60.25% 120.59% 108.66% 173.44% 27.23%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
112
<PAGE> 114
- --------------------------------------------------------------------------------
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. The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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.
- - 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.
113
<PAGE> 115
- --------------------------------------------------------------------------------
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.
(g) Custodian bank--The Fund recorded an amount payable to the Custodian bank
reflecting an overnight overdraft, which resulted from timing differences of
security transaction settlements.
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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $42,856 in commissions
on the execution of portfolio security transactions.
For the six months ended June 30, 1999, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $240 for providing security price
quotations to compute the Fund's net asset value.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $428,922,662 and $537,576,904, respectively.
114
<PAGE> 116
- --------------------------------------------------------------------------------
Net realized gains (losses) for the six months ended June 30, 1999 and net
unrealized gains (losses) as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments............. $43,122,531 $71,426,455
Foreign currency transactions..... (3,994,164) (212,705)
Forward foreign exchange
contracts........................ 6,460,362 118,314
----------- -----------
Total............................. $45,588,729 $71,332,064
=========== ===========
- --------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $71,426,455, of which $106,635,204 related to appreciated securities
and $35,208,749 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $603,528,228.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$104,024,807 and $29,551,610 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold......................... 46,014 $ 621,005
Shares issued to shareholders in
reinvestment of dividends.......... 502,184 6,709,180
---------- -------------
Total issued........................ 548,198 7,330,185
Shares redeemed..................... (8,253,810) (111,354,992)
---------- -------------
Net decrease........................ (7,705,612) $(104,024,807)
========== =============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold........................ 234,661 $ 3,070,103
Shares issued to shareholders in
reinvestment of dividends and
distributions..................... 11,480,542 142,188,175
----------- -------------
Total issued....................... 11,715,203 145,258,278
Shares redeemed.................... (13,691,765) (174,809,888)
----------- -------------
Net decrease....................... (1,976,562) $ (29,551,610)
=========== =============
- -----------------------------------------------------------------
</TABLE>
5. COMMITMENTS:
At June 30, 1999, 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 a value of
approximately $2,283,000 and $7,964,000, respectively.
6. SUBSEQUENT EVENT:
On July 7, 1999, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.022008 per Class A Share and a long-term capital
gains distribution in the amount of $.076065 per Class A Share, payable on July
14, 1999 to shareholders of record as of July 6, 1999.
115
<PAGE> 117
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. In Japan, there are not yet clear signs that
Japan's economy is improving. There were growing signs of improvement in some
emerging economies (most notably South Korea and Mexico), although concerns
remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
INVESTMENT ENVIRONMENT
The consolidation trend in the utility sector is spreading worldwide. Merger and
acquisition activity has increased both domestically and internationally.
Examples include the combination of the UK-based international cellular company,
Vodaphone Group PLC (a Fund holding) and US-based global cellular operator,
AirTouch Communications. The bidding contest between the Italian company
Olivetti SpA and Deutsche Telekom AG for the telecommunications services
provider Telecom Italia SpA, also a Fund holding, is another example. Activity
has not only focused on the fast-growing telecommunications sector but has also
taken place in the electric and water sectors. Scottish Power PLC is in the
process of acquiring the Oregon-based electric utility company PacifiCorp.,
another Fund holding. In approving this transaction and the National Grid
(UK)--New England Electric System purchase, Federal Energy Regulatory Commission
Chairman James Hoecker said it was noteworthy that as US electric power markets
deregulate, individual utilities are sought out by foreign buyers. "These
mergers illustrate," Mr. Hoecker said, "how attractive US utilities are to
foreign capital markets."
Fund holding Vivendi, a leader in the water business and headquartered in
France, has acquired United States Filter Corporation, which provides water and
wastewater treatment systems, products and services to all customer classes.
Yorkshire Water, of the United Kingdom, just announced its first US acquisition,
the Connecticut-based water treatment service company, Aquarion Co.
This recent cross border activity in the utility sector is in addition to the
numerous joint ventures and partnerships that have already occurred. Some
examples in this area include the Philadelphia-based electric utility company
PECO Energy Company joining with the UK-based nuclear electric company British
Energy to purchase and/or operate nuclear plants in the United States. In
addition, France Telecom and Deutsche TeleKom each owns a position in the
US-based telecommunications provider Sprint Corporation.
Turning to just US-based utility companies, we have seen an acceleration in
the merger and acquisition activity that has been occurring for some time now.
Recent activity in this region has included the natural gas company El Paso
Energy Corporation proposing to buy Fund holding Sonat Inc., another natural gas
pipeline company. Global Crossing Ltd., a provider of global long-distance
telecommunications facilities and services, which has agreed to purchase the
telecommunications provider Frontier Corporation, a Fund holding, has found
itself in a bidding war with Qwest Communications. On the electric side,
Denver-based New Century Energies, Inc. and Minneapolis-based Northern States
Power have announced plans to merge operations.
This heightened level of activity among utilities might imply the opportunity
for enhanced growth driven by both revenues and cost reductions. Combining
common operations, increased usage of existing and new technologies over a
larger operating base and labor force rationalization may all result in reduced
expenditures. With the prospects for growth seemingly improving as a result of
the current consolidation trend in the utility industry, we expect to see
attractive investment opportunities.
PORTFOLIO MATTERS
During the first half of 1999, the Fund's overweighted strategy in
European-based utility
116
<PAGE> 118
- --------------------------------------------------------------------------------
stocks was negatively impacted by the surprising strength in the US dollar
relative to the euro. Reduced economic growth estimates for the region and
nervousness over the direction of interest rates both in the United States and
abroad, coupled with the military action in Kosovo, contributed to this euro
weakness. Fundamentally, we believe the outlook for many of the Fund's holdings
in the European region has improved. Increased usage of the Internet is driving
demand for basic telecommunications services, and better pricing with improved
technology is raising the penetration and usage of mobile telephones. This has
been particularly evident in the results from Italy, Spain and the United
Kingdom. Finally, with continued higher interest rates in the United States a
possibility and considering the adverse derivative effects that they may have on
emerging markets, the assessment of risk versus return among global utilities
remains a challenge.
The issue of Year 2000 (Y2K) compliance has also had an impact on the
composition of the Fund's portfolio. Y2K testing is an issue of some prominence
at certain agencies regulating utilities such as the Department of Energy, the
Nuclear Regulatory Commission and the Federal Communications Commission, among
many others. We have had concerns as to the level of Y2K preparedness among
utility companies, especially those in emerging markets. Consequently, we have
underweighted the portfolio of equity holdings in emerging markets.
PORTFOLIO ACTIVITIES
In the first half of 1999, we continued to reduce and eliminate holdings that no
longer fit our investment criteria and to add to existing positions and new
holdings as the opportunities arose. For instance, during the June quarter we
added to one domestic utility company, Houston-based Reliant Energy, Inc. The
company provides both electric and natural gas to consumers. The company also
has interests in South American electric utilities. Recent news coming from the
Texas regulatory authorities has been constructive for the company's outlook. We
also eliminated three holdings and reduced weightings in six holdings based on
valuation and fundamental considerations.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Walter D. Rogers
Walter D. Rogers
Senior Vice President and Portfolio Manager
July 28, 1999
117
<PAGE> 119
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +14.04%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +17.18
- --------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/99 +13.72
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +14.04% +0.84%
</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.
118
<PAGE> 120
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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>
AUSTRALIA TELECOMMUNICATIONS 257,600 +Cable & Wireless Optus
Limited...................... $ 350,913 $ 586,539 0.5%
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 443,055 Australian Gas Light Company
Limited...................... 1,299,845 2,695,042 2.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRALIA 1,650,758 3,281,581 2.5
- -------------------------------------------------------------------------------------------------------------------------
BRAZIL TELECOMMUNICATIONS 10,300 Embratel Participacoes SA
(ADR)*....................... 218,398 142,912 0.1
1,030 Tele Celular Sul Participacoes
SA (ADR)*.................... 16,579 22,338 0.0
3,433 +Tele Centro Oeste Celular
Participacoes SA (ADR)*...... 10,362 13,517 0.0
2,060 Tele Centro Sul Participacoes
SA (ADR)*.................... 120,517 114,330 0.1
206 Tele Leste Celular
Participacoes SA (ADR)*...... 5,548 6,129 0.0
515 Tele Nordeste Celular
Participacoes SA (ADR)*...... 7,652 13,905 0.0
206 Tele Norte Celular
Participacoes SA (ADR)*...... 3,204 5,575 0.0
10,300 Tele Norte Leste Participacoes
SA (ADR)*.................... 158,618 191,194 0.2
2,060 Tele Sudeste Celular
Participacoes SA (ADR)*...... 65,679 59,740 0.0
10,300 +Telecomunicacoes Brasileiras
SA--Telebras (ADR)*.......... 797 644 0.0
515 Telemig Celular Participacoes
SA (ADR)*.................... 14,985 12,682 0.0
4,120 Telesp Celular Participacoes SA
(ADR)*....................... 132,633 110,210 0.1
10,300 Telesp Participacoes SA
(ADR)*....................... 388,972 235,612 0.2
----------- ------------ -----
1,143,944 928,788 0.7
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 100,000 Companhia Paranaense de
Energia--Copel (ADR)*........ 1,800,000 837,500 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN BRAZIL 2,943,944 1,766,288 1.3
- -------------------------------------------------------------------------------------------------------------------------
CHILE UTILITIES--ELECTRIC 20,132 Enersis SA (ADR)*.............. 430,125 460,520 0.3
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN CHILE 430,125 460,520 0.3
- -------------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 56,300 Tele Danmark A/S (ADR)*........ 677,188 1,449,725 1.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN DENMARK 677,188 1,449,725 1.1
- -------------------------------------------------------------------------------------------------------------------------
FINLAND TELECOMMUNICATIONS 6,236 Sonera Group Oyj............... 54,835 136,249 0.1
------------------------------------------------------------------------------------------------------
UTILITIES--OIL & 36,200 Fortum Corporation, the IVO-
GAS Neste Group.................. 229,591 174,973 0.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN FINLAND 284,426 311,222 0.2
- -------------------------------------------------------------------------------------------------------------------------
FRANCE UTILITIES--WATER 50,952 Vivendi........................ 1,939,819 4,124,749 3.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN FRANCE 1,939,819 4,124,749 3.1
- -------------------------------------------------------------------------------------------------------------------------
GERMANY TELECOMMUNICATIONS 8,927 Deutsche Telekom AG............ 186,171 374,427 0.3
2,010 Mannesmann AG.................. 179,264 299,747 0.2
----------- ------------ -----
365,435 674,174 0.5
------------------------------------------------------------------------------------------------------
</TABLE>
119
<PAGE> 121
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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>
GERMANY UTILITIES--ELECTRIC 15,000 RWE AG......................... $ 674,750 $ 693,955 0.5%
(CONCLUDED)
20,000 Veba AG........................ 652,699 1,174,884 0.9
1,500 Viag AG........................ 661,615 708,022 0.5
----------- ------------ -----
1,989,064 2,576,861 1.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN GERMANY 2,354,499 3,251,035 2.4
- -------------------------------------------------------------------------------------------------------------------------
ITALY TELECOMMUNICATIONS 651,600 Telecom Italia Mobile (TIM)
SpA.......................... 620,263 3,888,211 2.9
405,333 Telecom Italia SpA............. 950,865 4,210,781 3.2
761,900 Telecom Italia SpA (Registered
Non-Convertible)............. 1,629,934 4,130,226 3.1
----------- ------------ -----
3,201,062 12,229,218 9.2
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 138,000 AEM SpA........................ 130,809 246,045 0.2
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 513,400 Italgas SpA.................... 1,581,576 2,153,478 1.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN ITALY 4,913,447 14,628,741 11.0
- -------------------------------------------------------------------------------------------------------------------------
JAPAN TELECOMMUNICATIONS 110 Nippon Telegraph & Telephone
Corporation (NTT)............ 938,963 1,282,030 1.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN JAPAN 938,963 1,282,030 1.0
- -------------------------------------------------------------------------------------------------------------------------
MEXICO TELECOMMUNICATIONS 14,500 Telefonos de Mexico, SA de CV
(ADR)*....................... 914,790 1,171,781 0.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN MEXICO 914,790 1,171,781 0.9
- -------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND TELECOMMUNICATIONS 20,100 Telecom Corporation of New
Zealand Limited(ADR)*........ 477,195 702,244 0.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN NEW
ZEALAND 477,195 702,244 0.5
- -------------------------------------------------------------------------------------------------------------------------
PHILIPPINES TELECOMMUNICATIONS 43,600 Philippine Long Distance
Telephone Company (ADR)*..... 1,270,791 1,313,450 1.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
PHILIPPINES 1,270,791 1,313,450 1.0
- -------------------------------------------------------------------------------------------------------------------------
PORTUGAL TELECOMMUNICATIONS 32,120 Portugal Telecom SA (ADR)*..... 734,520 1,322,943 1.0
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 29,940 EDP-Electricidade de Portugal,
SA (ADR)*.................... 1,333,900 1,074,098 0.8
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN PORTUGAL 2,068,420 2,397,041 1.8
- -------------------------------------------------------------------------------------------------------------------------
SPAIN TELECOMMUNICATIONS 36,965 +Telefonica, SA (ADR)*......... 1,416,829 5,438,487 4.1
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 91,600 Endesa, SA (ADR)*.............. 1,092,526 1,946,500 1.5
22,500 Hidroelectrica del Cantabrico,
SA........................... 251,742 323,711 0.2
131,000 Iberdrola, SA.................. 879,896 1,994,077 1.5
----------- ------------ -----
2,224,164 4,264,288 3.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN SPAIN 3,640,993 9,702,775 7.3
- -------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM TELECOMMUNICATIONS 57,000 British Telecommunications
PLC.......................... 406,712 954,551 0.7
10,000 British Telecommunications PLC
(ADR)*....................... 741,450 1,712,500 1.3
88,700 Cable & Wireless PLC........... 1,132,309 1,129,782 0.8
45,000 Vodafone AirTouch PLC (ADR)*... 1,328,885 8,865,000 6.7
----------- ------------ -----
3,609,356 12,661,833 9.5
------------------------------------------------------------------------------------------------------
</TABLE>
120
<PAGE> 122
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 UTILITIES--ELECTRIC 167,500 National Power PLC............. $ 1,238,839 $ 1,219,123 0.9%
KINGDOM 95,139 PowerGen PLC................... 705,721 1,025,193 0.8
----------- ------------ -----
1,944,560 2,244,316 1.7
(CONCLUDED)
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED KINGDOM 5,553,916 14,906,149 11.2
- -------------------------------------------------------------------------------------------------------------------------
UNITED STATES TELECOMMUNICATIONS 25,500 AT&T Corp. .................... 683,145 1,423,219 1.1
46,400 Ameritech Corporation.......... 929,738 3,410,400 2.6
47,616 Bell Atlantic Corporation...... 1,184,107 3,112,896 2.3
58,000 BellSouth Corporation.......... 899,905 2,718,750 2.0
42,000 Frontier Corporation........... 969,520 2,478,000 1.8
33,500 GTE Corporation................ 1,124,815 2,537,625 1.9
40,000 +MCI WorldCom Inc.............. 1,323,316 3,440,000 2.6
46,600 SBC Communications Inc. ....... 982,372 2,702,800 2.0
42,000 Sprint Corp. (FON Group)....... 531,544 2,218,125 1.7
10,500 Sprint Corp. (PCS Group)....... 68,289 599,812 0.5
24,900 U S WEST, Inc. ................ 606,619 1,462,875 1.1
----------- ------------ -----
9,303,370 26,104,502 19.6
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 65,600 Allegheny Energy, Inc. ........ 1,689,846 2,103,300 1.6
25,000 American Electric Power
Company, Inc. ............... 1,092,125 939,062 0.7
55,500 BEC Energy..................... 1,472,300 2,289,375 1.7
38,192 Cinergy Corp. ................. 885,217 1,222,144 0.9
49,300 Consolidated Edison, Inc. ..... 1,597,050 2,230,825 1.7
31,500 DTE Energy Company............. 989,953 1,260,000 0.9
31,000 Duke Energy Corporation........ 1,172,492 1,685,625 1.3
31,000 Edison International........... 544,360 829,250 0.6
67,600 Energy East Corporation........ 932,936 1,757,600 1.3
54,300 Entergy Corporation............ 1,905,240 1,696,875 1.3
21,500 FPL Group, Inc. ............... 985,059 1,174,437 0.9
47,200 GPU, Inc. ..................... 1,343,992 1,991,250 1.5
44,000 New Century Energies, Inc. .... 1,312,146 1,707,750 1.3
89,100 NiSource Inc. ................. 1,405,792 2,299,894 1.7
72,800 PacifiCorp. ................... 1,401,416 1,337,700 1.0
49,200 Reliant Energy, Inc. .......... 1,104,129 1,359,150 1.0
25,100 The Southern Company........... 484,836 665,150 0.5
42,000 TXU Corp....................... 1,438,834 1,732,500 1.3
----------- ------------ -----
21,757,723 28,281,887 21.2
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 28,800 The Coastal Corporation........ 449,913 1,152,000 0.8
36,800 El Paso Energy Corporation..... 660,653 1,294,900 1.0
15,000 Enron Corp. ................... 690,790 1,226,250 0.9
33,000 KeySpan Corporation............ 855,855 870,375 0.7
26,100 National Fuel Gas Company...... 788,314 1,265,850 1.0
25,000 New Jersey Resources
Corporation.................. 656,623 935,937 0.7
50,000 Sempra Energy.................. 1,184,750 1,131,250 0.8
16,600 Sonat Inc. .................... 551,950 549,875 0.4
42,000 Washington Gas Light Company... 871,676 1,092,000 0.8
24,000 The Williams Companies,
Inc. ........................ 261,000 1,021,500 0.8
----------- ------------ -----
6,971,524 10,539,937 7.9
------------------------------------------------------------------------------------------------------
UTILITIES--WATER 33,300 Philadelphia Suburban
Corporation.................. 722,194 767,981 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED STATES 38,754,811 65,694,307 49.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON
STOCKS 68,814,085 126,443,638 94.9
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
121
<PAGE> 123
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 PAPER** $1,429,000 General Motors Acceptance
Corp., 5.63% due 7/01/1999... $ 1,428,777 $ 1,428,777 1.1%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES 1,428,777 1,428,777 1.1
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.............. $70,242,862 127,872,415 96.0
===========
OTHER ASSETS LESS
LIABILITIES.................. 5,313,982 4.0
------------ -----
NET ASSETS..................... $133,186,397 100.0%
============ =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
122
<PAGE> 124
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$70,242,862) (Note
1a)....................................................... $127,872,415
Cash........................................................ 315,085
Foreign cash (Note 1c)...................................... 50,901
Receivables:
Securities sold........................................... $4,864,881
Dividends................................................. 289,545 5,154,426
----------
Deferred organization expenses (Note 1f).................... 684
Prepaid expenses and other assets........................... 10,493
------------
Total assets................................................ 133,404,004
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser (Note 2)............................... 73,125
Capital shares redeemed................................... 32,559
Securities purchased...................................... 31,943 137,627
----------
Accrued expenses and other liabilities...................... 79,980
------------
Total liabilities........................................... 217,607
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $133,186,397
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 805,205
Paid-in capital in excess of par............................ 67,644,429
Undistributed investment income--net........................ 813,327
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 6,296,329
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 57,627,107
------------
NET ASSETS.................................................. $133,186,397
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $133,186,397 and 8,052,045
shares outstanding........................................ $ 16.54
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
123
<PAGE> 125
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $98,265 foreign withholding tax).......... $ 1,774,901
Interest and discount earned................................ 32,926
-----------
Total income................................................ 1,807,827
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 410,946
Custodian fees.............................................. 21,058
Accounting services (Note 2)................................ 13,281
Professional fees........................................... 7,663
Printing and shareholder reports............................ 6,932
Transfer agent fees (Note 2)................................ 2,460
Directors' fees and expenses................................ 1,480
Pricing services............................................ 1,301
Amortization of organization expenses (Note 1f)............. 328
Other....................................................... 1,126
-----------
Total expenses.............................................. 466,575
-----------
Investment income--net...................................... 1,341,252
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain from:
Investments--net.......................................... 6,295,141
Foreign currency transactions--net........................ 1,198 6,296,339
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (6,674,349)
Foreign currency transactions--net........................ (4,703) (6,679,052)
----------- -----------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (382,713)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 958,539
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
124
<PAGE> 126
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 1,341,252 $ 3,302,910
Realized gain on investments and foreign currency
transactions--net......................................... 6,296,339 4,738,767
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (6,679,052) 21,827,828
------------ ------------
Net increase in net assets resulting from operations........ 958,539 29,869,505
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (1,072,483) (3,589,798)
Realized gain on investments--net:
Class A................................................... (4,759,516) (6,606,938)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (5,831,999) (10,196,736)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital shares
transactions.............................................. (6,918,295) (12,900,783)
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (11,791,755) 6,771,986
Beginning of period......................................... 144,978,152 138,206,166
------------ ------------
End of period*.............................................. $133,186,397 $144,978,152
============ ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 813,327 $ 544,558
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
125
<PAGE> 127
- --------------------------------------------------------------------------------
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, 1999+ 1998+ 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 17.08 $ 14.84 $ 12.19 $ 11.30 $ 9.45
-------- -------- -------- -------- --------
Investment income--net............................... .16 .36 .43 .46 .45
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............. (.01) 2.99 2.66 .95 1.79
-------- -------- -------- -------- --------
Total from investment operations..................... .15 3.35 3.09 1.41 2.24
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................. (.13) (.40) (.44) (.52) (.39)
Realized gain on investments--net.................. (.56) (.71) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions.................... (.69) (1.11) (.44) (.52) (.39)
-------- -------- -------- -------- --------
Net asset value, end of period....................... $ 16.54 $ 17.08 $ 14.84 $ 12.19 $ 11.30
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... .84%++ 24.06% 25.90% 12.96% 24.33%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .68%* .68% .67% .66% .66%
======== ======== ======== ======== ========
Investment income--net............................... 1.96%* 2.39% 3.21% 3.90% 4.44%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $133,186 $144,978 $138,206 $142,438 $148,225
======== ======== ======== ======== ========
Portfolio turnover................................... 1.49% 5.20% 7.70% 11.39% 11.05%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
126
<PAGE> 128
- --------------------------------------------------------------------------------
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.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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.
- - 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.
127
<PAGE> 129
- --------------------------------------------------------------------------------
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) 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 that 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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $6,926 in commissions on the
execution of portfolio security transactions for the Fund.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $2,012,351 and $17,237,795, respectively.
Net realized gains for the six months ended June 30, 1999 and net unrealized
gains (losses) as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Realized Unrealized
Gains Gains (Losses)
- -------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $6,295,141 $57,629,553
Foreign currency transactions........ 1,198 (2,446)
---------- -----------
Total................................ $6,296,339 $57,627,107
========== ===========
- -------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated
128
<PAGE> 130
- --------------------------------------------------------------------------------
$57,629,553, of which $59,675,285 related to appreciated securities and
$2,045,732 related to depreciated securities. At June 30, 1999, the aggregate
cost of investments for Federal income tax purposes was $70,242,862.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$6,918,295 and $12,900,783 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 204,779 $ 3,342,366
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 349,256 5,831,998
---------- ------------
Total issued.......................... 554,035 9,174,364
Shares redeemed....................... (990,015) (16,092,659)
---------- ------------
Net decrease.......................... (435,980) $ (6,918,295)
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 539,702 $ 8,222,908
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 707,068 10,196,735
---------- ------------
Total issued......................... 1,246,770 18,419,643
Shares redeemed...................... (2,073,134) (31,320,426)
---------- ------------
Net decrease......................... (826,364) $(12,900,783)
========== ============
- -----------------------------------------------------------------
</TABLE>
5. COMMITMENTS:
At June 30, 1999, the Fund had entered into foreign exchange contracts under
which it had agreed to sell foreign currency with an approximate value of
$183,000.
6. SUBSEQUENT EVENT:
On July 7, 1999, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.102225 per Class A Share payable on July 14, 1999 to
shareholders of record as of July 6, 1999.
129
<PAGE> 131
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six months ended June 30, 1999, the US fixed-income market was
characterized by a dramatic shift in investor psychology that saw a
flight-to-quality mentality transformed into a flight-from-quality bias.
Specifically, interest rates trended higher and the yield curve flattened as
investors priced in the possibility that the Federal Reserve Board would seek to
tighten monetary policy by mid-year. The Federal Reserve Board's shift in policy
toward a tightening bias was being driven by its concern that the domestic
economy was growing at a pace sufficient to rekindle the inflationary fires.
Furthermore, many investors were convinced that the liquidity problems that had
developed as a result of both the deterioration of the emerging market economies
and the excessive amount of financial leverage in the system were now behind us.
On June 30, 1999, the Federal Reserve Board raised its overnight funds rate by
0.25% to 5.00% and simultaneously shifted to a neutral posture.
As we entered the six-month period ended June 30, 1999, the overall tone of
the Treasury market was relatively upbeat since most investors were expecting
technical conditions to remain strong and the Federal Reserve Board to continue
on an accommodative road as the domestic economy began to feel the negative
impact of the rising trade deficit. Although the Federal Reserve Board had moved
from an accommodative bias to a neutral posture, investors still believed it was
possible for the Federal Funds rate to reach 4% by mid-year since the economic
environment slowed down. However, this optimism would not last as first quarter
US gross domestic product growth rose an unexpectedly strong 4.5%, spurred on by
consumer spending, which jumped 6.7%. Clearly, consumers were benefiting from a
low unemployment rate and the wealth effect generated from a booming stock
market.
Overseas, Asian countries, at the heart of the crises in 1998, exhibited the
beginnings of economic recovery. This global recovery led to fears of a
rekindling of inflation. Commodities, such as copper, gained in price. More
importantly, the price of oil surged, spurred on mainly by an agreement by the
OPEC to limit production, but also on expectations of increased demand by
recovering economies. While the reported producer price index for April showed
only a 0.2% increase (excluding food and energy), the core consumer price index
(CPI) rose a greater-than-expected 0.7% for April, well above expectations and
the largest increase since April 1989. At this point, most investors believed
the Federal Reserve Board would raise short-term interest rates by at least 25
basis points (0.25%) at the late June Federal Open Market Committee (FOMC)
meeting.
Although investors were relieved to see a complete reversal of April's
inflationary picture in May and June (particularly as the CPI was unchanged),
most investors still believed the Federal Reserve Board would remain committed
to a course of tighter monetary policy. The forward market, which had priced in
approximately 120 basis points prior to the most recent inflationary release,
still projected a 50 basis point--75 basis point aggregate move by the Federal
Reserve Board at mid-month. The yield on the 30-year Treasury bond, which began
the year at 5%, traded to a high of 6.17% in June. At that time we were not
surprised by the Federal Reserve Board's increase of 25 basis points at its June
30, 1999 FOMC meeting, followed by a wait and see attitude to gauge the strength
of the economy and any inflationary pressures that may build.
PORTFOLIO MATTERS
In anticipation of the volatile interest rate environment, we increased our
allocation to mortgage-backed securities (MBS) throughout the year. We started
1999 with a minimal MBS position. However, expanded prospectus language allowed
us a greater participation in MBS, and currently the Fund has a 41% net asset
allocation in this sector. As a result, the Fund is now benchmarked against the
Salomon Government Mortgage Index given the enhanced flexibility the Fund has
relative to MBS. Furthermore, we believe this allows the Fund to be more closely
aligned with its competitive Lipper peer group. Concurrently, our Treasury
holdings fell from approximately 50% of net assets to 35% during the same
period, well below the benchmark allocation of 46%. We initially reduced our
allocation to Government agency debentures in line with the 15% weighting of the
Salomon Government/Mortgage Index. However, we recently increased our weighting
to 25% of net assets. We believed that the intermediate sector of the agency
yield curve contained some very attractive relative values following the spread
widening that characterized this market since the beginning of the second
quarter of 1999. We sold short-term and intermediate-term Treasury issues and
invested the proceeds in similar maturity agency securities. We shortened
duration when we shifted to the new Index, and have held it steady at 4.7 years,
in close proximity to the Index.
130
<PAGE> 132
- --------------------------------------------------------------------------------
We extended the average life of the Fund modestly to 8.4 years through agency
debentures as interest rates rose and spreads widened. With respect to MBS, we
focused on 30-year collateral with a particular interest on higher coupon issues
given our expectations for interest rates to rise through the period.
Unfortunately, the premium for this type of collateral rose as interest rates
increased, making it difficult to accumulate the amount we wanted. Recently, we
also focused on short-dated agency securities where breakeven levels relative to
Treasury issues were attractive.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Christopher G. Ayoub
Christopher G. Ayoub
Senior Vice President and Portfolio Manager
July 28, 1999
131
<PAGE> 133
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +2.40%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +6.72
- --------------------------------------------------------------------------------
Inception (5/02/94) through 6/30/99 +6.61
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +2.40% -2.27%
</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.
132
<PAGE> 134
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<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--3.3% $ 4,200,000 5% due 1/14/2002........................... $ 4,196,976 $ 4,126,500
2,000,000 6.27% due 7/10/2002........................ 2,013,620 2,015,620
7,000,000 5.75% due 12/07/2028....................... 6,928,530 6,142,500
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL FARM CREDIT BANK 13,139,126 12,284,620
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Federal Home Loan Bank:
BANK--5.9% 7,500,000 5.50% due 8/13/2001........................ 7,426,500 7,451,925
10,000,000 6.175% due 6/28/2002....................... 9,984,000 9,957,800
4,635,000 6.175% due 4/17/2008....................... 4,606,031 4,451,778
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN BANK 22,016,531 21,861,503
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME Federal Home Loan Mortgage Corporation+:
LOAN MORTGAGE
CORPORATION--16.3%
4,500,000 6.56% due 3/25/2016........................ 4,498,875 4,522,500
5,884,046 7% due 12/15/2020.......................... 5,979,661 5,843,563
5,962,155 6.30% due 5/15/2026........................ 5,881,107 5,814,949
Federal Home Loan Mortgage Corporation
Participation Certificates+:
5,500,000 6% due 4/14/2004........................... 5,499,934 5,372,785
5,000,000 5.50% due 2/15/2028........................ 4,775,781 4,567,650
Federal Home Loan Mortgage Corporation
Participation Certificates--Gold
Program+:
17,000,000 7% due 1/01/2020........................... 16,845,937 16,819,290
444,200 7.50% due 2/01/2023........................ 456,623 449,610
100,697 7.50% due 5/01/2024........................ 103,513 101,861
2,426,003 7.50% due 6/01/2024........................ 2,493,855 2,454,048
1,595,038 7.50% due 7/01/2024........................ 1,639,649 1,613,138
2,438,769 7.50% due 8/01/2024........................ 2,506,979 2,466,205
646,326 7.50% due 9/01/2024........................ 664,403 653,597
403,042 7.50% due 12/01/2024....................... 414,315 407,702
764,262 7.50% due 4/01/2025........................ 785,637 773,571
1,195,288 7.50% due 8/01/2025........................ 1,228,719 1,208,735
375,973 7.50% due 11/01/2025....................... 386,489 380,082
652,640 7.50% due 2/01/2026........................ 670,894 660,185
35,635 7.50% due 4/01/2026........................ 36,631 36,024
34,381 7.50% due 5/01/2026........................ 35,342 34,756
186,582 7.50% due 7/01/2026........................ 191,801 188,621
870,365 7.50% due 8/01/2026........................ 894,708 879,878
1,361,184 7.50% due 2/01/2027........................ 1,399,255 1,376,062
693,532 7.50% due 4/01/2027........................ 712,929 701,113
58,019 7.50% due 6/01/2027........................ 59,642 58,653
268,978 7.50% due 10/01/2027....................... 276,502 271,918
31,742 7.50% due 11/01/2027....................... 32,630 32,089
31,649 7.50% due 12/01/2027....................... 32,534 31,995
202,345 7.50% due 1/01/2028........................ 208,004 204,556
20,597 7.50% due 2/01/2028........................ 21,173 20,822
59,606 7.50% due 4/01/2028........................ 61,273 60,257
279,620 7.50% due 5/01/2028........................ 287,441 282,676
47,561 7.50% due 1/01/2029........................ 48,891 48,081
1,118,455 7.50% due 3/01/2029........................ 1,149,737 1,130,680
1,397,612 7.50% due 4/01/2029........................ 1,436,702 1,414,895
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORPORATION 61,717,566 60,882,547
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
133
<PAGE> 135
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (Note 1a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT & AGENCY OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Federal National Mortgage Association+:
MORTGAGE ASSOCIATION--21.6%
$11,000,000 6.85% due 5/08/2002........................ $ 11,183,906 $ 11,051,590
7,500,000 5.94% due 3/29/2004........................ 7,482,422 7,347,675
5,500,000 6.376% due 3/25/2007....................... 5,555,000 5,345,615
5,835,423 8% due 4/01/2008........................... 6,047,869 6,039,838
7,165,000 5.83% due 12/10/2008....................... 7,088,872 6,647,322
625,003 7% due 6/01/2028........................... 631,253 617,772
921,377 7% due 10/01/2028.......................... 930,590 910,716
2,839,197 7% due 2/01/2029........................... 2,867,589 2,806,349
5,116,549 7% due 3/01/2029........................... 5,167,715 5,057,351
9,182,211 7% due 5/01/2029........................... 9,274,035 9,075,974
7,000,000 6.50% due 6/01/2029........................ 6,927,812 6,752,760
16,319,446 7% due 6/01/2029........................... 16,482,638 16,130,630
3,000,000 7% due 7/01/2029........................... 3,030,000 2,965,290
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 82,669,701 80,748,882
- ----------------------------------------------------------------------------------------------------------------------
GOVERNMENT Government National Mortgage Association+:
NATIONAL MORTGAGE
ASSOCIATION--10.8%
28,705,934 6.50% due 2/15/2028........................ 28,629,684 27,635,925
485,426 7% due 2/15/2028........................... 494,679 478,902
1,534,600 7% due 3/15/2028........................... 1,563,853 1,513,975
246,851 7% due 4/15/2028........................... 251,557 243,534
1,809,192 6.50% due 5/15/2028........................ 1,804,387 1,739,647
836,122 7% due 5/15/2028........................... 852,061 824,884
1,512,224 7% due 6/15/2028........................... 1,541,051 1,491,900
354,561 7% due 7/15/2028........................... 361,320 349,796
2,559,997 7% due 8/15/2028........................... 2,608,797 2,525,591
812,103 7% due 11/15/2028.......................... 827,584 801,188
45,815 7% due 12/15/2028.......................... 46,689 45,199
2,574,767 7% due 5/15/2029........................... 2,623,848 2,540,162
- ----------------------------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION 41,605,510 40,190,703
- ----------------------------------------------------------------------------------------------------------------------
PRIVATE EXPORT Private Export Funding Corporation:
FUNDING CORPORATION--2.5%
3,895,000 5.50% due 3/15/2001........................ 3,847,286 3,870,150
3,335,000 7.01% due 4/30/2004........................ 3,643,588 3,442,821
2,000,000 7.11% due 4/15/2007........................ 2,145,460 2,067,180
- ----------------------------------------------------------------------------------------------------------------------
TOTAL PRIVATE EXPORT FUNDING CORPORATION 9,636,334 9,380,151
- ----------------------------------------------------------------------------------------------------------------------
STUDENT LOAN 8,000,000 Student Loan Marketing Association, 7.50%
MARKETING ASSOCIATION--2.1% due 3/08/2000............................ 8,266,160 8,102,480
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STUDENT LOAN MARKETING ASSOCIATION 8,266,160 8,102,480
- ----------------------------------------------------------------------------------------------------------------------
TENNESSEE VALLEY 5,000,000 Tennessee Valley Authority,
AUTHORITY--1.3% 6.25% due 12/15/2017....................... 5,270,200 4,771,850
- ----------------------------------------------------------------------------------------------------------------------
TOTAL TENNESSEE VALLEY AUTHORITY 5,270,200 4,771,850
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
134
<PAGE> 136
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (Note 1a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT & AGENCY OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------
US TREASURY BONDS & US Treasury Bonds:
NOTES--32.7%
$ 2,000,000 10.625% due 8/15/2015...................... $ 2,826,250 $ 2,877,180
1,500,000 9.25% due 2/15/2016........................ 1,862,344 1,953,750
2,500,000 7.50% due 11/15/2016....................... 2,999,609 2,817,575
7,500,000 8.875% due 8/15/2017....................... 9,044,297 9,581,250
1,000,000 8.75% due 5/15/2020........................ 1,216,406 1,285,000
1,500,000 8.125% due 5/15/2021....................... 1,892,930 1,826,715
9,500,000 8.125% due 8/15/2021....................... 11,135,078 11,582,590
6,000,000 7.50% due 11/15/2024....................... 6,390,938 6,975,000
2,000,000 6.125% due 11/15/2027...................... 2,178,750 1,986,560
3,000,000 5.50% due 8/15/2028........................ 3,201,250 2,746,860
US Treasury Notes:
1,000,000 5.875% due 8/31/1999....................... 1,000,937 1,001,870
4,000,000 7.75% due 12/31/1999....................... 4,181,562 4,051,240
14,500,000 8.50% due 11/15/2000....................... 15,533,203 15,082,320
3,000,000 7.875% due 8/15/2001....................... 3,195,938 3,136,860
5,000,000 7.50% due 11/15/2001....................... 5,140,469 5,208,600
7,000,000 6.625% due 4/30/2002....................... 7,445,703 7,185,920
3,000,000 7.50% due 5/15/2002........................ 3,302,813 3,147,180
1,500,000 6.375% due 8/15/2002....................... 1,497,422 1,530,240
8,000,000 6.25% due 8/31/2002........................ 8,403,125 8,133,760
3,000,000 5.25% due 8/15/2003........................ 2,988,516 2,948,910
7,500,000 5.75% due 8/15/2003........................ 7,965,352 7,504,650
1,500,000 4.25% due 11/15/2003....................... 1,485,586 1,416,330
4,000,000 11.875% due 11/15/2003..................... 5,235,469 4,916,240
10,000,000 7% due 7/15/2006........................... 11,310,625 10,592,200
1,500,000 5.50% due 2/15/2008........................ 1,540,312 1,459,455
1,250,000 5.625% due 5/15/2008....................... 1,365,234 1,224,412
- ----------------------------------------------------------------------------------------------------------------------
TOTAL US TREASURY BONDS & NOTES 124,340,118 122,172,667
- ----------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--96.5% 368,661,246 360,395,403
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT 27,217,000 Student Loan Marketing Association,
AGENCY OBLIGATIONS*--7.3% 4.60% due 7/01/1999........................ 27,213,522 27,213,522
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES--7.3% 27,213,522 27,213,522
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--103.8%.................. $395,874,768 387,608,925
============
LIABILITIES IN EXCESS OF OTHER
ASSETS--(3.8%)........................... (14,354,945)
------------
NET ASSETS--100.0%......................... $373,253,980
============
</TABLE>
- --------------------------------------------------------------------------------
* Certain US Government Agency Obligations are traded on a discount basis; the
interest rate shown reflects the discount rate paid at the time of purchase by
the Fund.
+ Subject to principal paydowns.
See Notes to Financial Statements.
135
<PAGE> 137
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$395,874,768) (Note
1a)....................................................... $387,608,925
Cash........................................................ 91
Receivables:
Interest.................................................. $3,971,848
Capital shares sold....................................... 418,538
Paydowns.................................................. 300 4,390,686
----------
Prepaid expenses and other assets........................... 23,563
------------
Total assets................................................ 392,023,265
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 18,538,959
Investment adviser (Note 2)............................... 166,238 18,705,197
----------
Accrued expenses and other liabilities...................... 64,088
------------
Total liabilities........................................... 18,769,285
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $373,253,980
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 3,605,804
Paid-in capital in excess of par............................ 376,216,372
Undistributed investment income--net........................ 1,961,092
Accumulated realized capital losses on investments--net..... (263,445)
Unrealized depreciation on investments--net................. (8,265,843)
------------
NET ASSETS.................................................. $373,253,980
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $373,253,980 and 36,058,039
shares outstanding........................................ $ 10.35
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
136
<PAGE> 138
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and discount earned................................ $ 10,969,754
Other income................................................ 10,284
------------
Total income................................................ 10,980,038
------------
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $890,857
Accounting services (Note 2)................................ 39,848
Custodian fees.............................................. 16,035
Professional fees........................................... 14,070
Printing and shareholder reports............................ 4,229
Directors' fees and expenses................................ 3,577
Transfer agent fees (Note 2)................................ 2,362
Pricing services............................................ 1,974
--------
Total expenses.............................................. 972,952
------------
Investment income--net...................................... 10,007,086
------------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET (NOTES 1d &
3):
Realized loss on investments--net........................... (603,882)
Change in unrealized appreciation/depreciation on
investments--net.......................................... (17,428,188)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (8,024,984)
============
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
137
<PAGE> 139
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 10,007,086 $ 13,545,855
Realized gain (loss) on investments--net.................... (603,882) 1,052,590
Change in unrealized appreciation/depreciation on
investments--net.......................................... (17,428,188) 4,754,422
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (8,024,984) 19,352,867
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (9,625,835) (12,902,841)
Realized gain on investments--net:
Class A................................................... -- (687,846)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (9,625,835) (13,590,687)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 40,489,153 164,833,095
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 22,838,334 170,595,275
Beginning of period......................................... 350,415,646 179,820,371
------------ ------------
End of period*.............................................. $373,253,980 $350,415,646
============ ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,961,092 $ 1,579,841
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
138
<PAGE> 140
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT 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, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 10.88 $ 10.60 $ 10.40 $ 10.79 $ 9.97
-------- -------- -------- ------- -------
Investment income--net.................................. .29 .59 .63 .65 .62
Realized and unrealized gain (loss) on
investments--net...................................... (.53) .31 .25 (.36) .81
-------- -------- -------- ------- -------
Total from investment operations........................ (.24) .90 .88 .29 1.43
-------- -------- -------- ------- -------
Less dividends and distributions:
Investment income--net................................ (.29) (.60) (.63) (.64) (.61)
Realized gain on investments--net..................... -- (.02) (.05) (.04) --
In excess of realized gain on investments--net........ -- -- --+ -- --
-------- -------- -------- ------- -------
Total dividends and distributions....................... (.29) (.62) (.68) (.68) (.61)
-------- -------- -------- ------- -------
Net asset value, end of period.......................... $ 10.35 $ 10.88 $ 10.60 $ 10.40 $ 10.79
======== ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................... (2.27%)++ 8.76% 8.88% 2.86% 14.83%
======== ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................... .55%* .56% .51% .15% .00%
======== ======== ======== ======= =======
Expenses................................................ .55%* .56% .57% .59% .66%
======== ======== ======== ======= =======
Investment income--net.................................. 5.62%* 5.66% 6.26% 6.39% 6.28%
======== ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $373,254 $350,416 $179,820 $89,581 $40,996
======== ======== ======== ======= =======
Portfolio turnover...................................... 105.15% 43.10% 117.65% 21.23% 45.39%
======== ======== ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.01 per share.
++ Aggregate total investment return.
See Notes to Financial Statements.
139
<PAGE> 141
- --------------------------------------------------------------------------------
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. The Fund's
financial statements are prepared in accordance with generally accepted
accounting principles, which may require the use of management accruals and
estimates. 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 that 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 that
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 and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company.
(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.
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, 1999, Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
subsidiary of ML & Co., earned $1,634 for providing security price quotations to
compute the Fund's net asset value.
140
<PAGE> 142
- --------------------------------------------------------------------------------
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $431,054,862 and $358,987,471, respectively.
Net realized losses for the six months ended June 30, 1999 and net unrealized
losses as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Realized Unrealized
Losses Losses
- -----------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $(603,750) $(8,265,843)
Short-term investments................. (132) --
--------- -----------
Total.................................. $(603,882) $(8,265,843)
========= ===========
- -----------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $8,265,843, of which $1,955,252 related to appreciated securities and
$10,221,095 related to depreciated securities. At June 30, 1999, the aggregate
cost of investments for Federal income tax purposes was $395,874,768.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$40,489,153 and $164,833,095 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 3,853,849 $ 40,622,549
Shares issued to shareholders in
reinvestment of dividends............ 910,349 9,625,835
---------- ------------
Total issued.......................... 4,764,198 50,248,384
Shares redeemed....................... (925,642) (9,759,231)
---------- ------------
Net increase.......................... 3,838,556 $ 40,489,153
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 14,779,601 $159,800,815
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,267,563 13,590,688
---------- ------------
Total issued......................... 16,047,164 173,391,503
Shares redeemed...................... (799,020) (8,558,408)
---------- ------------
Net increase......................... 15,248,144 $164,833,095
========== ============
- -----------------------------------------------------------------
</TABLE>
5. SUBSEQUENT EVENT:
On July 1, 1999, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.054387 per Class A Share payable on July 1, 1999 to
shareholders of record as of June 30, 1999.
141
<PAGE> 143
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUND, INC.--HIGH CURRENT INCOME FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. In Japan, there are not yet clear signs that
Japan's economy is improving. There were growing signs of improvement in some
emerging economies (most notably South Korea and Mexico), although concerns
remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
PORTFOLIO MATTERS
The first half of 1999 was characterized by a relentless rise in US Treasury
yields, robust domestic economic growth and volatile equity markets. In this
environment, the high-yield asset class performed quite well. Specifically, the
unmanaged CS First Boston Global High Yield Index registered a total return of
+2.82% for the six months ended June 30, 1999, in sharp contrast to the ten-year
US Treasury return of -6.52% for the same period. (The hefty coupon associated
with high yield issues, as well as different supply and demand dynamics and
investor sentiment, all contributed to the divergence between the two markets.)
The Standard & Poor's 500 (S&P 500) Index advanced 12.38% during the same
period. The yield spread between the High Yield Index and US Treasury securities
of similar maturity narrowed to 574 basis points (5.74%) at June 30, 1999,
compared to 657 basis points at year-end 1998.
New-issue volume has slowed from last year's frenetic pace, resulting in
weaker flows into high-yield mutual funds. Year-to-date issuance (in terms of
proceeds) was about 37% below the year-ago period. Credits in the media/
telecommunications sector continue to account for the largest portion of new
issues, about 36%. However, one of the largest issuers during the period was a
commodity chemical company--Lyondell Chemical Co.--that completed a $2.4
billion, three-tranche transaction in May. We established positions in two of
the tranches and believe that the company is well positioned for the next
industry cyclical upturn.
Default rates continued to rise, according to data tracked by Moody's
Investors Service, Inc. (Moody's) and Donaldson Lufkin & Jenrette (DLJ) (a
leading high-yield underwriter). For the 12 months ended June 1999, Moody's
reports that the default rate (based on percentage of principal amount
outstanding) equaled 5.04% (up from 3.75% for 1998), while DLJ reported a rate
of 2.78% (up from 1.28% in 1998). Despite these gloomy statistics, we note that
as of this date, several sectors of the high-yield universe--energy, paper and
steel--are benefiting from rising product prices.
Against this backdrop, the Fund's Class A Shares had a total return of +3.71%,
outperforming the unmanaged CS First Boston High Yield Index, which had a total
return of +2.82% for the six-month period ended June 30, 1999. The Fund's
results were aided by our relatively high exposure to emerging markets issues
(11.1% as compared to 7.1% for the Index) that have recovered from last year's
dramatic sell-off. Our overweighting in the paper/packaging and
utility/independent power producer sectors also aided the Fund's performance, as
did our underweighting in healthcare, the worst-performing sector during the
period. Positive event risk affecting several credits in the Fund also had a
favorable impact on performance. Among these were AT&T Corp.'s announced plans
to acquire (in a two-step transaction) MetroNet Communications (a Canadian
competitive local exchange carrier) and Sprint Corp.'s planned takeover of
American Telecasting Inc. (ATEL), an operator of wireless cable TV systems. The
ATEL transaction announcement caused its bonds, which had been trading at
distressed levels, to surge over par. In addition to these pending mergers with
investment-grade credits, two companies--Premier Parks and Quest Diagnos-
142
<PAGE> 144
- --------------------------------------------------------------------------------
tics--announced premium tender offers for their
bonds.
For the better part of May and June, the high-yield market was plagued by
asset outflows. While mutual funds are not the only institutional buyers of
high-yield debt, they are important players. In contrast, the Fund received a
healthy inflow in June, while May outflows were very modest. Hence, we were able
to take advantage of a soft market, and found some excellent relative values.
Our largest purchases in the new-issue market were the bonds of Consolidated
Container Co. (a leading North American manufacturer of rigid plastic
containers) and Caithness Coso, a special purpose corporation that issued the
bonds on behalf of partnerships, which own geothermal power projects in
California. We favor the packaging and independent power sectors because of
their stable cash flows. Both of these credits are among the Fund's largest
holdings. In the secondary market, we established a new position in Clearnet
Communications, a leading Canadian wireless company. We were able to purchase
this senior discount bond at roughly four points below the price at which it was
issued back only in April. Our major sales were a preferred share issue of
Coastal Finance, which had its ratings move to investment grade, and a senior
note issue of Lenfest Communications. This cable TV company's bonds tightened to
investment-grade spreads following AT&T's announcement in early May that it
would acquire the remaining 50% of the company that it did not already own.
At June 30, 1999, communications and media remained our largest broad industry
category, equaling 27.6% of the Fund's total market value. Of the more narrowly
classified sectors, the largest industries were: communications, 12.0%; cable
(domestic and international), 8.5%; utilities/IPPs, 8.5%; packaging/paper and
forest products, 8.2%; and broadcasting/printing and publishing, 7.1%. Foreign
bonds totaled 22.2% of the Fund's market value, with emerging market issues
(primarily Latin American corporate bonds) accounting for 11.1% of market value.
At June 30, 1999, the average maturity of the Fund was 6.8 years, and cash and
cash equivalents amounted to 7.2% of market value.
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/ Terry K. Glenn
Terry K. Glenn
President
/s/ Robert F. Murrary
Robert F. Murray
Vice President and Portfolio Manager
July 28, 1999
143
<PAGE> 145
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 - 2.60%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 + 7.65
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +10.13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 -2.60% +3.71%
</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.
144
<PAGE> 146
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE--0.6% B B2 $ 3,000,000 L-3 Communications Corp.,
10.375% due 5/01/2007....... $ 3,000,000 $ 3,138,750
- ---------------------------------------------------------------------------------------------------------------------------
AIRLINES--0.8% BB Ba2 4,000,000 USAir Inc., 10.375% due
3/01/2013................... 3,935,000 4,246,000
- ---------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE--1.2% CC Caa3 5,000,000 Breed Technologies Inc., 9.25%
due 4/15/2008............... 5,000,000 800,000
B B2 2,000,000 Collins & Aikman Products,
11.50% due 4/15/2006........ 2,000,000 2,020,000
B B2 750,000 Dura Operating Corp., 9% due
5/01/2009(e)................ 750,000 716,250
B B2 3,000,000 Venture Holdings Trust, 11%
due 6/01/2007(e)............ 3,000,000 3,030,000
------------ ------------
10,750,000 6,566,250
- ---------------------------------------------------------------------------------------------------------------------------
BROADCASTING-- BB- Ba3 3,000,000 Antenna TV SA, 9% due
RADIO & TV--4.7% 8/01/2007................... 2,940,158 2,850,000
B B1 3,000,000 Chancellor Media Corp., 9% due
10/01/2008.................. 3,000,000 3,052,500
CCC+ B3 2,000,000 Cumulus Media, Inc., 10.375%
due 7/01/2008............... 2,000,000 2,120,000
B+ B2 5,000,000 Globo Comunicacoes e
Participacoes, Ltd., 10.50%
due 12/20/2006(e)........... 5,101,250 3,600,000
BB Ba2 4,000,000 Grupo Televisa SA, 11.375% due
5/15/2003................... 4,025,000 4,090,000
B- B3 1,278,000 SFX Broadcasting Inc., 10.75%
due 5/15/2006............... 1,271,610 1,389,825
B- B3 2,500,000 Salem Communications Corp.,
9.50% due 10/01/2007........ 2,551,250 2,625,000
Sinclair Broadcasting Group
Inc.:
B B2 2,000,000 10% due 9/30/2005............. 1,993,750 2,040,000
B B2 3,000,000 8.75% due 12/15/2007.......... 2,988,240 2,910,000
------------ ------------
25,871,258 24,677,325
- ---------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS--0.3% B B2 1,500,000 NCI Building Systems Inc.,
9.25% due 5/01/2009(e)...... 1,482,500 1,443,750
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--3.4% B- B3 1,500,000 Avalon Cable of Michigan,
9.375% due 12/01/2008(e).... 1,500,000 1,524,375
Century Communications
Corporation:
BB- Ba3 3,000,000 9.50% due 3/01/2005........... 2,953,750 3,097,500
BB- Ba3 2,500,000 8.375% due 12/15/2007......... 2,454,475 2,412,500
B B2 2,000,000 Echostar DBS Corp., 9.25% due
2/01/2006(e)................ 2,000,000 2,022,500
B B2 4,000,000 Intermedia Capital Partners
LP, 11.25% due 8/01/2006.... 3,997,500 4,450,000
B+ B1 4,000,000 Olympus Communications
LP/Capital Corp., 10.625%
due 11/15/2006.............. 4,000,000 4,320,000
------------ ------------
16,905,725 17,826,875
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
145
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CABLE-- Australis Media Ltd.(c)(g):
INTERNATIONAL--3.5% D NR* $ 8,000,000 1.75%/15.75% due
5/15/2003(k)................ $ 5,575,080 $ 80,000
D NR* 136,859 1.75%/15.75% due 5/15/2003.... 75,292 1,369
BB Ba3 2,000,000 Cablevision SA, 13.75% due
5/01/2009(e)................ 2,000,000 1,820,000
B- B3 5,500,000 International Cabletel, Inc.,
10.986% due 2/01/2006(d).... 4,671,346 4,798,750
B- B3 2,000,000 NTL Incorporated (Series B),
10% due 2/15/2007........... 1,955,000 2,070,000
B+ B1 7,000,000 TeleWest Communications PLC,
11.45% due 10/01/2007(d).... 5,955,935 6,230,000
B B3 5,000,000 United International Holdings,
Inc., 10.75% due
2/15/2008(d)(j)............. 3,431,667 3,287,500
------------ ------------
23,664,320 18,287,619
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--2.7% B+ B1 4,000,000 Bucyrus International, 9.75%
due 9/15/2007............... 4,000,000 3,640,000
B B2 4,000,000 Columbus McKinnon Corp., 8.50%
due 4/01/2008............... 3,989,360 3,840,000
B- B3 4,500,000 International Wire Group,
Inc., 11.75% due
6/01/2005................... 4,490,625 4,668,750
CCC- Ca 4,750,000 Morris Materials Handling,
9.50% due 4/01/2008......... 4,705,000 1,828,750
------------ ------------
17,184,985 13,977,500
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS--2.4% B- B3 5,000,000 Great Lakes Carbon Corp.,
Series B, 11.75% due
5/15/2008(a)................ 5,000,000 4,875,000
BB- Ba3 3,500,000 ISP Holdings Inc., 9.75% due
2/15/2002................... 3,500,000 3,561,250
Lyondell Chemical Company(e):
BB Ba3 2,000,000 9.875% due 5/01/2007.......... 2,000,000 2,045,000
B+ B2 2,000,000 10.875% due 5/01/2009......... 2,000,000 2,080,000
------------ ------------
12,500,000 12,561,250
- ---------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--0.9% CCC Ca 2,838,901 American Telecasting Inc.,
14.50% due
6/15/2004(c)(d)............. 2,714,358 2,980,846
B- B3 2,500,000 Satelites Mexicanos SA,
10.125% due 11/01/2004...... 2,500,000 1,987,500
------------ ------------
5,214,358 4,968,346
- ---------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES-- BB- Ba3 3,500,000 Amkor Technologies Inc., 9.25%
ELECTRONICS--1.7% due 5/01/2006(e)............ 3,500,000 3,412,500
CCC Caa1 3,000,000 Dictaphone Corp., 11.75% due
8/01/2005................... 2,943,750 1,710,000
B B2 4,000,000 Hadco Corp., 9.50% due
6/15/2008................... 3,986,400 3,890,000
------------ ------------
10,430,150 9,012,500
- ---------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES--0.8% B- B3 2,000,000 Eagle-Picher Industries,
9.375% due 3/01/2008........ 1,996,720 1,900,000
B+ B1 2,500,000 Sequa Corp., 9.375% due
12/15/2003.................. 2,512,812 2,537,500
------------ ------------
4,509,532 4,437,500
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER--SERVICES--0.3% BB+ Ba3 2,000,000 Protection One Alarm
Monitoring, 8.125% due
1/15/2009(e)................ 2,000,000 1,852,500
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER B+ B1 2,000,000 Playtex Products, Inc., Series
PRODUCTS--0.6% B, 8.875% due
7/15/2004(e)................ 2,016,875 2,025,000
CCC+ Caa1 1,500,000 Syratech Corp., 11% due
4/15/2007................... 1,230,000 945,000
------------ ------------
3,246,875 2,970,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
146
<PAGE> 148
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DIVERSIFIED--0.9% B+ B1 $ 500,000 Applied Power Inc., 8.75% due
4/01/2009................... $ 500,000 $ 485,000
B- B2 1,000,000 Koppers Industries, Inc.,
9.875% due 12/01/2007....... 1,000,000 975,000
B+ B3 4,000,000 RBX Corp, 12% due 1/15/2003... 4,022,500 3,400,000
------------ ------------
5,522,500 4,860,000
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--6.3% B- B3 2,000,000 Bellwether Exploration,
10.875% due 4/01/2007....... 2,000,000 1,915,000
B B3 4,500,000 Benton Oil and Gas Co.,
11.625% due 5/01/2003....... 4,500,000 3,285,000
Chesapeake Energy Corp.:
B B3 1,500,000 9.625% due 5/01/2005.......... 1,500,000 1,402,500
B B3 1,000,000 9.125% due 4/15/2006.......... 997,650 880,000
B+ B3 2,500,000 Clark USA Inc., 10.875% due
12/01/2005.................. 2,738,125 2,156,250
B B2 4,000,000 Energy Corp. of America, 9.50%
due 5/15/2007............... 4,000,000 3,660,000
CCC- Caa2 2,000,000 Hvide Marine, Inc., 8.375% due
2/15/2008................... 2,000,000 900,000
B- B3 5,000,000 Northern Offshore ASA, 10% due
5/15/2005................... 5,000,000 2,750,000
B+ B1 3,500,000 Parker Drilling Co., 9.75% due
11/15/2006.................. 3,584,160 3,237,500
NR* B2 3,000,000 Petroleo Brasileiro SA, 10%
due 10/17/2006(e)........... 3,000,313 2,700,000
B+ B2 1,500,000 Pool Energy Services Co.,
8.625% due 4/01/2008........ 1,500,000 1,485,000
CCC- Caa2 3,500,000 Southwest Royalties Inc.,
10.50% due 10/15/2004....... 3,368,730 1,645,000
BB- B1 3,000,000 Tesoro Petroleum Corp., 9% due
7/01/2008................... 2,982,870 2,917,500
D C 14,365,000 TransAmerican Energy Corp.,
13.127% due
6/15/2002(c)(d)............. 13,910,369 1,669,931
B- B3 1,500,000 United Refining Co., 10.75%
due 6/15/2007............... 1,507,500 1,020,000
B B2 2,500,000 Universal Compression Inc.,
9.875% due 2/15/2008(d)..... 1,762,400 1,562,500
------------ ------------
54,352,117 33,186,181
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--1.8% B- B3 4,000,000 Premier Parks Inc., 9.75% due
6/15/2007................... 3,990,920 3,990,920
B- B3 5,000,000 Six Flags Theme Parks, Series
A, 12.25% due 6/15/2005..... 5,000,000 5,575,000
------------ ------------
8,990,920 9,565,920
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.6% CCC+ Caa3 2,000,000 Amresco Inc., 9.875% due
3/15/2005................... 2,005,000 1,540,000
NR* ba1 2,000,000 IBJ Capital Co. LLC
(Preferred), 8.79% due
12/29/2049(e)(i)............ 1,992,500 1,675,000
------------ ------------
3,997,500 3,215,000
- ---------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--0.9% B+ B1 4,500,000 Chiquita Brands International
Inc., 9.125% due 3/01/2004.. 4,448,750 4,567,500
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
147
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GAMING--2.0% D Caa1 $ 4,000,000 GB Property Funding Corp.,
10.875% due 1/15/2004(c).... $ 3,590,000 $ 2,410,000
Jazz Casino Co. LLC:
NR* NR* 2,001,136 5.927% due 11/15/2009(a)...... 983,763 1,260,716
NR* NR* 189,000 Contingent Notes due
11/15/2009(h)............... 0 0
B B2 6,000,000 Trump Atlantic City
Associates/Funding Inc.,
11.25% due 5/01/2006........ 5,935,000 5,370,000
B- B3 1,500,000 Venetian Casino/LV Sands,
12.25% due 11/15/2004....... 1,515,000 1,500,000
------------ ------------
12,023,763 10,540,716
- ---------------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES--3.0% B+ Ba3 4,000,000 Beverly Enterprises Inc., 9%
due 2/15/2006............... 3,740,000 3,960,000
BB+ Ba2 2,000,000 Columbia HCA/Healthcare Corp.,
7.15% due 3/30/2004......... 1,920,000 1,847,740
B- B2 2,000,000 Extendicare Health Services,
9.35% due 12/15/2007........ 2,000,000 1,460,000
B+ ba3 3,000,000 Fresenius Medical Capital
Trust II, 7.875% due
2/01/2008................... 3,000,000 2,790,000
B- Caa1 2,000,000 Magellan Health Services, 9%
due 2/15/2008............... 2,000,000 1,710,000
CC C 2,500,000 Mariner Post--Acute Network,
9.50% due 11/01/2007........ 2,488,850 475,000
NR* B2 3,000,000 Quest Diagnostic Inc., 10.75%
due 12/15/2006.............. 3,000,000 3,420,000
------------ ------------
18,148,850 15,662,740
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS & MOTELS--0.4% BB Ba2 2,000,000 HMH Properties, Inc., 8.45%
due 12/01/2008.............. 1,993,280 1,900,000
- ---------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER AES Corporation:
PRODUCERS--4.5% B+ Ba3 5,000,000 10.25% due 7/15/2006.......... 5,400,000 5,112,500
BB Ba1 2,500,000 9.50% due 6/01/2009........... 2,495,375 2,568,750
BB Ba2 6,000,000 Caithness Coso Fund Corp.,
9.05% due 12/15/2009(e)..... 6,000,000 5,985,000
BB Ba2 3,000,000 Calpine Corporation, 8.75% due
7/15/2007................... 3,009,530 2,955,000
BB+ Ba1 2,500,000 Cogentrix Energy Inc., 8.75%
due 10/15/2008.............. 2,487,950 2,487,500
BB Ba1 1,950,000 ESI Tractebel Acquisition
Corp., 7.99% due
12/30/2011.................. 1,852,625 1,855,971
BB Ba3 250,000 Midland Funding II, 11.75% due
7/23/2005................... 250,000 286,580
BB Ba2 3,000,000 Monterrey Power, SA de CV,
9.625% due 11/15/2009(e).... 2,994,480 2,415,000
------------ ------------
24,489,960 23,666,301
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- B B3 1,000,000 Anthony Crane Rental LP,
SERVICES--2.6% 10.375% due 8/01/2008....... 1,000,000 965,000
B NR* 10,000,000 Anthony Crane Rentals, 13.375%
due 8/01/2003(d)............ 5,891,748 4,912,500
B B3 4,000,000 Neff Corp., 10.25% due
6/01/2008................... 3,985,160 4,080,000
CCC+ Caa1 8,000,000 Thermadyne Holdings Corp.,
12.50% due 6/01/2008(d)..... 4,974,279 3,800,000
------------ ------------
15,851,187 13,757,500
- ---------------------------------------------------------------------------------------------------------------------------
INTERNET TRANSPORT--0.8% B- B3 4,000,000 PSINet, Inc., 10% due
2/15/2005................... 4,000,000 4,020,000
- ---------------------------------------------------------------------------------------------------------------------------
MACHINERY--0.6% CCC+ B3 4,000,000 Numatics Inc., 9.625% due
4/01/2008................... 4,000,000 3,240,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
148
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
METALS & MINING--2.4% B- Caa1 $ 3,000,000 AEI Resources Inc., 11.50% due
12/15/2006(e)............... $ 3,000,000 $ 2,932,500
CCC+ B3 4,500,000 Kaiser Aluminum & Chemical
Corp., 12.75% due
2/01/2003................... 4,770,000 4,545,000
B B2 5,000,000 P & L Coal Holdings Corp.,
9.625% due 5/15/2008........ 4,985,700 4,962,500
------------ ------------
12,755,700 12,440,000
- ---------------------------------------------------------------------------------------------------------------------------
PACKAGING--5.5% BB- B1 4,500,000 Ball Corporation, 8.25% due
8/01/2008................... 4,500,000 4,432,500
B B2 7,000,000 Consolidated Containers
Company LLC, 10.125% due
7/15/2009(e)................ 7,000,000 7,070,000
B- B3 4,500,000 Indesco International, 9.75%
due 4/15/2008............... 4,490,000 3,285,000
B B2 4,000,000 Portola Packaging Inc., 10.75%
due 10/01/2005.............. 4,000,000 4,090,000
Silgan Holdings, Inc.:
B NR* 2,810,000 13.25% due 7/15/2006(a)....... 3,142,137 3,105,050
B B1 1,000,000 9% due 6/01/2009.............. 1,000,000 990,000
B- B3 6,500,000 Tekni-Plex, Inc., 9.25% due
3/01/2008................... 6,456,250 6,337,500
------------ ------------
30,588,387 29,310,050
- ---------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST B B3 4,000,000 Ainsworth Lumber Company,
PRODUCTS--3.1% 12.50% due 7/15/2007(a)..... 3,900,941 4,470,000
B- B2 2,000,000 Container Corp. of America,
Series B, 10.75% due
5/01/2002................... 2,190,000 2,105,000
Doman Industries Limited:
B+ B3 1,700,000 12% due 7/01/2004(e).......... 1,609,136 1,640,500
B Caa1 5,000,000 Series B, 9.25% due
11/15/2007.................. 5,000,000 2,950,000
CCC+ Caa1 4,000,000 Pindo Deli Financial
Mauritius, 10.75% due
10/01/2007.................. 3,987,920 2,780,000
B+ B1 2,000,000 SD Warren Co., Series B, 12%
due 12/15/2004.............. 2,000,000 2,160,000
BB+ Ba3 500,000 Tembec Industries, Inc.,
8.625% due 6/30/2009........ 497,375 497,500
------------ ------------
19,185,372 16,603,000
- ---------------------------------------------------------------------------------------------------------------------------
PRINTING & B+ B1 4,000,000 Garden State Newspapers,
PUBLISHING--2.1% Series B, 8.75% due
10/01/2009.................. 3,976,600 3,920,000
BB- Ba3 5,000,000 Hollinger International
Publishing, Inc., 9.25% due
2/01/2006................... 4,961,250 5,100,000
BB- Ba3 2,000,000 Primedia, Inc., 7.625% due
4/01/2008................... 1,988,500 1,910,000
------------ ------------
10,926,350 10,930,000
- ---------------------------------------------------------------------------------------------------------------------------
PRODUCT B- B3 4,000,000 AmeriServe Food Distributors,
DISTRIBUTION--0.6% 10.125% due 7/15/2007....... 4,000,000 3,400,000
- ---------------------------------------------------------------------------------------------------------------------------
RESTAURANTS--0.4% BB- NR* 2,000,000 FM 1993A Corp., 9.75% due
11/01/2003.................. 1,972,075 2,047,500
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.3% NR* NR* 1,516,000 Cumberland Farms, Inc., 10.50%
due 10/01/2003.............. 1,483,785 1,493,260
- ---------------------------------------------------------------------------------------------------------------------------
STEEL--2.0% NR* B2 5,000,000 CSN Iron SA, 9.125% due
6/01/2007(e)................ 4,850,000 3,812,500
B B2 3,500,000 Weirton Steel Corp., 10.75%
due 6/01/2005............... 3,346,250 3,325,000
BB- B2 3,500,000 Wheeling Pittsburgh Corp.,
9.25% due 11/15/2007........ 3,473,045 3,325,000
------------ ------------
11,669,295 10,462,500
- ---------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.3% BB Ba3 2,000,000 Disco SA, 9.875% due
5/15/2008................... 1,986,840 1,635,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
149
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TELEPHONY--COMPETITIVE B- B2 $ 2,000,000 Cencall Communications
LOCAL EXCHANGE Corporation, 13.935% due
CARRIERS--4.6% 1/15/2004(d)................ $ 2,000,000 $ 2,030,000
BBB- A2 3,000,000 Comcast Cellular Holdings,
9.50% due 5/01/2007......... 2,995,110 3,356,250
BB- B1 3,000,000 Comtel Brasileira Ltd., 10.75%
due 9/26/2004(e)............ 3,000,000 2,670,000
B B1 4,000,000 Energis PLC, 9.75% due
6/15/2009(e)................ 3,984,840 4,050,000
B B2 3,000,000 Intermedia Communications
Inc., 8.60% due 6/01/2008... 3,000,000 2,760,000
B B3 3,000,000 Level 3 Communications, 9.125%
due 5/01/2008............... 2,905,000 2,947,500
B B3 3,500,000 Metronet Communications, 9.95%
due 6/15/2008(d)............ 2,382,899 2,572,500
NR* B3 3,000,000 Nextlink Communications, 9.45%
due 4/15/2008(d)............ 2,113,654 1,785,000
BBB- Ba3 2,000,000 Telefonica de Argentina SA,
11.875% due 11/01/2004...... 1,957,620 2,040,000
------------ ------------
24,339,123 24,211,250
- ---------------------------------------------------------------------------------------------------------------------------
TEXTILES--0.8% B- B3 2,800,000 Anvil Knitwear Inc., Series B,
10.875% due 3/15/2007....... 2,906,625 1,764,000
B B3 2,000,000 Galey & Lord, Inc., 9.125% due
3/01/2008................... 2,002,500 1,310,000
D Caa3 4,000,000 Polysindo International
Finance Company BV, 9.375%
due 7/30/2007(c)............ 3,601,250 1,000,000
------------ ------------
8,510,375 4,074,000
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--3.7% BB- NR* 5,000,000 Autopistas del Sol SA, 10.25%
due 8/01/2009(e)............ 4,971,250 3,750,000
BB Ba3 6,000,000 GS Superhighway Holdings,
10.25% due 8/15/2007........ 5,956,875 3,060,000
B NR* 4,500,000 MRS Logistica SA, 10.625% due
8/15/2005(e)................ 4,449,375 2,823,750
BB- B1 4,000,000 Sea Containers Ltd., 12.50%
due 12/01/2004.............. 4,380,000 4,360,000
B- B2 5,700,000 Transtar Holdings LP, 11.067%
due 12/15/2003(d)........... 5,472,437 5,643,000
------------ ------------
25,229,937 19,636,750
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES--4.6% BBB- Ba1 2,000,000 AES Eastern Energy, 9% due
1/02/2017(e)................ 2,000,000 1,939,800
BB- NR* 2,500,000 CIA Saneamento Basico, 10% due
7/28/2005(e)................ 2,340,000 1,887,500
BB Ba3 2,000,000 CMS Energy Corp., 7.50% due
1/15/2009................... 2,000,000 1,861,788
BB- Ba2 1,000,000 Empresa Electricidad del
Norte, 10.50% due
6/15/2005(e)................ 1,000,000 650,000
B+ B2 3,500,000 Espirito Santo-Escelsa, 10%
due 7/15/2007............... 3,475,625 2,642,500
BB+ NR* 3,000,000 Inversora de Electrica, 9% due
9/16/2004(e)................ 3,000,000 2,092,500
BBB- Ba3 4,000,000 Metrogas SA, 12% due
8/15/2000................... 3,935,000 4,090,000
BBB- Ba3 2,446,000 Niagara Mohawk Power Corp.,
8.77% due 1/01/2018......... 2,594,010 2,555,140
BBB- Baa3 2,933,205 TransGas de Occidente SA,
9.79% due
11/01/2010(e)(f)............ 2,933,205 2,460,522
+Tucson Electric & Power
Co.(f):
NR* NR* 3,400,687 10.211% due 1/01/2009......... 3,287,974 3,686,514
NR* NR* 500,000 10.732% due 1/01/2013......... 461,050 554,375
------------ ------------
27,026,864 24,420,639
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
150
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WASTE MANAGEMENT--1.5% BB Ba3 $ 4,000,000 Allied Waste North America,
7.375% due 1/01/2004........ $ 3,994,120 $ 3,790,000
D Ca 3,500,000 Mid-American Waste Systems,
Inc., 12.25% due
2/15/2003(c)................ 1,124,239 105,000
B+ B2 4,000,000 Safety-Kleen Services, 9.25%
due 6/01/2008............... 4,000,000 4,100,000
------------ ------------
9,118,359 7,995,000
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- B- B2 10,000,000 Nextel Communications, Inc.,
DOMESTIC PAGING & 9.75% due 8/15/2004(d)...... 8,478,747 10,150,000
CELLULAR--1.9%
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS NR* B3 3,050,000 ClearNet Communications,
COMMUNICATIONS 11.15% due 5/01/2004(d)..... 1,737,731 1,738,500
INTERNATIONAL--3.4% B- Caa1 7,505,000 McCaw International Ltd.,
12.484% due 4/15/2007(d).... 5,375,056 4,765,675
B- Caa1 8,000,000 Millicom International
Cellular, 13.31% due
6/01/2006(d)................ 6,252,897 5,960,000
Orange PLC:
BB- Ba3 3,500,000 8% due 8/01/2008.............. 3,386,875 3,342,500
BB- Ba3 2,000,000 9% due 6/01/2009(e)........... 2,000,000 2,010,000
------------ ------------
18,752,559 17,816,675
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE
BONDS--85.5% 514,537,298 450,773,647
- ---------------------------------------------------------------------------------------------------------------------------
SHARES
HELD PREFERRED STOCKS
- ---------------------------------------------------------------------------------------------------------------------------
BROADCASTING--RADIO & TV--0.5% 2,288 Cumulus Media, Inc., Series A,
(Preferred), 13.75%(a)(c)... 2,304,755 2,516,800
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--DOMESTIC--1.4% 65,781 CSC Holdings Inc. (Series
A)(a)(c).................... 5,704,813 7,170,129
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--INTERNATIONAL--0.8% 4,002 NTL Incorporated (Series
B)(a)(c).................... 4,075,625 4,442,220
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--0.3% 2,199 Clark Material
Handling(a)(c).............. 2,171,050 1,869,150
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--0.3% 2,364 +Clark USA Inc.(a)(c)......... 2,319,310 1,595,700
+TCR Holdings:
23,076 (Class B) (Convertible)....... 1,384 1,384
12,692 (Class C) (Convertible)....... 711 711
33,460 (Class D) (Convertible)....... 1,773 1,773
69,227 (Class E) (Convertible)....... 4,361 4,361
------------ ------------
2,327,539 1,603,929
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.6% 120,000 California Federal Bank
(Series A).................. 3,030,000 3,135,000
- ---------------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING--0.4% 20,000 Primedia, Inc. (Series H)..... 1,988,000 1,902,500
- ---------------------------------------------------------------------------------------------------------------------------
STEEL--0.6% 120,000 USX Capital LLC, Series A..... 3,000,000 3,015,000
- ---------------------------------------------------------------------------------------------------------------------------
TELEPHONY--COMPETITIVE LOCAL EXCHANGE 4,078 Intermedia Communications Inc.
CARRIERS--0.7% (Convertible)(a)(c)......... 4,101,918 3,996,440
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS--DOMESTIC PAGING & 2,495 Nextel Communications, Inc.
CELLULAR--0.5% (Series D)(a)(c)............ 2,530,130 2,719,550
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PREFERRED
STOCKS--6.1% 31,233,830 32,370,718
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--0.2% 86,526 CHI Energy, Inc.(c)........... 1,257,994 1,124,838
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.3% 93,747 On Command Corporation(c)..... 2,744,654 1,617,136
- ---------------------------------------------------------------------------------------------------------------------------
GAMING--0.1% 54,802 JCC Holding Company (Class
A)(c)....................... 219,208 424,715
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
151
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRIES HELD COMMON STOCKS COST (NOTE 1a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WIRELESS COMMUNICATIONS--DOMESTIC PAGING & 9,295 Nextel Communications, Inc.
CELLULAR--0.1% (Class A)(c)................ 149,988 466,493
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON
STOCKS--0.7% 4,371,844 3,633,182
- ---------------------------------------------------------------------------------------------------------------------------
TRUSTS & WARRANTS
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.0% 29,830 On Command Corporation
(Warrants)(b)............... 238,640 167,794
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.0% 17,308 Bradlees (Warrants)(b)........ 4,469,442 69,232
- ---------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.0% 2,809 Grand Union Co.
(Warrants)(b)............... 28 4,916
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TRUSTS &
WARRANTS--0.0% 4,708,110 241,942
- ---------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER**--5.3% $ 2,000,000 General Electric Capital
Corp., 5.75% due
7/01/1999................... 1,999,681 1,999,681
25,702,000 General Motors Acceptance
Corp., 5.63% due 7/01/1999.. 25,697,980 25,697,980
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 10,014,000 Federal National Mortgage
OBLIGATIONS**--1.9% Association, 4.79% due
7/15/1999................... 9,994,014 9,994,014
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-
TERM SECURITIES--7.2% 37,691,675 37,691,675
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.5%...... $592,542,757 524,711,164
============
OTHER ASSETS LESS
LIABILITIES--0.5%........... 2,539,926
------------
NET ASSETS--100.0%............ $527,251,090
============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Not Rated.
** Commercial Paper and certain US Government Agency
Obligations are traded on a discount basis; the interest
rates shown reflect the discount rates paid at the time
of purchase by the Fund.
(a) Represents a pay-in-kind security which may pay
interest/dividends in additional face amount/shares.
(b) 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.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate
shown reflects 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.
(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 a annual rate of 15.75% until maturity.
(h) Represents an obligation by Jazz Casino Co. LLC to pay a
semi-annual amount to the Fund through 11/15/2009. The
payments are based upon varying interest rates and the
amounts, which may be paid-in-kind, are contingent upon
the earnings before income taxes, depreciation and
amortization of Jazz Casino LLC on a fiscal year basis.
(i) The security is a perpetual bond and has no definite
maturity date.
(j) Each $1,000 face amount contains one warrant of United
International Holdings, Inc.
(k) Each $1,000 face amount contains one warrant of
Australis Media Ltd.
</TABLE>
152
<PAGE> 154
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
+ Restricted securities as to resale. The value of the
Fund's investment in restricted securities was
approximately $5,845,000, representing 1.1% of net assets.
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE(s) COST (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clark USA Inc............................................... 9/26/1997-3/17/1999 $ 2,319,310 $ 1,595,700
TCR Holdings (Class B) (Convertible)........................ 12/10/1998 1,384 1,384
TCR Holdings (Class C) (Convertible)........................ 12/10/1998 711 711
TCR Holdings (Class D) (Convertible)........................ 12/10/1998 1,773 1,773
TCR Holdings (Class E) (Convertible)........................ 12/10/1998 4,361 4,361
Tucson Electric & Power Co., 10.211% due 1/01/2009.......... 6/16/1993-6/01/1998 3,287,974 3,686,514
Tucson Electric & Power Co., 10.732% due 1/01/2013.......... 3/01/1993 461,050 554,375
- ------------------------------------------------------------------------------------------------------------------
TOTAL $ 6,076,563 $ 5,844,818
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
153
<PAGE> 155
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$592,542,757) (Note
1a)....................................................... $524,711,164
Cash........................................................ 5,775,966
Receivables:
Interest.................................................. $10,166,375
Securities sold........................................... 2,036,333
Dividends................................................. 448,941
Capital shares sold....................................... 3,805 12,655,454
-----------
Prepaid expenses and other assets........................... 40,463
------------
Total assets................................................ 543,183,047
------------
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 9,140,502
Capital shares redeemed................................... 374,574
Investment adviser (Note 2)............................... 220,732 9,735,808
-----------
Accrued expenses and other liabilities...................... 6,196,149
------------
Total liabilities........................................... 15,931,957
------------
- ----------------------------------------------------------------------------------------
NET ASSETS.................................................. $527,251,090
============
- ----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 5,291,583
Paid-in capital in excess of par............................ 599,963,902
Undistributed investment income--net........................ 4,555,402
Accumulated realized capital losses on investments--net
(Note 5).................................................. (12,773,884)
Accumulated distributions in excess of realized capital
gains on investments--net (Note 1d)....................... (1,954,320)
Unrealized depreciation on investments--net................. (67,831,593)
------------
NET ASSETS.................................................. $527,251,090
============
- ----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $527,251,090 and 52,915,831
shares outstanding........................................ $ 9.96
============
- ----------------------------------------------------------------------------------------
</TABLE>
+The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
154
<PAGE> 156
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and discount earned................................ $24,698,018
Dividends................................................... 2,778,743
Other income................................................ 164,008
-----------
Total income................................................ 27,640,769
-----------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $1,194,591
Accounting services (Note 2)................................ 47,772
Professional fees........................................... 24,712
Printing and shareholder reports............................ 23,802
Custodian fees.............................................. 23,239
Directors' fees and expenses................................ 5,971
Pricing services............................................ 4,753
Transfer agent fees (Note 2)................................ 2,578
----------
Total expenses.............................................. 1,327,418
-----------
Investment income--net...................................... 26,313,351
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES
1c & 3):
Realized gain on investments--net........................... 70,186
Change in unrealized depreciation on investments--net....... (7,382,502)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $19,001,035
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
155
<PAGE> 157
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 26,313,351 $ 53,633,171
Realized gain (loss) on investments--net.................... 70,186 (14,546,617)
Change in unrealized appreciation/depreciation on
investments--net.......................................... (7,382,502) (58,641,664)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ 19,001,035 (19,555,110)
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1d):
Investment income--net:
Class A................................................... (26,256,493) (53,722,935)
In excess of realized gain on investments--net:
Class A................................................... -- (1,954,320)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (26,256,493) (55,677,255)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 12,606,927 43,185,871
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 5,351,469 (32,046,494)
Beginning of period......................................... 521,899,621 553,946,115
------------ ------------
End of period*.............................................. $527,251,090 $521,899,621
============ ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 4,555,402 $ 4,498,544
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
156
<PAGE> 158
- --------------------------------------------------------------------------------
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, 1999+ 1998+ 1997+ 1996+ 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.11 $ 11.52 $ 11.39 $ 11.25 $ 10.61
-------- -------- -------- -------- --------
Investment income--net.............................. .51 1.05 1.05 1.08 1.09
Realized and unrealized gain (loss) on
investments--net.................................. (.14) (1.40) .14 .12 .65
-------- -------- -------- -------- --------
Total from investment operations.................... .37 (.35) 1.19 1.20 1.74
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.52) (1.02) (1.04) (1.06) (1.10)
Realized gain on investments--net................. -- -- (.02) -- --
In excess of realized gain on investments--net.... -- (.04) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions................... (.52) (1.06) (1.06) (1.06) (1.10)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 9.96 $ 10.11 $ 11.52 $ 11.39 $ 11.25
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 3.71%++ (3.09%) 11.00% 11.27% 17.21%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .52%* .53% .54% .54% .55%
======== ======== ======== ======== ========
Investment income--net.............................. 10.31%* 9.52% 9.11% 9.50% 9.92%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $527,251 $521,900 $553,946 $414,615 $356,352
======== ======== ======== ======== ========
Portfolio turnover.................................. 13.29% 33.63% 53.63% 48.92% 41.60%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
+Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
157
<PAGE> 159
- --------------------------------------------------------------------------------
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. The Fund's financial statements are prepared in accordance with
generally accepted accounting principles, which may require the use of
management accruals and estimates. 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 that 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 that
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 and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company.
(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. 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 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, 1999, the aggregate average daily net assets of the Fund
and Prime Bond Fund was approximately $1,100,383,000.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement that 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.
158
<PAGE> 160
- --------------------------------------------------------------------------------
For the six months ended June 30, 1999, Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
subsidiary of ML & Co., earned $1,798 for providing security price quotations to
compute the Fund's net asset value.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $65,454,645 and $63,905,837, respectively.
Net realized gains for the six months ended June 30, 1999 and net unrealized
losses as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Losses
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments................... $70,186 $(67,831,593)
------- ------------
Total................................... $70,186 $(67,831,593)
======= ============
- ------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $67,831,593, of which $12,352,283 related to appreciated securities
and $80,183,876 related to depreciated securities. June 30, 1999, the aggregate
cost of investments for Federal income tax purposes was $592,542,757.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$12,606,927 and $43,185,871 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 3,474,827 $ 34,595,632
Shares issued to shareholders in
reinvestment of dividends........... 2,617,490 26,256,493
---------- ------------
Total issued......................... 6,092,317 60,852,125
Shares redeemed...................... (4,800,247) (48,245,198)
---------- ------------
Net increase......................... 1,292,070 $ 12,606,927
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 6,122,173 $ 67,979,206
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 4,927,513 53,722,935
---------- ------------
Total issued......................... 11,049,686 121,702,141
Shares redeemed...................... (7,492,123) (78,516,270)
---------- ------------
Net increase......................... 3,557,563 $ 43,185,871
========== ============
- -----------------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1998, the Fund had a net capital loss carryforward of
approximately $3,029,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
6. SUBSEQUENT EVENT:
On July 1, 1999, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.089867 per Class A Share, payable on July 1, 1999 to
shareholders of record as of June 30, 1999.
159
<PAGE> 161
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES--INDEX 500 FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The equity market's first quarter rally led the Standard & Poor's 500 Composite
(S&P 500) Index to its first-ever close above the 1,300 level on March 15, 1999.
In April, optimism regarding corporate earnings prospects powered the equity
market's continued broad-based advance. During that month, the Dow Jones
Industrial Average, which is heavily weighted with cyclical stocks, posted its
best one-month gain since January 1987. In comparison, the S&P 500 Index
produced a more modest total return of +3.87% for the same month. The market
displayed evidence of a rotation out of long-favored growth stocks into value
stocks. The S&P 500 Index's energy, basic industries and capital goods sectors
were the best-performing groups during the month, and in direct contrast to the
trend of recent history, small and mid cap stocks handily outperformed large cap
issues during April.
Trading once again became choppy in May, as renewed fears of inflation began to
take their toll on both the 30-year US Treasury bond and the equity market as
well. While small stocks continued to advance during the month of May, the S&P
500 Index (which reached an all-time high of 1367.56 on May 13) fell back below
the 1,300 level by May 26, 1999. Powered by a 20-point rally on the last day of
trading for the month, the Index once again managed to finish the month just
above the 1,300 level, which it had first broken through more than two months
earlier.
Mired by mixed signals regarding an uncertain inflationary outlook, the S&P
500 Index spent most of June in a narrow range around the 1,300 level. Four
weeks of this trading range were all but forgotten on the last three days of the
month, as renewed evidence of still moderate inflationary pressures in the
economy put such fears into the background yet again. A strong rally saw the S&P
500 Index gain over 57 points in the last three days of June. This momentum was
capped off by the Federal Reserve Board's modest increase of 25 basis points
(0.25%) in the Federal Funds rate and its shift to a neutral bias on the last
day of the month. This allowed the Index to finish the first half of 1999 at yet
another record high of 1,372.71, surpassing the level reached in the middle of
May. For the three-month and six-month periods ended June 30, the S&P 500 Index
had total returns of +7.05% and +12.38%, respectively. However, unlike most
recent periods, the latest leg of the bull market in US equities was led in the
second quarter by mid-capitalization and smaller-capitalization stocks, as the
unmanaged S&P MidCap Index and S&P Small Cap Index both posted double-digit
advances during the second quarter of 1999.
PORTFOLIO MATTERS
For the six months ended June 30, 1999, Index 500 Fund's Class A Shares had a
total return of +12.07%. Since inception (December 13, 1996) through June 30,
1999, the Fund's Class A Shares had a total return of +94.15%. The Fund's
benchmark, the unmanaged S&P 500 Composite Index, produced total returns of
+12.38% and +96.06% for the same six-month and since inception periods,
respectively.
Cash inflows into the Fund continued at a solid pace throughout the first half
of 1999, and combined with the continuing gains in the market, the Fund's net
assets grew from $403.2 million on December 31, 1998 to $591.3 million on June
30, 1999. This represents an increase of more than 46% 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 quickly convert most daily cash
flows into the Fund into equity exposure. At the end of June, the Fund's equity
portfolio was valued at $573.0 million. In addition, the Fund held a long
position of 53 S&P 500 futures contracts. As always, it is the Fund's goal to be
100% invested in the S&P 500 Index at all times.
The first half of 1999 was an active period for composition changes within the
Index. In response to this activity, we initiated positions in the following
stocks during the first quarter of the year: McKesson HBOC, Inc., SouthTrust
Corporation, AmSouth Bancorporation, CenturyTel, Inc. and Kansas City Southern
Industries, Inc. In the second quarter of 1999, we added: Watson Pharmaceutical,
CMS Energy Corporation, AFLAC Incorporated, Delphi Automotive Systems
Corporation, Paine Webber Group Inc., Wellpoint Health Networks Inc., Nabisco
Group Holdings Corp., Florida Progress Corporation, Office Depot, Inc., Network
Appliance, Inc., Best Buy Co., Inc. and Vulcan Materials Company.
160
<PAGE> 162
- --------------------------------------------------------------------------------
IN CONCLUSION
We appreciate your investment in Index 500 Fund of Merrill Lynch Variable Series
Funds, Inc., and we look forward to assisting you with your investment needs in
the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Eric S. Mitofsky
Eric S. Mitofsky
Senior Vice President and Portfolio Manager
July 28, 1999
161
<PAGE> 163
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +22.33%
- --------------------------------------------------------------------------------
Inception (12/13/96) to 6/30/99 +29.78
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +22.33% +12.07%
</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.
162
<PAGE> 164
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
+3Com Corporation.............. 18,454 $ 492,491
+The AES Corporation........... 9,708 564,277
AFLAC Incorporated............. 13,626 652,345
ALLTEL Corporation............. 14,347 1,025,810
+ALZA Corporation.............. 5,141 261,548
+AMR Corporation............... 7,831 534,466
ASARCO Incorporated............ 2,022 38,039
AT&T Corp. .................... 162,270 9,056,694
Abbott Laboratories............ 77,532 3,527,706
Adobe Systems Incorporated..... 3,107 255,162
Adolph Coors Company (Class
B)........................... 1,852 91,674
+Advanced Micro Devices,
Inc. ........................ 7,475 135,017
Aetna Inc...................... 7,189 642,966
Air Products and Chemicals,
Inc. ........................ 11,702 471,005
Alberto-Culver Company (Class
B)........................... 2,909 77,452
Albertson's, Inc. ............. 21,417 1,104,315
Alcan Aluminium Ltd. .......... 11,525 368,080
Alcoa Inc. .................... 18,846 1,166,096
Allegheny Teledyne
Incorporated................. 9,827 222,336
Allergan Inc. ................. 3,396 376,956
AlliedSignal Inc. ............. 28,184 1,775,592
The Allstate Corporation....... 41,152 1,476,328
Amerada Hess Corporation....... 4,631 275,544
Ameren Corporation............. 6,985 268,049
+America Online, Inc........... 55,406 6,122,363
American Electric Power
Company, Inc................. 9,828 369,164
American Express Company....... 22,976 2,989,752
American General Corporation... 12,794 964,348
American Greetings Corporation
(Class A).................... 3,437 103,540
American Home Products
Corporation.................. 66,787 3,840,252
American International Group,
Inc. ........................ 63,175 7,395,423
Ameritech Corporation.......... 56,091 4,122,688
+Amgen Inc..................... 26,109 1,589,385
AmSouth Bancorporation......... 8,988 208,409
Anadarko Petroleum
Corporation.................. 6,169 227,096
+Andrew Corporation............ 4,228 80,068
Anheuser-Busch Companies,
Inc. ........................ 24,258 1,720,802
Aon Corporation................ 13,062 538,807
Apache Corporation............. 5,681 221,559
+Apple Computer, Inc. ......... 8,116 375,872
+Applied Materials, Inc. ...... 19,020 1,405,102
Archer-Daniels-Midland
Company...................... 29,991 462,986
Armstrong World Industries,
Inc.......................... 2,040 117,937
Ashland Inc.................... 3,731 149,706
Associates First Capital
Corporation (Class A)........ 37,155 1,646,431
Atlantic Richfield Company
(ARCO)....................... 16,418 1,371,929
Autodesk, Inc.................. 3,053 90,254
Automatic Data Processing,
Inc. ........................ 31,553 1,388,332
+AutoZone, Inc. ............... 7,655 230,607
Avery Dennison Corporation..... 5,799 350,115
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Avon Products, Inc. ........... 13,353 $ 741,091
BB&T Corporation............... 16,032 588,174
The B.F. Goodrich Company...... 3,792 161,160
+BMC Software, Inc. ........... 12,035 649,890
Baker Hughes Incorporated...... 16,677 558,679
Ball Corporation............... 1,550 65,487
Bank of America Corporation.... 88,980 6,523,346
The Bank of New York Company,
Inc. ........................ 38,801 1,423,512
Bank One Corporation........... 60,223 3,587,032
BankBoston Corporation......... 15,131 773,572
Barrick Gold Corporation....... 19,886 385,291
Battle Mountain Gold Company... 11,718 28,563
Bausch & Lomb Incorporated..... 2,909 222,538
Baxter International Inc. ..... 14,870 901,494
The Bear Stearns Companies
Inc. ........................ 5,937 277,555
Becton, Dickinson and Company.. 12,708 381,240
Bell Atlantic Corporation...... 79,190 5,177,046
BellSouth Corporation.......... 96,587 4,527,516
Bemis Company, Inc. ........... 2,678 106,450
+Best Buy Co., Inc. ........... 10,489 708,007
Bestfoods...................... 14,250 705,375
+Bethlehem Steel Corporation... 6,613 50,837
Biomet, Inc. .................. 5,686 226,018
The Black & Decker
Corporation.................. 4,481 282,863
The Boeing Company............. 49,672 2,194,881
Boise Cascade Corporation...... 2,845 121,979
+Boston Scientific
Corporation.................. 20,177 886,527
Briggs & Stratton
Corporation.................. 1,221 70,513
Bristol-Myers Squibb Company... 101,267 7,132,994
Brown-Forman Corporation (Class
B)........................... 3,501 228,221
Browning Ferris Industries,
Inc. ........................ 8,000 344,000
Brunswick Corporation.......... 4,689 130,706
Burlington Northern Santa Fe
Corp. ....................... 23,928 741,768
Burlington Resources Inc. ..... 9,053 391,542
+CBS Corporation............... 36,303 1,576,912
CIGNA Corporation.............. 10,375 923,375
CMS Energy Corporation......... 5,984 250,580
C.R. Bard, Inc. ............... 2,621 125,317
CSX Corporation................ 11,119 503,830
CVS Corporation................ 19,930 1,011,447
+Cabletron Systems, Inc. ...... 8,787 114,231
Campbell Soup Company.......... 22,243 1,031,519
Capital One Financial
Corporation.................. 10,051 559,715
Cardinal Health, Inc. ......... 13,885 890,376
Carnival Corporation........... 31,281 1,517,128
Carolina Power & Light
Company...................... 7,691 329,271
Case Corporation............... 3,776 181,720
Caterpillar Inc. .............. 18,145 1,088,700
+Cendant Corporation........... 39,181 803,210
Centex Corporation............. 3,026 113,664
Central & South West
Corporation.................. 10,823 252,988
CenturyTel, Inc. .............. 7,104 282,384
+Ceridian Corporation.......... 7,363 240,678
</TABLE>
163
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SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Champion International
Corporation.................. 4,872 $ 233,247
The Charles Schwab
Corporation.................. 20,817 2,287,268
The Chase Manhattan
Corporation.................. 43,145 3,737,436
Chevron Corporation............ 33,419 3,181,071
The Chubb Corporation.......... 8,245 573,027
Cincinnati Financial
Corporation.................. 8,420 316,276
Cinergy Corp. ................. 8,086 258,752
Circuit City Stores -- Circuit
City Group................... 5,104 474,672
+Cisco Systems, Inc. .......... 162,896 10,506,792
Citigroup Inc. ................ 172,318 8,185,105
+Clear Channel Communications,
Inc. ........................ 16,934 1,167,388
The Clorox Company............. 6,018 642,798
The Coastal Corporation........ 10,842 433,680
The Coca-Cola Company.......... 125,814 7,863,375
Coca-Cola Enterprises Inc. .... 21,652 644,147
Colgate-Palmolive Company...... 14,936 1,474,930
Columbia Energy Group.......... 4,225 264,855
Columbia/HCA Healthcare
Corporation.................. 28,969 660,855
Comcast Corporation (Class
A)........................... 37,745 1,450,823
Comerica Incorporated.......... 7,927 471,161
Compaq Computer Corporation.... 86,691 2,053,493
Computer Associates
International, Inc. ......... 27,350 1,504,250
+Computer Sciences
Corporation.................. 8,061 557,720
+Compuware Corporation......... 18,757 596,707
ConAgra, Inc. ................. 24,896 662,856
Conseco, Inc. ................. 16,498 502,158
Consolidated Edison, Inc. ..... 11,588 524,357
Consolidated Natural Gas
Company...................... 4,846 294,394
+Consolidated Stores
Corporation.................. 5,577 150,579
Constellation Energy Group..... 7,588 224,794
Cooper Industries, Inc. ....... 4,811 250,172
Cooper Tire & Rubber
Company...................... 3,865 91,311
Corning Incorporated........... 12,456 873,477
+Costco Companies, Inc. ....... 11,201 896,780
Countrywide Credit Industries,
Inc. ........................ 5,744 245,556
Crane Co. ..................... 3,497 109,937
Crown Cork & Seal Company,
Inc. ........................ 6,240 177,840
Cummins Engine Company, Inc. .. 2,137 122,076
Cyprus Amax Minerals Company... 4,638 70,440
DTE Energy Company............. 7,387 295,480
Dana Corporation............... 8,472 390,241
Danaher Corporation............ 6,905 401,353
Darden Restaurants, Inc. ...... 6,824 148,848
+Data General Corporation...... 2,581 37,586
Dayton Hudson Corporation...... 22,574 1,467,310
Deere & Company................ 11,816 468,209
+Dell Computer Corporation..... 129,332 4,785,284
Delphi Automotive Systems
Corporation.................. 28,824 535,045
Delta Air Lines, Inc. ......... 7,157 412,422
Deluxe Corporation............. 3,984 155,127
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Dillard's, Inc. (Class A)...... 5,447 $ 191,326
Dollar General Corporation..... 11,289 327,381
Dominion Resources, Inc. ...... 9,789 423,986
Dover Corporation.............. 10,881 380,835
The Dow Chemical Company....... 11,204 1,421,508
Dow Jones & Company, Inc. ..... 4,619 245,096
Duke Energy Corporation........ 18,574 1,009,961
The Dun & Bradstreet
Corporation.................. 8,366 296,470
EG & G, Inc. .................. 2,328 82,935
E.I. du Pont de Nemours and
Company...................... 57,517 3,929,130
+EMC Corporation............... 51,624 2,839,320
Eastern Enterprises............ 1,142 45,394
Eastman Chemical Company....... 4,034 208,759
Eastman Kodak Company.......... 16,406 1,111,506
Eaton Corporation.............. 3,640 334,880
Ecolab Inc. ................... 6,577 286,922
Edison International........... 17,706 473,635
Electronic Data Systems
Corporation.................. 25,136 1,421,755
Eli Lilly and Company.......... 56,146 4,021,457
Emerson Electric Co. .......... 22,195 1,395,511
Engelhard Corporation.......... 6,405 144,913
Enron Corp. ................... 18,033 1,474,198
Entergy Corporation............ 12,562 392,562
Equifax Inc. .................. 7,366 262,874
Exxon Corporation++............ 123,804 9,548,384
+FDX Corporation............... 15,168 822,864
+FMC Corporation............... 1,619 110,598
FPL Group, Inc. ............... 9,236 504,517
Federal Home Loan Mortgage
Association.................. 35,450 2,056,100
Federal National Mortgage
Association.................. 52,270 3,573,961
+Federated Department Stores,
Inc. ........................ 10,636 563,043
Fifth Third Bancorp............ 13,701 911,973
First Data Corporation......... 22,026 1,077,897
First Union Corporation........ 49,358 2,319,826
Firstar Corporation............ 33,729 944,412
FirstEnergy Corp. ............. 11,966 370,946
Fleet Financial Group, Inc. ... 29,088 1,290,780
Fleetwood Enterprises, Inc. ... 1,758 46,477
Florida Progress Corporation... 4,949 204,456
Fluor Corporation.............. 3,863 156,452
Ford Motor Company............. 61,772 3,486,257
Fort James Corporation......... 11,235 425,526
Fortune Brands, Inc. .......... 8,519 352,474
Foster Wheeler Corporation..... 2,066 29,182
Franklin Resources, Inc. ...... 12,883 523,372
Freeport-McMoRan Copper & Gold,
Inc. (Class B)............... 8,336 149,527
Frontier Corporation........... 8,831 521,029
+Fruit of the Loom, Inc. (Class
A)........................... 3,667 35,753
GPU, Inc. ..................... 6,409 270,380
GTE Corporation................ 49,553 3,753,640
Gannett Co., Inc. ............. 14,247 1,016,880
The Gap, Inc. ................. 43,825 2,207,710
+Gateway Inc. ................. 7,972 470,348
General Dynamics Corporation... 6,463 442,716
</TABLE>
164
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SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
General Electric Company++..... 166,849 $ 18,853,937
+General Instrument
Corporation.................. 8,802 374,085
General Mills, Inc. ........... 7,803 627,166
General Motors Corporation..... 33,064 2,182,224
Genuine Parts Company.......... 9,175 321,125
Georgia-Pacific Group.......... 8,753 414,673
The Gillette Company........... 56,586 2,320,026
Golden West Financial
Corporation.................. 2,906 284,788
The Goodyear Tire & Rubber
Company...................... 7,992 470,030
The Great Atlantic & Pacific
Tea Company, Inc. ........... 1,945 65,765
Great Lakes Chemical
Corporation.................. 3,012 138,740
Guidant Corporation............ 15,377 790,954
H & R Block, Inc. ............. 4,982 249,100
+HCR Manor Care, Inc. ......... 5,653 136,732
+HEALTHSOUTH Corporation....... 21,149 315,913
H.J. Heinz Company............. 18,331 918,841
Halliburton Company............ 22,426 1,014,777
Harcourt General, Inc. ........ 3,608 186,038
+Harrah's Entertainment,
Inc. ........................ 6,508 143,176
Harris Corporation............. 4,064 159,258
The Hartford Financial Services
Group, Inc. ................. 11,572 674,792
Hasbro, Inc.................... 9,966 278,425
Helmerich & Payne, Inc. ....... 2,542 60,531
Hercules Incorporated.......... 5,131 201,712
Hershey Foods Corporation...... 7,126 423,106
Hewlett-Packard Company........ 51,804 5,206,302
Hilton Hotels Corporation...... 13,170 186,849
The Home Depot, Inc. .......... 75,558 4,868,769
Homestake Mining Company....... 13,227 108,296
Honeywell Inc. ................ 6,431 745,192
Household International,
Inc. ........................ 24,447 1,158,177
+Humana Inc. .................. 8,545 110,551
Huntington Bancshares
Incorporated................. 10,710 374,850
IKON Office Solutions, Inc. ... 7,583 113,745
IMS Health Incorporated........ 16,155 504,844
ITT Industries, Inc. .......... 4,483 170,914
Illinois Tool Works Inc. ...... 12,772 1,047,304
Inco Limited................... 9,789 176,202
Ingersoll-Rand Company......... 8,418 544,013
Intel Corporation.............. 169,200 10,067,400
International Business Machines
Corporation.................. 92,547 11,961,700
International Flavors &
Fragrances Inc. ............. 5,454 242,021
International Paper Company.... 20,916 1,056,258
The Interpublic Group of
Companies, Inc. ............. 7,167 620,841
J.C. Penney Company, Inc. ..... 13,450 653,166
J.P. Morgan & Co.,
Incorporated................. 9,045 1,270,823
Jefferson-Pilot Corporation.... 5,408 357,942
Johnson & Johnson.............. 68,629 6,725,642
Johnson Controls, Inc. ........ 4,314 299,014
Jostens, Inc. ................. 1,802 37,955
+KLA-Tencor Corporation........ 4,496 291,678
Kansas City Southern
Industries, Inc. ............ 5,583 356,265
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Kaufman and Broad Home
Corporation.................. 2,444 $ 60,795
Kellogg Company................ 20,674 682,242
Kerr-McGee Corporation......... 4,424 222,030
KeyCorp........................ 22,838 733,671
Kimberly-Clark Corporation..... 27,150 1,547,550
+King World Productions,
Inc. ........................ 3,649 127,031
+Kmart Corporation............. 25,246 414,981
Knight Ridder, Inc. ........... 4,015 220,574
+Kohl's Corporation............ 8,297 640,425
+The Kroger Co. ............... 42,124 1,176,839
+LSI Logic Corporation......... 7,295 336,482
Laidlaw Inc. .................. 16,820 124,048
Lehman Brothers Holdings
Inc. ........................ 6,058 377,111
The Limited, Inc. ............. 10,884 493,862
Lincoln National Corporation... 10,254 536,412
Liz Claiborne, Inc. ........... 3,215 117,348
Lockheed Martin Corporation.... 20,108 749,023
Loews Corporation.............. 5,571 440,805
Longs Drug Stores
Corporation.................. 1,979 68,399
Louisiana-Pacific
Corporation.................. 5,477 130,079
Lowe's Companies, Inc. ........ 18,949 1,074,171
Lucent Technologies Inc. ...... 155,016 10,453,898
MBIA, Inc. .................... 5,062 327,765
MBNA Corporation............... 40,872 1,251,705
+MCI WorldCom, Inc. ........... 94,884 8,160,024
MGIC Investment Corporation.... 5,585 271,571
Mallinckrodt Inc. ............. 3,637 132,296
Marriott International, Inc.
(Class A).................... 12,724 475,560
Marsh & McLennan Companies,
Inc. ........................ 13,424 1,013,512
Masco Corporation.............. 17,182 496,130
Mattel, Inc. .................. 21,246 561,691
The May Department Stores
Company...................... 17,040 696,510
Maytag Corporation............. 4,509 314,221
McDermott International,
Inc. ........................ 3,017 85,230
McDonald's Corporation......... 69,248 2,860,808
The McGraw-Hill Companies,
Inc. ........................ 10,044 541,748
McKesson HBOC, Inc. ........... 14,141 454,280
The Mead Corporation........... 5,197 216,975
+MediaOne Group, Inc. ......... 30,879 2,296,626
Medtronic, Inc. ............... 29,800 2,320,675
Mellon Bank Corporation........ 26,572 966,557
Mercantile Bancorporation
Inc. ........................ 8,026 458,485
Merck & Co., Inc. ............. 120,376 8,907,824
Meredith Corporation........... 2,685 92,968
Merrill Lynch & Co., Inc.++.... 18,759 1,499,548
+Micron Technology, Inc. ...... 12,769 514,750
+Microsoft Corporation++....... 260,270 23,473,101
Milacron Inc. ................. 1,888 34,928
Millipore Corporation.......... 2,217 89,927
Minnesota Mining and
Manufacturing Company (3M)... 20,532 1,785,001
+Mirage Resorts,
Incorporated................. 10,138 169,812
Mobil Corporation.............. 39,905 3,950,595
Monsanto Company............... 32,202 1,269,966
Morgan Stanley Dean Witter &
Co........................... 29,096 2,982,340
</TABLE>
165
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Motorola, Inc.................. 30,750 $ 2,913,563
NACCO Industries, Inc. (Class
A)........................... 414 30,429
NICOR, Inc. ................... 2,433 92,606
Nabisco Group Holdings
Corp. ....................... 16,558 323,916
Nalco Chemical Company......... 3,355 174,041
National City Corporation...... 16,034 1,050,227
+National Semiconductor
Corporation.................. 8,566 216,827
National Service Industries,
Inc. ........................ 2,111 75,996
+Navistar International
Corporation.................. 3,415 170,750
+Network Appliance, Inc. ...... 3,652 204,056
New Century Energies, Inc. .... 5,830 226,277
The New York Times Company
(Class A).................... 9,001 331,349
Newell Rubbermaid Inc. ........ 14,369 668,159
Newmont Mining Corporation..... 8,502 168,977
+Nextel Communications, Inc.
(Class A).................... 15,092 757,430
+Niagara Mohawk Holdings
Inc. ........................ 9,531 153,092
Nike, Inc. (Class B)........... 14,342 908,028
Nordstrom, Inc. ............... 7,251 242,909
Norfolk Southern Corporation... 19,375 583,672
Nortel Networks Corporation.... 33,869 2,940,253
Northern States Power Company.. 7,833 189,461
Northern Trust Corporation..... 5,673 550,281
Northrop Grumman Corporation... 3,509 232,691
+Novell, Inc. ................. 17,158 454,687
Nucor Corporation.............. 4,468 211,951
ONEOK, Inc. ................... 1,574 49,975
Occidental Petroleum
Corporation.................. 17,746 374,884
+Office Depot, Inc. ........... 19,012 419,452
Omnicom Group Inc. ............ 9,122 729,760
+Oracle Corporation............ 73,406 2,725,198
Owens Corning.................. 2,753 94,634
+Owens-Illinois, Inc. ......... 7,921 258,918
PACCAR Inc. ................... 3,982 212,539
PE Corp-PE Biosystems Group.... 2,601 298,465
PECO Energy Company............ 9,781 409,579
PG&E Corporation............... 19,560 635,700
PNC Bank Corp. ................ 15,502 893,303
PP&L Resources, Inc. .......... 8,042 247,292
PPG Industries, Inc. .......... 8,858 523,176
PacifiCorp. ................... 15,153 278,436
Paine Webber Group Inc. ....... 7,447 348,147
Pall Corporation............... 6,325 140,336
+Parametric Technology
Corporation.................. 13,806 191,558
Parker-Hannifin Corporation.... 5,553 254,050
Paychex, Inc. ................. 12,510 398,756
Peoples Energy Corporation..... 1,787 67,348
+PeopleSoft, Inc. ............. 12,277 211,778
The Pep Boys-Manny, Moe &
Jack......................... 2,658 57,479
PepsiCo, Inc. ................. 75,319 2,913,904
Pfizer Inc. ................... 66,001 7,243,610
Pharmacia & Upjohn, Inc. ...... 25,842 1,468,149
Phelps Dodge Corporation....... 2,983 184,760
Philip Morris Companies
Inc.++....................... 123,037 4,944,549
Phillips Petroleum Company..... 12,877 647,874
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Pioneer Hi-Bred International,
Inc. ........................ 12,221 $ 475,855
Pitney Bowes Inc. ............. 13,698 880,097
Placer Dome Inc. .............. 16,590 195,969
Polaroid Corporation........... 2,245 62,018
Potlatch Corporation........... 1,469 64,544
Praxair, Inc. ................. 8,061 394,485
The Procter & Gamble Company... 67,765 6,048,026
The Progressive Corporation.... 3,718 539,110
Provident Companies, Inc. ..... 6,892 275,680
Providian Financial
Corporation.................. 7,258 678,623
Public Service Enterprise Group
Incorporated................. 11,197 457,677
Pulte Corporation.............. 2,198 50,691
The Quaker Oats Company........ 6,877 456,461
R. R. Donnelley & Sons
Company...................... 6,670 247,207
Ralston-Ralston Purina Group... 16,609 505,536
Raychem Corporation............ 3,951 146,187
Raytheon Company (Class B)..... 17,188 1,209,606
+Reebok International Ltd. .... 2,849 53,063
Regions Financial
Corporation.................. 11,426 439,187
Reliant Energy, Inc. .......... 15,111 417,441
Republic New York
Corporation.................. 5,364 365,758
Reynolds Metals Company........ 3,287 193,933
Rite Aid Corporation........... 13,205 325,173
Rockwell International
Corporation.................. 9,685 588,364
Rohm and Haas Company.......... 10,834 464,503
+Rowan Companies, Inc. ........ 4,275 78,820
Royal Dutch Petroleum Company
(NY Registered Shares)....... 109,348 6,588,217
Russell Corporation............ 1,741 33,950
Ryder System, Inc. ............ 3,655 95,030
SAFECO Corporation............. 6,949 306,625
SBC Communications Inc. ....... 100,145 5,808,410
SLM Holding Corporation........ 8,306 380,519
SUPERVALU INC. ................ 6,123 157,285
SYSCO Corporation.............. 16,878 503,175
+Safeway Inc. ................. 25,324 1,253,538
Sara Lee Corporation........... 46,073 1,045,281
Schering-Plough Corporation.... 75,070 3,978,710
Schlumberger Limited........... 27,847 1,773,506
Scientific-Atlanta, Inc. ...... 3,824 137,664
+Seagate Technology, Inc. ..... 11,357 291,023
The Seagram Company Ltd. ...... 21,845 1,100,442
+Sealed Air Corporation........ 4,240 275,070
Sears, Roebuck & Co. .......... 19,426 865,671
Sempra Energy.................. 12,271 277,631
Service Corporation
International................ 13,912 267,806
Shared Medical Systems
Corporation.................. 1,312 85,608
The Sherwin-Williams Company... 8,674 240,704
Sigma-Aldrich Corporation...... 5,127 176,561
+Silicon Graphics, Inc. ....... 9,608 157,331
Snap-On Incorporated........... 3,354 121,373
+Solectron Corporation......... 12,837 856,067
Sonat Inc. .................... 5,611 185,864
SouthTrust Corporation......... 8,533 327,454
The Southern Company........... 35,546 941,969
Southwest Airlines Co. ........ 17,129 533,140
</TABLE>
166
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
Springs Industries, Inc. (Class
A)........................... 935 $ 40,789
Sprint Corp. (FON Group)....... 44,115 2,329,823
Sprint Corp. (PCS Group)....... 22,434 1,281,542
+St. Jude Medical, Inc. ....... 4,282 152,546
The St. Paul Companies,
Inc. ........................ 11,540 367,116
The Stanley Works.............. 4,527 145,713
+Staples, Inc. ................ 23,703 733,312
State Street Corporation....... 8,181 698,453
Summit Bancorp................. 8,733 365,149
+Sun Microsystems, Inc. ....... 39,463 2,718,014
Sunoco, Inc. .................. 4,612 139,225
SunTrust Banks, Inc. .......... 16,357 1,135,789
Synovus Financial Corp. ....... 13,823 274,732
The TJX Companies, Inc. ....... 16,406 546,525
TRW Inc. ...................... 6,108 335,177
Tandy Corporation.............. 9,870 482,396
Tektronix, Inc. ............... 2,384 71,967
+Tellabs, Inc. ................ 19,967 1,349,020
Temple-Inland, Inc. ........... 2,834 193,421
+Tenet Healthcare
Corporation.................. 15,796 293,213
Tenneco Inc. .................. 8,656 206,662
Texaco Inc. ................... 27,312 1,707,000
Texas Instruments
Incorporated................. 19,989 2,898,405
Texas Utilities Company........ 14,312 590,370
Textron, Inc. ................ 7,689 632,901
+Thermo Electron Corporation... 8,051 161,523
Thomas & Betts Corporation..... 2,893 136,694
Time Warner Inc. .............. 60,829 4,470,932
The Times Mirror Company (Class
A)........................... 3,687 218,455
The Timken Company............. 3,176 61,932
Torchmark Corporation.......... 6,801 232,084
+Toys "R" Us, Inc. ............ 12,674 262,193
Transamerica Corporation....... 6,377 478,275
Tribune Company................ 6,057 527,716
+Tricon Global Restaurants,
Inc. ........................ 7,829 423,745
Tupperware Corporation......... 2,943 75,047
Tyco International Ltd. ....... 41,849 3,965,193
U S WEST, Inc. ................ 25,637 1,506,174
+US Airways Group, Inc. ....... 3,765 164,013
US Bancorp..................... 37,068 1,260,312
UST Inc. ...................... 8,980 262,665
USX-Marathon Group............. 15,740 512,534
USX-U.S. Steel Group........... 4,495 121,365
Unicom Corporation............. 11,058 426,424
Unilever NV (NY Registered
Shares)...................... 29,132 2,031,957
Union Carbide Corporation...... 6,778 330,428
Union Pacific Corporation...... 12,593 734,329
Union Pacific Resources Group
Inc. ........................ 12,858 209,746
Union Planters Corporation..... 7,273 325,012
+Unisys Corporation............ 13,750 535,391
United HealthCare
Corporation.................. 8,829 552,916
United Technologies
Corporation.................. 24,594 1,763,082
Unocal Corporation............. 12,302 487,467
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (Note 1a)
- ------------------------------------------------------
<S> <C> <C>
+Unum Provident Corporation.... 7,047 $ 385,823
V. F. Corporation.............. 6,117 261,502
+Viacom, Inc. (Class B)........ 35,207 1,549,108
Vulcan Materials Company....... 5,232 252,444
+W.R. Grace & Co............... 3,526 64,790
W. W. Grainger, Inc. .......... 4,759 256,094
Wachovia Corporation........... 10,341 884,802
Wal-Mart Stores, Inc. ......... 226,964 10,951,013
Walgreen Co. .................. 51,075 1,500,328
The Walt Disney Company........ 105,014 3,235,744
Warner-Lambert Company......... 43,378 3,009,349
Washington Mutual, Inc. ....... 30,334 1,073,065
Waste Management, Inc. ........ 31,059 1,669,421
+Watson Pharmaceutical......... 4,879 171,070
+Wellpoint Health Networks
Inc. ........................ 3,435 291,546
Wells Fargo Company............ 84,285 3,603,184
Wendy's International, Inc. ... 6,293 178,171
Westvaco Corporation........... 5,108 148,132
Weyerhaeuser Company........... 10,230 703,313
Whirlpool Corporation.......... 3,854 285,196
Willamette Industries, Inc. ... 5,656 260,530
The Williams Companies,
Inc. ........................ 22,049 938,461
Winn-Dixie Stores, Inc. ....... 7,575 279,802
Wm. Wrigley Jr. Company........ 5,910 531,900
Worthington Industries,
Inc. ........................ 4,716 77,225
Xerox Corporation.............. 33,723 1,991,765
- ------------------------------------------------------
TOTAL COMMON STOCKS
(COST--$435,525,288)--96.9% 572,998,090
- ------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
SHORT-TERM OBLIGATIONS-- FACE
COMMERCIAL PAPER* AMOUNT
- ------------------------------------------------------
General Motors Acceptance
Corp., 5.63% due
7/01/1999................ $15,200,000 15,200,000
- ------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(COST--$15,200,000)--2.6% 15,200,000
- ------------------------------------------------------
TOTAL INVESTMENTS
(COST--$450,725,288)--99.5%........... 588,198,090
VARIATION MARGIN ON FINANCIAL FUTURES
CONTRACTS**--0.1%..................... 331,250
OTHER ASSETS LESS LIABILITIES--0.4%..... 2,804,636
------------
NET ASSETS--100.0%...................... $591,333,976
============
- ------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
* Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
167
<PAGE> 169
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
** Financial futures contracts purchased as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE DATE (Notes 1a & 1b)
- ----------------------------------------------------------------
<S> <C> <C> <C>
53 S&P 500 Stock Index September 1999 $18,307,525
- ----------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED
(CONTRACT PRICE--$17,712,133) $18,307,525
===========
- ----------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Portion of holdings pledged as collateral for financial futures contracts.
++ An affiliate of the Fund.
See Notes to Financial Statements.
168
<PAGE> 170
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$450,725,288) (Note
1a)....................................................... $588,198,090
Cash........................................................ 265,195
Receivables:
Securities sold........................................... $3,156,129
Capital shares sold....................................... 528,252
Dividends................................................. 505,842
Variation margin (Note 1b)................................ 331,250 4,521,473
----------
Deferred organization expenses (Note 1f).................... 6,083
Prepaid expenses and other assets........................... 24,126
------------
Total assets................................................ 593,014,967
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 944,875
Capital shares redeemed................................... 198,108
Investment adviser (Note 2)............................... 151,258 1,294,241
----------
Accrued expenses and other liabilities...................... 386,750
------------
Total liabilities........................................... 1,680,991
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $591,333,976
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 3,333,933
Paid-in capital in excess of par............................ 445,825,179
Undistributed investment income--net........................ 2,940,308
Undistributed realized capital gains on investments--net.... 1,166,362
Unrealized appreciation on investments--net................. 138,068,194
------------
NET ASSETS.................................................. $591,333,976
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $591,333,976 and 33,339,330
shares outstanding........................................ $ 17.74
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
169
<PAGE> 171
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $49,717 foreign withholding tax).......... $ 3,147,443
Interest and discount earned................................ 641,904
-----------
Total income................................................ 3,789,347
-----------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 739,307
Accounting services (Note 2)................................ 46,124
Printing and shareholder reports............................ 21,486
Custodian fees.............................................. 16,394
Professional fees........................................... 16,154
Directors' fees and expenses................................ 3,935
Transfer agent fees (Note 2)................................ 2,237
Registration fees........................................... 984
Amortization of organization expenses (Note 1f)............. 911
Pricing services............................................ 122
Other....................................................... 1,381
----------
Total expenses.............................................. 849,035
-----------
Investment income--net...................................... 2,940,312
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1b, 1e
& 3):
Realized gain on investments--net........................... 1,983,492
Change in unrealized appreciation on investments--net....... 52,588,366
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $57,512,170
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
170
<PAGE> 172
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 2,940,312 $ 4,385,862
Realized gain on investments--net........................... 1,983,492 5,356,606
Change in unrealized appreciation on investments--net....... 52,588,366 65,816,752
------------ ------------
Net increase in net assets resulting from operations........ 57,512,170 75,559,220
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1g):
Investment income--net:
Class A................................................... (4,385,859) (2,775,835)
Realized gain on investments--net:
Class A................................................... (5,594,390) (10,487,182)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (9,980,249) (13,263,017)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 140,584,642 125,686,790
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 188,116,563 187,982,993
Beginning of period......................................... 403,217,413 215,234,420
------------ ------------
End of period*.............................................. $591,333,976 $403,217,413
============ ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 2,940,308 $ 4,385,855
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
171
<PAGE> 173
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 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 ------------------------ DEC. 13, 1996+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999 1998 1997 TO DEC. 31, 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 16.23 $ 13.48 $ 10.17 $ 10.00
-------- -------- -------- -------
Investment income--net............................. .09 .18 .17 .02
Realized and unrealized gain on investments--net... 1.83 3.40 3.16 .15
-------- -------- -------- -------
Total from investment operations................... 1.92 3.58 3.33 .17
-------- -------- -------- -------
Less dividends and distributions:
Investment income--net........................... (.18) (.17) (.02) --
Realized gain on investments--net................ (.23) (.66) --++ --
-------- -------- -------- -------
Total dividends and distributions.................. (.41) (.83) (.02) --
-------- -------- -------- -------
Net asset value, end of period..................... $ 17.74 $ 16.23 $ 13.48 $ 10.17
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. 12.07%++++ 28.28% 32.81% 1.68%++++
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..................... .34%* .36% .34% .00%*
======== ======== ======== =======
Expenses........................................... .34%* .36% .40% .60%*
======== ======== ======== =======
Investment income--net............................. 1.19%* 1.36% 2.01% 3.08%*
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $591,334 $403,217 $215,234 $10,752
======== ======== ======== =======
Portfolio turnover................................. 1.76% 11.92% 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.
172
<PAGE> 174
- --------------------------------------------------------------------------------
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. The Fund's
financial statements are prepared in accordance with generally accepted
accounting principles, which may require the use of management accruals and
estimates. 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 that 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 that 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 or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options traded in
the over-the-counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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) Foreign currency transactions--Transactions denominated in foreign
currencies are
173
<PAGE> 175
- --------------------------------------------------------------------------------
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. 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 0.30% 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.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $131,522,261 and $8,284,504, respectively.
Net realized gains for the six months ended June 30, 1999 and net unrealized
gains as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments............. $1,191,628 $137,472,802
Financial futures contracts....... 791,864 595,392
---------- ------------
Total............................. $1,983,492 $138,068,194
========== ============
- --------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $137,472,802, of which $146,380,610 related to appreciated securities
and $8,907,808 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $450,725,288.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$140,584,642 and $125,686,790 for the six months ended June 30, 1999 and the
year ended December 31, 1998, respectively.
174
<PAGE> 176
- --------------------------------------------------------------------------------
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 8,450,047 $140,382,869
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 631,734 9,980,249
---------- ------------
Total issued.......................... 9,081,781 150,363,118
Shares redeemed....................... (587,855) (9,778,476)
---------- ------------
Net increase.......................... 8,493,926 $140,584,642
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 13,011,352 $183,963,924
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,043,297 13,263,016
---------- ------------
Total issued......................... 14,054,649 197,226,940
Shares redeemed...................... (5,178,470) (71,540,150)
---------- ------------
Net increase......................... 8,876,179 $125,686,790
========== ============
- -----------------------------------------------------------------
</TABLE>
175
<PAGE> 177
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Once again we are looking back upon a period of remarkable events in the world's
equity markets. Over the six months ended June 30, 1999, the unmanaged Morgan
Stanley Capital International (MSCI) World (Ex-US) Index, returned +4.5% in US
dollar terms. Over the same period, the unmanaged MSCI Emerging Markets Free
Index returned +39.9% in US dollar terms.
However, these results mask wide divergences between some of the world's
equity markets. Within the developed market universe, the Pacific Basin,
excluding Japan, rose by 26.0%, while Japan itself gained 20.8%. These advances
were exceeded by the Asian Emerging markets, which collectively rose by 54.3%.
(References to markets are measured by Morgan Stanley indexes for the six months
ended June 30, 1999 and are in US dollar terms.) Outside Japan, the gains marked
the early stages of recovery from the crises that had severely hit these markets
over the previous 18 months. The economies in the region continued to benefit
from global monetary easing, initiated in the United States with two interest
rate cuts in October 1998, and followed by similar cuts in nearly all other
major countries.
Within the Asian region, improving trade figures, greater currency stability
and falling interest rates formed a base for recovery. The recovery was also
assisted by International Monetary Fund (IMF) funding and, in many countries, a
clear political will to adhere to the conditions set by the IMF for improving
the domestic financial systems. Most notable among the successes were Indonesia,
South Korea and Malaysia Free. These markets rose by 110.9%, 77.9% and 77.5%,
respectively, during the six months ended June 30, 1999. In South Korea, the
government's efforts were also rewarded with a significant re-rating of its
sovereign risk. Among the largest gains in the developed markets were the 60.4%
and 31.5% increases recorded by Singapore and Hong Kong, respectively.
Notwithstanding the outperformance produced by Asian stock markets, we believe
that problems remain in that there is still too much production capacity and the
ever-present threat of deflation. These issues hang over the whole region,
including Japan. However, Japan has also been showing some sporadic signs of
recovery, such as the housing sector, triggered by the various stimulative
packages implemented by the government. However, first quarter gross domestic
product figures showing growth at an annualized rate of 7.9% probably exaggerate
the pace of recovery.
In contrast with Asia, equity markets in other major regions performed
relatively poorly over the six-month period ended June 30, 1999. Continental
European developed markets actually fell by 4.4% over the six months, while the
United Kingdom rose by only 2.6%. Eastern European and Middle Eastern emerging
markets appeared to demonstrate a strong recovery with the unmanaged
International Finance Corporation Investables Europe and Middle East Index
rising by 29.4%. However, this figure masked a mixed picture with Russia
bouncing back dramatically (up 133.7%) from a very low base following last
year's bond default. Other emerging European markets were not so fortunate, for
example, Hungary fell 8.8%.
In January 1999, Europe saw the introduction of the euro as a common currency
for 11 countries, including Germany, France, Italy, the Netherlands and Spain.
This region had performed particularly well in the 12 months leading up to the
launch of the new currency and had reached extremely high valuation levels amid
great optimism regarding the benefits of the single currency. However, the
collapse of the Russian financial markets in August 1998 led to massive losses
for many European banks and sharp falls on European markets. The region's stock
markets have underperformed consistently for the six months ended June 30, 1999,
a trend that has been exacerbated for US-dollar based investors by a near 12%
depreciation of the euro since its launch.
The Latin American equity markets were overshadowed at the beginning of the
calendar year by their current account deficits. Defaults on some Brazilian
local government bonds impacted both currencies (Brazil was forced to float the
real in January) and equity markets at the start of 1999. However, Latin
American markets rallied sharply after the real's devaluation, aided by signs
that the recession in Brazil may be a brief one. The Latin America Index rose by
31.0% over the first half of 1999.
Throughout all of these events, the US economy continued to grow and prosper.
The strength of the US equity market underpinned the US consumer-spending
boom--a boom so strong that for the first time in over 20 years the US savings
ratio became negative. Until recently, the absence of tangible signs of
inflation, combined with the need for the US economic engine to power the rest
of the world, helped keep US bond yields on a flat to
176
<PAGE> 178
- --------------------------------------------------------------------------------
downward trend. However, this downward bias was reversed by May and June with
the Federal Reserve Board raising interest rates by 0.25% on June 30, 1999.
PORTFOLIO MATTERS
During the six-months ended June 30, 1999, the Fund experienced a sharp
improvement in performance relative to its benchmark. The Fund's Class A Shares
had a total return of +10.6% for the six months ended June 30, 1999, while the
Fund's benchmark MSCI World (Ex-US) Index returned +4.5% for the same period.
For the six-months ended June 30, 1999, the Fund was underweighted in
Continental Europe, which benefited performance. In the last half of the
six-month period, we reduced the scale of the underweighting to approximately
1.5% relative to the benchmark, from about 6% at the beginning of the calendar
year.
The Fund started the six month period overweight in the UK market relative to
the benchmark, having raised the exposure in late 1998 on the belief that
investors had underestimated both the scope of interest rate cuts and the impact
these cuts would have on ensuring that the UK economy would avoid recession. In
May we reversed this position as it became clear that investors had caught up
with the reality of a stronger economy. At the same time, we increased the
Fund's exposure to Germany on the belief that pessimism toward the German
economy was overdone considering the weaker currency, lower interest rates and
less tight fiscal policy at a time of rising expectations of global demand.
We were almost neutral in Japan for most of the period relative to the
benchmark (although the Fund had a much higher weighting than many international
funds) and moved to an overweight position in March, just as the market began a
period of outperformance. We believed that investor perceptions toward the
Japanese market would begin to improve, despite the many well-known pressures
that are faced there. The yen proved the strongest of the major currencies over
this period.
The change in Federal Reserve Board policy in October sparked a major rally in
global markets in late 1998, which has been extended in 1999 by consistent
upgrading of forecasts for the world economy. The recent change of direction by
the Federal Reserve Board has been carefully staged and timed to limit any risk
of cutting off this global rally. We consistently held low cash levels during
this period to ensure that the Fund benefited from this strong performance.
In the first quarter of 1999, we became positive on the prospects of the
global economy, which influenced our decisions to raise exposure to commodity
stocks and regions; to emerging markets; to value stocks in preference to growth
stocks and also to smaller stocks around the world. All of these decisions added
to the performance of the Fund.
IN CONCLUSION
The improvement in the Fund's performance relative to its benchmark also
coincided with the completion of various changes in the management of the Fund
that were initiated in April 1998. These changes included the resetting of the
Fund's benchmark. We are now placing greater emphasis on combining the bottom-up
stock selection process with top-down asset allocation. We believe that this
strategy has helped improve the Fund's investment returns.
Over recent months some trends have started to emerge in global equity
markets. The emerging markets of Asia have already started their recoveries.
There are also signs that commodity markets are beginning to pick up.
We appreciate your investment in Merrill Lynch 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/ Terry K. Glenn
Terry K. Glenn
President
/s/ Clive D. Lang
Clive D. Lang
Portfolio Manager
August 2, 1999
177
<PAGE> 179
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +7.76%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +4.80
- --------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/99 +6.01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +7.76% +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.
178
<PAGE> 180
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
AFRICA INDUSTRY HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH AFRICA FINANCIAL SERVICES 80,000 ABSA Group Limited......... $ 444,494 $ 452,768 0.3%
------------------------------------------------------------------------------------------------------
GOLD MINES 17,500 AngloGold Limited
(ADR)(a)................. 369,047 376,250 0.2
11,750 Anglo American PLC(d)...... 388,858 549,138 0.3
------------ ------------ -----
757,905 925,388 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA 1,202,399 1,378,156 0.8
- ---------------------------------------------------------------------------------------------------------------------------
NORTH
AMERICA
- ---------------------------------------------------------------------------------------------------------------------------
CANADA AEROSPACE & MILITARY 22,960 Bombardier Inc. 'B'........ 346,511 349,574 0.2
TECHNOLOGY
------------------------------------------------------------------------------------------------------
BANKING 10,910 Bank of Nova Scotia........ 233,354 233,991 0.1
5,960 Royal Bank of Canada....... 308,758 262,146 0.2
------------ ------------ -----
542,112 496,137 0.3
------------------------------------------------------------------------------------------------------
BEVERAGES & TOBACCO 10,000 Seagram Company............ 459,851 496,346 0.3
------------------------------------------------------------------------------------------------------
BROADCASTING & 14,860 Rogers Communications, Inc.
PUBLISHING 'B'(d)................... 252,568 237,812 0.1
------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 28,840 Laidlaw Inc................ 220,450 208,816 0.1
SERVICES
------------------------------------------------------------------------------------------------------
ELECTRICAL & 5,350 Newbridge Networks
ELECTRONICS Corporation(d)........... 191,371 152,050 0.1
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 7,100 Alberta Energy Company
Ltd. .................... 207,068 227,250 0.1
16,330 Anderson Exploration
Ltd.(d).................. 211,517 213,822 0.1
14,610 Renaissance Energy
Ltd.(d).................. 167,435 195,749 0.1
6,200 Suncor Energy, Inc. ....... 219,336 253,194 0.2
------------ ------------ -----
805,356 890,015 0.5
------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & 17,710 Abitibi-Consolidated
PAPER Inc. .................... 175,940 202,530 0.1
------------------------------------------------------------------------------------------------------
GOLD MINES 15,060 Placer Dome Inc............ 191,999 174,263 0.1
------------------------------------------------------------------------------------------------------
MERCHANDISING 5,380 Canadian Tire Corp. 'A'.... 150,512 156,544 0.1
------------------------------------------------------------------------------------------------------
METALS--NONFERROUS 5,130 Alcan Aluminum Ltd. ....... 169,133 162,287 0.1
12,180 Inco Limited............... 172,026 216,764 0.1
------------ ------------ -----
341,159 379,051 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 6,740 BCE Inc. .................. 293,745 327,240 0.2
12,770 Nortel Networks
Corporation.............. 747,033 1,088,794 0.6
------------ ------------ -----
1,040,778 1,416,034 0.8
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 4,718,607 5,159,172 2.9
- ---------------------------------------------------------------------------------------------------------------------------
UNITED STATES EQUITY BASKET 69,392 Webs-Malaysia.............. 429,774 477,070 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED STATES 429,774 477,070 0.3
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH
AMERICA 5,148,381 5,636,242 3.2
- ---------------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN
- ---------------------------------------------------------------------------------------------------------------------------
AUSTRALIA BANKING 26,500 National Australia Bank
Limited.................. 414,782 438,509 0.2
37,500 Westpac Banking Corporation
Limited.................. 231,918 243,248 0.1
------------ ------------ -----
646,700 681,757 0.3
------------------------------------------------------------------------------------------------------
</TABLE>
179
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA BEVERAGES & TOBACCO 36,000 Foster's Brewing Group
(CONCLUDED) Limited.................. $ 105,539 $ 101,461 0.1%
------------------------------------------------------------------------------------------------------
BROADCASTING & 75,000 The News Corporation
PUBLISHING Limited.................. 509,471 639,892 0.4
25,500 The News Corporation
Limited (Preferred)...... 142,606 194,271 0.1
15,000 Publishing & Broadcasting
Limited.................. 100,999 98,987 0.1
------------ ------------ -----
753,076 933,150 0.6
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & 67,500 Pioneer International
COMPONENTS Limited.................. 155,101 172,011 0.1
------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 4,900 Brambles Industries
SERVICES Limited.................. 103,203 129,084 0.1
------------------------------------------------------------------------------------------------------
CHEMICALS 25,500 Orica Limited.............. 137,697 139,264 0.1
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 33,000 Broken Hill Proprietary
Company Limited.......... 261,364 382,247 0.2
18,700 Woodside Petroleum
Limited.................. 104,617 126,622 0.1
------------ ------------ -----
365,981 508,869 0.3
------------------------------------------------------------------------------------------------------
GOLD MINES 114,000 Newcrest Mining(d)......... 200,710 255,949 0.1
75,000 Normandy Mining Limited.... 70,603 49,940 0.0
------------ ------------ -----
271,313 305,889 0.1
------------------------------------------------------------------------------------------------------
INSURANCE 27,200 AMP Limited(d)............. 326,208 297,349 0.2
33,800 National Mutual Holdings
Limited.................. 61,461 50,338 0.0
27,000 QBE Insurance Group
Limited.................. 99,414 102,760 0.1
------------ ------------ -----
487,083 450,447 0.3
------------------------------------------------------------------------------------------------------
MERCHANDISING 15,000 Coles Myer Limited......... 75,543 87,272 0.0
28,000 Woolworths Limited......... 97,070 93,129 0.1
------------ ------------ -----
172,613 180,401 0.1
------------------------------------------------------------------------------------------------------
METALS--NONFERROUS 300,000 M.I.M. Holdings Limited.... 168,699 212,470 0.1
52,500 WMC Limited................ 198,938 225,526 0.1
------------ ------------ -----
367,637 437,996 0.2
------------------------------------------------------------------------------------------------------
REAL ESTATE 19,100 Lend Lease Corporation
Limited.................. 239,558 262,239 0.1
15,000 Westfield Holdings
Limited.................. 71,203 91,938 0.1
------------ ------------ -----
310,761 354,177 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 94,000 Telstra Corporation
Limited(d)............... 392,560 538,626 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 4,269,264 4,933,132 2.8
- ---------------------------------------------------------------------------------------------------------------------------
CHINA TELECOMMUNICATIONS 9,500 China Telecom (Hong Kong)
Limited (ADR)(a)(d)...... 445,187 541,500 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHINA 445,187 541,500 0.3
- ---------------------------------------------------------------------------------------------------------------------------
INDONESIA EQUITY BASKET 18,000 MSCI Indonesian OPALS
'B'(f)................... 356,580 356,580 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDONESIA 356,580 356,580 0.2
- ---------------------------------------------------------------------------------------------------------------------------
JAPAN APPLIANCES & 8,100 Sony Corporation........... 720,225 873,740 0.5
HOUSEHOLD DURABLES
------------------------------------------------------------------------------------------------------
</TABLE>
180
<PAGE> 182
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES HELD/ VALUE PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN AUTOMOBILES 95,000 Fuji Heavy Industries,
Ltd. .................... $ 484,752 $ 733,427 0.4%
(CONTINUED) 34,000 Toyota Motor Corporation... 912,442 1,076,376 0.6
------------ ------------ -----
1,397,194 1,809,803 1.0
------------------------------------------------------------------------------------------------------
BANKING 117,000 The Asahi Bank, Ltd. ...... 533,184 560,919 0.3
------------------------------------------------------------------------------------------------------
BEVERAGES & TOBACCO 58 Japan Tobacco, Inc. ....... 423,294 642,420 0.4
------------------------------------------------------------------------------------------------------
BROADCASTING & 1,400 Avex Inc. ................. 138,536 218,714 0.1
PUBLISHING
14,000 Nippon Broadcasting System,
Incorporated............. 733,416 694,330 0.4
1,000 Nippon Television Network
Corp. ................... 300,910 413,291 0.2
------------ ------------ -----
1,172,862 1,326,335 0.7
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & 64,000 Sekisui Chemical Co.,
COMPONENTS Ltd. .................... 336,861 371,367 0.2
------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 350 Bellsystem 24, Inc. ....... 133,290 143,061 0.1
SERVICES
1,500 Oracle Corporation Japan... 144,841 166,143 0.1
62,000 Ricoh Co., Ltd............. 724,553 853,794 0.5
1,000 Trend Micro
Incorporated(d).......... 130,464 166,143 0.1
------------ ------------ -----
1,133,148 1,329,141 0.8
------------------------------------------------------------------------------------------------------
CHEMICALS 75,000 Kaneka Corporation......... 434,653 706,728 0.4
24,000 Shin-Etsu Chemical Co.,
Ltd. .................... 571,992 803,439 0.5
116,000 Toray Industries, Inc. .... 623,988 581,055 0.3
------------ ------------ -----
1,630,633 2,091,222 1.2
------------------------------------------------------------------------------------------------------
CONSTRUCTION & 127,000 Nishimatsu Construction
HOUSING Co., Ltd. ............... 625,597 728,534 0.4
------------------------------------------------------------------------------------------------------
DATA PROCESSING & 64,000 Fujitsu Limited............ 861,705 1,288,147 0.7
REPRODUCTION
------------------------------------------------------------------------------------------------------
ELECTRICAL & 73,000 Hitachi Ltd. .............. 595,546 684,865 0.4
ELECTRONICS
22,000 Square Co., Ltd. .......... 802,298 792,858 0.4
3,900 Sumida Electric Co.,
Ltd. .................... 105,177 117,664 0.1
------------ ------------ -----
1,503,021 1,595,387 0.9
------------------------------------------------------------------------------------------------------
ELECTRONIC 4,200 Keyence Corporation........ 474,236 735,295 0.4
COMPONENTS &
INSTRUMENTATION
12,000 Murata Manufacturing Co.,
Ltd. .................... 361,035 789,552 0.5
31 NTT Mobile Communications
Network, Inc.(d)(e)...... 1,151,127 420,235 0.2
124 NTT Mobile Communications
Network, Inc.(d)(e)...... 0 1,660,440 0.9
4,000 Rohm Company Ltd. ......... 401,186 626,550 0.4
------------ ------------ -----
2,387,584 4,232,072 2.4
------------------------------------------------------------------------------------------------------
FINANCIAL INVESTMENT 13,000 Jafco Co., Ltd. ........... 786,284 870,392 0.5
COMPANY
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 99,000 Daiwa Securities Group
Inc. .................... 457,127 654,654 0.4
US$ 905,000 MBL International Finance
(Bermuda), 3% due
11/30/2002............... 1,104,100 1,018,125 0.6
96,000,000 Sanwa International Finance
Ltd. (Convertible
Preferred)(d)............ 819,448 831,212 0.4
360 Shohkoh Fund & Co., Ltd. .. 209,437 258,291 0.1
9,800 Takefuji Corporation....... 721,925 1,013,374 0.6
------------ ------------ -----
3,312,037 3,775,656 2.1
------------------------------------------------------------------------------------------------------
</TABLE>
181
<PAGE> 183
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN FOOD & HOUSEHOLD 2,000 Hokuto Corporation......... $ 79,344 $ 107,456 0.1%
(CONCLUDED) PRODUCTS
5,400 Nissin Co., Ltd. .......... 182,375 258,439 0.1
2,000 Q'sai Co., Ltd. ........... 68,603 74,558 0.0
------------ ------------ -----
330,322 440,453 0.2
------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 49,000 Fujisawa Pharmacturical
CARE Co., Ltd. ............... 543,501 797,900 0.5
24,000 Sankyo Company, Ltd. ...... 558,969 605,059 0.3
15,000 Takeda Chemical
Industries............... 507,540 695,570 0.4
------------ ------------ -----
1,610,010 2,098,529 1.2
------------------------------------------------------------------------------------------------------
INDUSTRIAL 23,000 Bridgestone Corp. ......... 524,255 695,817 0.4
COMPONENTS 114,000 NSK Limited................ 540,942 625,690 0.3
------------ ------------ -----
1,065,197 1,321,507 0.7
------------------------------------------------------------------------------------------------------
INSURANCE 129,000 Mitsui Marine and Fire
Insurance Company,
Ltd. .................... 694,278 634,444 0.4
------------------------------------------------------------------------------------------------------
LEISURE & TOURISM 166,000 Mizuno Corporation......... 676,978 628,434 0.3
2,600 People Co., Ltd. .......... 103,705 120,351 0.1
3,300 Roland Corporation......... 110,573 106,381 0.1
28 Round One Corporation...... 107,550 196,495 0.1
------------ ------------ -----
998,806 1,051,661 0.6
------------------------------------------------------------------------------------------------------
MACHINERY & 95,000 Komatsu Ltd. .............. 545,382 607,001 0.3
ENGINEERING 5,300 THK Co., Ltd. ............. 95,145 122,665 0.1
------------ ------------ -----
640,527 729,666 0.4
------------------------------------------------------------------------------------------------------
MERCHANDISING 3,000 Art Vivant Co., Ltd. ...... 77,174 100,430 0.1
14,000 FamilyMart Co., Ltd. ...... 648,227 642,255 0.4
10,000 Ito-Yokado Co., Ltd. ...... 471,237 669,532 0.4
500 Ryohin Keikaku Company
Limited.................. 110,904 125,847 0.1
3,100 Sunkus & Associates
Inc. .................... 104,813 102,753 0.1
36,000 Uny Co., Ltd. ............. 542,451 541,577 0.3
2,000 Yamada Denki............... 87,416 107,456 0.1
------------ ------------ -----
2,042,222 2,289,850 1.5
------------------------------------------------------------------------------------------------------
METALS--STEEL 263,000 Nippon Steel Corporation... 634,109 610,870 0.3
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 62,000 Ibiden Co., Ltd. .......... 904,963 1,024,963 0.6
------------------------------------------------------------------------------------------------------
NON INDEX 463,474 Nikkei (Warrants)(c)....... 366,489 332,262 0.2
------------------------------------------------------------------------------------------------------
REAL ESTATE 3,000 Able Inc. ................. 116,558 149,033 0.1
67,000 Mitsui Fudosan Co.,
Ltd. .................... 724,583 542,734 0.3
------------ ------------ -----
841,141 691,767 0.4
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS.. 68 Nippon Telegraph &
Telephone Corporation
(NTT).................... 638,585 792,528 0.4
------------------------------------------------------------------------------------------------------
TRANSPORTATION-- 104 East Japan Railway
ROAD & RAIL Company.................. 487,097 558,770 0.3
86,000 Nippon Express Co.,
Ltd. .................... 562,288 515,374 0.3
------------ ------------ -----
1,049,385 1,074,144 0.6
------------------------------------------------------------------------------------------------------
WHOLESALE & 92,000 Mitsubishi Corporation..... 667,548 623,574 0.3
INTERNATIONAL TRADE
5,100 Softbank Corporation....... 688,170 1,033,237 0.6
------------ ------------ -----
1,355,718 1,656,811 0.9
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 29,995,381 36,244,590 20.5
- ---------------------------------------------------------------------------------------------------------------------------
MALAYSIA++ FINANCIAL SERVICES 285 Rashid Hussain BHD
(Warrants)(c)............ 376 145 0.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIA 376 145 0.0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
182
<PAGE> 184
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEW ZEALAND ENERGY SOURCES 120,940 Fletcher Challenge
Energy................... $ 302,670 $ 326,654 0.2%
------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & 123,360 Fletcher Challenge Paper... 118,883 92,117 0.0
PAPER
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 104,040 Telecom Corporation of New
Zealand Limited.......... 503,207 446,307 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NEW
ZEALAND 924,760 865,078 0.5
- ---------------------------------------------------------------------------------------------------------------------------
PHILIPPINES EQUITY BASKET 15,000 MSCI Philippines OPALS
'B'(e)(f)................ 679,350 747,900 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PHILIPPINES 679,350 747,900 0.4
- ---------------------------------------------------------------------------------------------------------------------------
SINGAPORE EQUITY BASKET 38,000 MSCI Singapore OPALS
'B'(f)................... 1,564,230 1,936,100 1.1
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 125,000 Singapore
Telecommunications,
Ltd. .................... 182,925 214,517 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SINGAPORE 1,747,155 2,150,617 1.2
- ---------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA APPLIANCES & 404 Samsung Electronics
HOUSEHOLD DURABLES (GDR)(b)(d)(e)........... 9,019 21,533 0.0
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 668 SK Telecom Co. Ltd.
(ADR)(a)(e).............. 10,284 11,363 0.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH
KOREA 19,303 32,896 0.0
- ---------------------------------------------------------------------------------------------------------------------------
THAILAND EQUITY BASKET 9,000 MSCI Thailand OPALS(f)..... 967,725 1,043,820 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THAILAND 967,725 1,043,820 0.6
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 39,405,081 46,916,258 26.5
- ---------------------------------------------------------------------------------------------------------------------------
WESTERN EUROPE
- ---------------------------------------------------------------------------------------------------------------------------
AUSTRIA BANKING 6,000 Bank Austria AG............ 356,307 315,364 0.2
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & 7,200 Wienerberger
COMPONENTS Baustoffindustrie AG..... 166,662 186,324 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRIA 522,969 501,688 0.3
- ---------------------------------------------------------------------------------------------------------------------------
BELGIUM EQUITY BASKET 30,300 MSCI Belgium OPALS
'B'(f)................... 2,469,081 2,413,395 1.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
BELGIUM 2,469,081 2,413,395 1.4
- ---------------------------------------------------------------------------------------------------------------------------
DENMARK EQUITY BASKET 4,900 MSCI Denmark OPALS
'B'(e)(f)................ 684,873 680,610 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
DENMARK 684,873 680,610 0.4
- ---------------------------------------------------------------------------------------------------------------------------
FINLAND EQUITY BASKET 6,900 MSCI Finland OPALS
'B'(f)................... 1,571,282 2,204,136 1.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FINLAND 1,571,282 2,204,136 1.2
- ---------------------------------------------------------------------------------------------------------------------------
FRANCE AEROSPACE & MILITARY 8,000 Thomson CSF................ 256,207 277,850 0.2
TECHNOLOGY
------------------------------------------------------------------------------------------------------
AUTOMOBILES 2,017 PSA Peugeot Citroen........ 380,380 318,044 0.2
------------------------------------------------------------------------------------------------------
</TABLE>
183
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FRANCE BANKING 5,500 Banque Nationale de Paris
(CONCLUDED) (BNP).................... $ 487,835 $ 457,999 0.3%
5,600 Compagnie Financiere de
Paribas (CFP)............ 455,983 627,347 0.3
2,000 Societe Generale 'A'....... 379,110 352,259 0.2
------------ ------------ -----
1,322,928 1,437,605 0.8
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & 3,900 Compagnie de Saint
COMPONENTS Gobain................... 614,733 620,988 0.4
4,500 Lafarge SA (Ordinary)...... 436,776 427,596 0.2
------------ ------------ -----
1,051,509 1,048,584 0.6
------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 3,100 Cap Gemini SA.............. 479,719 486,897 0.3
SERVICES
5,500 Suez Lyonnaise des Eaux.... 1,044,854 991,386 0.6
13,800 Vivendi.................... 1,043,131 1,117,160 0.6
------------ ------------ -----
2,567,704 2,595,443 1.5
------------------------------------------------------------------------------------------------------
ELECTRICAL & 4,000 Alcatel.................... 488,600 562,708 0.3
ELECTRONICS
7,000 Schneider SA............... 406,146 392,813 0.3
------------ ------------ -----
894,746 955,521 0.6
------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & 4,800 Coflexip................... 374,804 411,828 0.2
SERVICES
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 5,400 Elf Aquitaine SA........... 742,449 791,934 0.4
9,400 Total SA 'B'(d)............ 1,057,034 1,211,924 0.7
------------ ------------ -----
1,799,483 2,003,858 1.1
------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 1,700 Groupe Danone SA........... 436,030 438,005 0.2
PRODUCTS
------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 650 L'Oreal SA................. 326,510 439,113 0.2
CARE
6,100 Rhone-Poulenc SA........... 293,117 278,562 0.2
------------ ------------ -----
619,627 717,675 0.4
------------------------------------------------------------------------------------------------------
INDUSTRIAL 5,000 Compagnie Generale des
COMPONENTS Etablissements Michelin
'B'...................... 233,420 204,420 0.1
------------------------------------------------------------------------------------------------------
INSURANCE 11,000 Axa........................ 1,305,960 1,341,120 0.8
------------------------------------------------------------------------------------------------------
MANUFACTURING 13,000 Sanofi-Synthelabo SA(d).... 523,704 551,319 0.3
------------------------------------------------------------------------------------------------------
MERCHANDISING 5,400 Carrefour SA............... 632,158 793,047 0.5
4,300 Pinault-Printemps-Redoute
SA....................... 674,097 737,415 0.4
330 Promodes................... 198,677 216,472 0.1
------------ ------------ -----
1,504,932 1,746,934 1.0
------------------------------------------------------------------------------------------------------
METALS--STEEL 24,000 Usinor SA.................. 300,200 357,412 0.2
------------------------------------------------------------------------------------------------------
RECREATION/OTHER 1,200 LVMH (Louis Vuitton Moet
CONSUMER GOODS Hennessy)................ 296,462 351,105 0.2
1,200 LVMH (Louis Vuitton Moet
Hennessy) (Rights)(g).... 0 35,061 0.0
------------ ------------ -----
296,462 386,166 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 13,982 France Telecom SA.......... 927,959 1,055,521 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FRANCE................... 14,796,055 15,847,305 9.0
- ---------------------------------------------------------------------------------------------------------------------------
GERMANY AUTOMOBILES 23,000 DaimlerChrysler AG......... 1,896,883 1,991,119 1.1
8,200 Volkswagen AG.............. 530,508 524,802 0.3
------------ ------------ -----
2,427,391 2,515,921 1.4
------------------------------------------------------------------------------------------------------
BANKING 18,811 Deutsche Bank AG........... 1,298,264 1,146,718 0.6
12,200 HypoVereinsbank............ 894,284 792,119 0.4
------------ ------------ -----
2,192,548 1,938,837 1.0
------------------------------------------------------------------------------------------------------
</TABLE>
184
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GERMANY CHEMICALS 17,300 BASF AG.................... $ 796,578 $ 763,989 0.4%
(CONCLUDED)
19,450 Bayer AG................... 790,574 809,825 0.5
6,800 Hoechst AG................. 303,274 307,655 0.2
------------ ------------ -----
1,890,426 1,881,469 1.1
------------------------------------------------------------------------------------------------------
ELECTRICAL & 17,400 Siemens AG................. 1,208,026 1,341,347 0.8
ELECTRONICS
------------------------------------------------------------------------------------------------------
EQUITY BASKET 4,500 MSCI German OPALS 'B'(f)... 1,349,333 1,390,545 0.8
------------------------------------------------------------------------------------------------------
INSURANCE 4,925 Allianz AG (Registered
Shares).................. 1,411,227 1,365,365 0.8
4,000 Axa Colonia Konzern AG..... 437,600 383,383 0.2
------------ ------------ -----
1,848,827 1,748,748 1.0
------------------------------------------------------------------------------------------------------
METALS--STEEL 38,000 Thyssen Krupp AG(d)........ 816,262 835,343 0.5
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 36,147 Deutsche Telekom AG........ 1,205,500 1,516,199 0.9
9,500 Mannesmann AG.............. 1,111,990 1,416,714 0.8
------------ ------------ -----
2,317,490 2,932,913 1.7
------------------------------------------------------------------------------------------------------
TRANSPORTATION-- 18,500 Deutsche Lufthansa AG
AIRLINES (Registered Shares)...... 455,773 335,182 0.2
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRICAL 21,000 RWE AG..................... 1,001,372 971,536 0.5
& GAS
7,700 RWE AG (Preferred)......... 230,868 267,430 0.2
13,000 Veba AG.................... 813,721 763,675 0.4
------------ ------------ -----
2,045,961 2,002,641 1.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GERMANY 16,552,037 16,922,946 9.6
- ---------------------------------------------------------------------------------------------------------------------------
HUNGARY BANKING 18,527 OTP Bank Rt. (GDR)(b)...... 842,637 759,607 0.4
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 34,294 MOL Magyar Olaj-es Gazipari
Rt. (GDR)(b)............. 820,074 814,483 0.5
------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 2,690 EGIS Rt.................... 95,700 64,442 0.0
CARE
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HUNGARY 1,758,411 1,638,532 0.9
- ---------------------------------------------------------------------------------------------------------------------------
IRELAND BANKING 22,500 Bank of Ireland............ 490,610 379,448 0.2
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & 15,603 CRH PLC.................... 170,576 276,248 0.2
COMPONENTS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
IRELAND 661,186 655,696 0.4
- ---------------------------------------------------------------------------------------------------------------------------
ITALY BANKING 70,000 Istituto Bancario San Paolo
di Torino................ 1,106,091 952,274 0.5
160,000 Unicredito Italiano SpA.... 893,000 702,457 0.4
------------ ------------ -----
1,999,091 1,654,731 0.9
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 215,000 ENI SpA.................... 1,462,697 1,282,942 0.7
------------------------------------------------------------------------------------------------------
INSURANCE 33,000 Assicurazioni Generali..... 1,422,416 1,142,729 0.7
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 170,000 Telecom Italia Mobile (TIM)
SpA...................... 1,020,144 1,014,420 0.6
120,000 Telecom Italia SpA......... 1,276,262 1,246,614 0.7
------------ ------------ -----
2,296,406 2,261,034 1.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 7,180,610 6,341,436 3.6
- ---------------------------------------------------------------------------------------------------------------------------
NETHERLANDS APPLIANCES & 10,560 Koninklijke (Royal) Philips
HOUSEHOLD DURABLES Electronics NV(d)........ 699,145 1,040,972 0.6
------------------------------------------------------------------------------------------------------
BANKING 58,500 ABN AMRO Holding NV........ 1,235,950 1,266,092 0.7
------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 15,000 TNT Post Group NV.......... 439,536 357,876 0.2
SERVICES
------------------------------------------------------------------------------------------------------
</TABLE>
185
<PAGE> 187
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NETHERLANDS ENERGY SOURCES 34,900 Royal Dutch Petroleum
(CONCLUDED) Company.................. $ 1,720,174 $ 2,042,979 1.2%
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 17,000 ING Groep NV............... 995,891 919,811 0.5
------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 8,839 Unilever NV 'A'............ 795,530 595,304 0.3
PRODUCTS
------------------------------------------------------------------------------------------------------
INSURANCE 11,500 AEGON NV................... 882,081 833,781 0.5
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 17,000 KPN NV..................... 793,019 797,169 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 7,561,326 7,853,984 4.4
- ---------------------------------------------------------------------------------------------------------------------------
NORWAY EQUITY BASKET 12,300 MSCI Norway OPALS
'B'(e)(f)................ 1,078,203 1,072,806 0.6
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORWAY 1,078,203 1,072,806 0.6
- ---------------------------------------------------------------------------------------------------------------------------
POLAND BANKING 8,500 Bank Rozwoju Eksportu SA
(BRE).................... 281,710 267,725 0.2
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 6,000 Elektrim Spolka Akcyjna
SA....................... 83,019 84,927 0.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND 364,729 352,652 0.2
- ---------------------------------------------------------------------------------------------------------------------------
PORTUGAL EQUITY BASKET 18,800 MSCI Portugal OPALS
'B'(e)(f)................ 1,496,368 1,218,616 0.7
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGAL 1,496,368 1,218,616 0.7
- ---------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING 101,000 Banco Santander Central
Hispano SA............... 946,242 1,051,315 0.6
------------------------------------------------------------------------------------------------------
CONSTRUCTION & 3,250 Fomento de Construcciones y
HOUSING Contratas SA............. 199,206 185,894 0.1
17,700 Grupo Dragados SA.......... 191,884 207,407 0.1
------------ ------------ -----
391,090 393,301 0.2
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 20,700 Repsol SA.................. 381,357 422,402 0.2
------------------------------------------------------------------------------------------------------
EQUITY BASKET 12,200 MSCI Spain OPALS
'B'(e)(f)................ 1,506,694 1,452,044 0.8
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 21,848 Telefonica SA(d)........... 960,556 1,051,748 0.6
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRICAL 45,000 Endesa SA.................. 1,105,502 959,076 0.6
& GAS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SPAIN.................... 5,291,441 5,329,886 3.0
- ---------------------------------------------------------------------------------------------------------------------------
SWEDEN APPLIANCES & 27,298 Electrolux AB 'B'.......... 313,524 573,169 0.3
HOUSEHOLD DURABLES
------------------------------------------------------------------------------------------------------
AUTOMOBILES 11,000 Volvo AB 'B'............... 290,209 319,847 0.2
------------------------------------------------------------------------------------------------------
BANKING 34,000 Skandinaviska Enskilda
Banken (SEB) 'A'......... 419,853 397,051 0.2
48,000 Svenska Handelsbanken AB... 673,081 577,529 0.4
------------ ------------ -----
1,092,934 974,580 0.6
------------------------------------------------------------------------------------------------------
ELECTRICAL & 60,000 Telefonaktiebolaget LM
ELECTRONICS Ericsson 'B'............. 1,601,127 1,928,635 1.1
------------------------------------------------------------------------------------------------------
EQUITY BASKET 4,000 MSCI Sweden OPALS
'B'(e)(f)................ 861,800 958,960 0.5
------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & 15,500 Svenska Cellulosa AB (SCA)
PAPER 'B'...................... 405,987 402,241 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 4,565,581 5,157,432 2.9
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
186
<PAGE> 188
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES HELD/ VALUE PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SWITZERLAND BANKING 3,000 Credit Suisse Group
(Registered Shares)...... $ 444,156 $ 519,740 0.3%
2,500 UBS AG (Registered
Shares).................. 626,620 747,086 0.4
------------ ------------ -----
1,070,776 1,266,826 0.7
------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 450 Nestle SA (Registered
PRODUCTS Shares).................. 995,805 811,779 0.5
------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 770 Novartis AG (Registered
CARE Shares).................. 1,475,147 1,125,716 0.6
110 Roche Holding AG........... 1,296,106 1,132,092 0.6
------------ ------------ -----
2,771,253 2,257,808 1.2
------------------------------------------------------------------------------------------------------
INSURANCE 160 Schweizerische
Rueckversicherungs-
Gesellschaft (Swiss Re)
(Registered Shares)...... 400,706 305,017 0.2
525 Zurich Allied AG........... 340,253 298,899 0.2
------------ ------------ -----
740,959 603,916 0.4
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 800 Swisscom AG (Registered
Shares)(d)............... 285,453 301,410 0.2
------------------------------------------------------------------------------------------------------
TEXTILES & APPAREL 6,500 Charles Voegele Holding
AG(d).................... 948,690 983,770 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWITZERLAND 6,812,936 6,225,509 3.5
- ----------------------------------------------------------------------------------------------------------------------------
UNITED AEROSPACE & 84,000 British Aerospace PLC...... 615,615 544,884 0.3
KINGDOM MILITARY US$ 270,000 British Aerospace PLC,
TECHNOLOGY 3.75% due 7/21/2006........ 426,114 435,992 0.2
82,000 Rolls-Royce PLC............ 378,283 346,856 0.2
------------ ------------ -----
1,420,012 1,327,732 0.7
------------------------------------------------------------------------------------------------------
BANKING 21,600 Abbey National PLC......... 491,188 405,281 0.2
30,000 Bank of Scotland........... 293,108 397,001 0.2
20,800 Barclays PLC............... 624,643 604,903 0.3
22,911 HSBC Holdings PLC.......... 610,676 810,671 0.5
55,600 Lloyds TSB Group PLC....... 666,842 753,293 0.4
24,000 National Westminster Bank
PLC...................... 500,110 508,539 0.3
------------ ------------ -----
3,186,567 3,479,688 1.9
------------------------------------------------------------------------------------------------------
BEVERAGES & TOBACCO 36,000 Cadbury Schweppes PLC...... 273,608 229,126 0.1
96,000 Diageo PLC................. 1,021,433 1,001,954 0.6
------------ ------------ -----
1,295,041 1,231,080 0.7
------------------------------------------------------------------------------------------------------
BROADCASTING & 54,000 WPP Group PLC.............. 454,193 456,409 0.3
PUBLISHING
------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & 50,400 RMC Group PLC.............. 504,547 811,073 0.5
COMPONENTS
------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 64,000 Securicor PLC.............. 578,469 561,094 0.3
SERVICES
90,000 Shanks & McEwan Group
PLC...................... 288,558 330,361 0.2
------------ ------------ -----
867,027 891,455 0.5
------------------------------------------------------------------------------------------------------
CONSTRUCTION & 32,000 The Berkeley Group PLC..... 303,109 384,650 0.2
HOUSING
------------------------------------------------------------------------------------------------------
DATA PROCESSING & 54,000 Computacenter PLC.......... 386,424 421,104 0.2
REPRODUCTION
------------------------------------------------------------------------------------------------------
ENERGY 54,000 British Energy PLC......... 562,638 459,387 0.3
------------------------------------------------------------------------------------------------------
ENERGY SOURCES 149,200 BP Amoco PLC............... 2,215,916 2,672,515 1.5
50,000 Enterprise Oil PLC......... 332,554 325,320 0.2
------------ ------------ -----
2,548,470 2,997,835 1.7
------------------------------------------------------------------------------------------------------
</TABLE>
187
<PAGE> 189
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES VALUE PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS COST (NOTE 1a) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED FINANCIAL SERVICES 31,080 Halifax PLC(d)............. $ 440,172 $ 370,653 0.2%
KINGDOM
(CONCLUDED)
------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 123,600 Unilever PLC............... 1,241,534 1,099,191 0.6
PRODUCTS
------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 21,600 AstraZeneca Group PLC...... 914,779 835,063 0.5
CARE
31,840 Glaxo Wellcome PLC......... 871,289 884,334 0.5
80,800 Nycomed Amersham PLC....... 549,693 561,359 0.3
66,400 SmithKline Beecham PLC..... 774,392 862,481 0.5
------------ ------------ -----
3,110,153 3,143,237 1.8
------------------------------------------------------------------------------------------------------
INDUSTRIAL 68,000 BBA Group PLC.............. 430,198 521,709 0.3
COMPONENTS
------------------------------------------------------------------------------------------------------
INSURANCE 32,000 Allied Zurich.............. 404,607 402,016 0.2
39,200 Prudential Corporation
PLC...................... 582,207 576,798 0.3
116,363 Royal & Sun Alliance
Insurance Group PLC...... 1,082,334 1,043,081 0.6
------------ ------------ -----
2,069,148 2,021,895 1.1
------------------------------------------------------------------------------------------------------
LEISURE & TOURISM 37,200 Bass PLC................... 533,722 539,458 0.3
60,000 Carlton Communications
PLC...................... 610,837 497,196 0.3
100,000 Hilton Group PLC........... 432,065 396,213 0.2
------------ ------------ -----
1,576,624 1,432,867 0.8
------------------------------------------------------------------------------------------------------
MERCHANDISING 72,000 ASDA Group PLC............. 168,918 246,424 0.2
35,000 The Great University Stores
PLC...................... 390,041 387,627 0.2
60,000 J Sainsbury PLC............ 378,444 378,096 0.2
502,000 Tesco PLC.................. 1,458,856 1,291,064 0.7
------------ ------------ -----
2,396,259 2,303,211 1.3
------------------------------------------------------------------------------------------------------
MISCELLANEOUS 90,000 Rexam PLC.................. 297,447 364,390 0.2
MATERIALS &
COMMODITIES
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 81,016 BTR Siebe PLC.............. 594,508 383,217 0.2
------------------------------------------------------------------------------------------------------
REAL ESTATE 32,000 The British Land Company
PLC...................... 261,357 267,440 0.2
------------------------------------------------------------------------------------------------------
TECHNOLOGY 46,000 SEMA Group PLC............. 439,178 443,506 0.3
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 92,000 British Telecommunications
PLC...................... 1,528,024 1,540,678 0.9
16,000 Cable & Wireless PLC....... 177,948 203,794 0.1
22,000 Cable & Wireless
Communications PLC....... 199,975 211,419 0.1
68,000 Vodafone Group PLC......... 1,283,056 1,339,090 0.8
------------ ------------ -----
3,189,003 3,294,981 1.9
------------------------------------------------------------------------------------------------------
TRANSPORTATION-- 32,000 British Airways PLC........ 200,039 220,682 0.1
AIRLINES
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRICAL 112,000 BG PLC..................... 651,241 683,724 0.4
& GAS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED KINGDOM 28,424,889 29,011,116 16.4
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPE 101,791,977 103,427,745 58.5
- ---------------------------------------------------------------------------------------------------------------------------
LATIN
AMERICA
- ---------------------------------------------------------------------------------------------------------------------------
BRAZIL EQUITY BASKET 23,000 MSCI Brazil OPALS(f)....... 1,003,720 913,560 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 1,003,720 913,560 0.5
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
188
<PAGE> 190
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<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>
CHILE FINANCIAL SERVICES 18,000 Genesis Chile Fund(d)...... $ 482,310 $ 522,000 0.3%
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHILE 482,310 522,000 0.3
- ----------------------------------------------------------------------------------------------------------------------------
MEXICO EQUITY BASKET 4,500 MSCI Mexican OPALS(f)...... 401,670 430,920 0.2
------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT 1,538,000 Mexican Par Bond
BONDS (Rights)(h).............. 0 0 0.0
1,000,000 United Mexican States, 'C',
5.87438% due
12/31/2019(j)............ 823,386 840,015 0.5
------------ ------------ -----
823,386 840,015 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 1,225,056 1,270,935 0.7
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN
AMERICA 2,711,086 2,706,495 1.5
- ----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FACE
SECURITIES AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL US$ 2,008,000 General Electric Capital
PAPER* Corp., 5.75% due
7/01/1999................ 2,007,679 2,007,679 1.1
7,000,000 General Motors Acceptance
Corp., 5.63% due
7/01/1999................ 6,998,905 6,998,905 4.0
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMERCIAL PAPER 9,006,584 9,006,584 5.1
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Bills:
OBLIGATIONS* US$ 1,000,000 4.62% due 9/02/1999(i)..... 991,787 992,250 0.5
500,000 4.52% due 9/09/1999(i)..... 495,543 495,665 0.3
500,000 4.64% due 9/23/1999........ 494,522 494,705 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
US GOVERNMENT OBLIGATIONS 1,981,852 1,982,620 1.1
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-
TERM SECURITIES 10,988,436 10,989,204 6.2
- ----------------------------------------------------------------------------------------------------------------------------
OPTIONS NOMINAL VALUE COVERED PREMIUMS
PURCHASED BY OPTIONS PURCHASED ISSUE PAID
- ----------------------------------------------------------------------------------------------------------------------------
CALL OPTIONS 33,000 DBS, expiring March 2000 at
PURCHASED US$0.01.................. 182,399 352,770 0.2
35,797 Nikkei 225 OTC, expiring
December 1999 at
US$190................... 138,031 148,144 0.1
38,000 OCBC, expiring March 2000
at US$0.01............... 179,716 251,940 0.1
41,000 SIA, expiring March 2000 at
US$0.01.................. 179,943 356,290 0.2
41,000 UOB, expiring March 2000 at
US$0.01.................. 181,528 312,830 0.2
- ----------------------------------------------------------------------------------------------------------------------------
CURRENCY PUT 8,000,000 Japanese Yen, expiring
OPTIONS October 1999 at Y150..... 71,600 80 0.0
PURCHASED
- ----------------------------------------------------------------------------------------------------------------------------
PUT OPTIONS 850 FTSE 6325, expiring
PURCHASED September 1999 at
US$632................... 314,503 353,520 0.2
------------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED 1,247,720 1,775,574 1.0
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 162,495,080 172,829,674 97.7
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
189
<PAGE> 191
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPTIONS NOMINAL VALUE COVERED PREMIUMS VALUE PERCENT OF
WRITTEN BY OPTIONS WRITTEN ISSUE RECEIVED (NOTE 1a) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALL OPTIONS 850 FTSE 7000, expiring
WRITTEN September 1999 at
US$700................... $ (107,045) $ (54,233) 0.0%
- ----------------------------------------------------------------------------------------------------------------------------
CURRENCY CALL 8,000,000 Japanese Yen, expiring
OPTIONS WRITTEN October 1999 at
US$96.45................. (71,600) (4,000) 0.0
- ----------------------------------------------------------------------------------------------------------------------------
PUT OPTIONS 850 FTSE 5625, expiring
WRITTEN September 1999 at
US$562................... (120,442) (123,866) (0.1)
------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (299,087) (182,099) (0.1)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, NET OF
OPTIONS WRITTEN.......... $162,195,993 172,647,575 97.6
============
INTEREST RATE SWAPS........ 45,657 0.0
VARIATION MARGIN ON
FINANCIAL FUTURES
CONTRACTS**.............. (46,918) 0.0
UNREALIZED DEPRECIATION ON
FORWARD FOREIGN EXCHANGE
CONTRACTS***............. (23,104) 0.0
OTHER ASSETS LESS
LIABILITIES.............. 4,189,251 2.4
------------ -----
NET ASSETS................. $176,812,461 100.0%
============ =====
- ----------------------------------------------------------------------------------------------------------------------------
</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) 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) 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.
(g) The rights may be exercised until 9/21/1999.
(h)
The rights may be exercised until 6/30/2003.
(i)
Securities held as collateral in connection with open financial futures
contracts.
(j)
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 ratio of commercial bank loans by countries issuing these securities.
++ Effective February 16, 1999, the Company's Board of Directors adopted a
change in valuation for Malaysian securities. The Company will utilize a
Malaysian exchange rate of 3.80 and record an estimated exit tax on the value of
any investments made before February 15, 1999, based upon its value as of August
31, 1998, in the amount of 30% through March 31, 1999, 20% from April 1, 1999
through May 31, 1999 and 10% from June 1, 1999 through August 31, 1999. These
changes are due to the capital controls implemented by the Malaysian government,
which froze the Malaysian ringgit at 3.80 until September 1, 1999 and initiated
a tax at various rates, as described above, on any funds repatriated from
Malaysia.
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at the
time of purchase by the Fund.
** Financial futures contracts purchased as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTES 1a & 1b)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
Taiwan MSCI SIMEX July 1999
19 $ 707,180
Nikkei 225 Index Future SIMEX September 1999
62 4,497,024
OMX Index Future OML July 1999
47 458,773
TSE--35 Index Future TSE September 1999
10 1,374,510
- --------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT
PRICE--$6,766,821) $7,037,487
==========
- --------------------------------------------------------------------------------
</TABLE>
190
<PAGE> 192
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
**
Financial futures contracts sold as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTES 1a & 1b)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
DAX DTB September 1999
6 $ 833,008
MIB--30 FIB September 1999
16 2,885,103
All Ordinaries Futures SFE September 1999
26 1,280,810
- --------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT
PRICE--$5,000,047) $4,998,921
==========
- --------------------------------------------------------------------------------
</TABLE>
*** Forward foreign exchange contracts as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
FOREIGN CURRENCY PURCHASED EXPIRATION DATE (NOTE 1b)
<S> <C> <C> <C>
- ------------------------------------------------------------
Y 416,734,500
July 1999 $(50,411)
- ------------------------------------------------------------
(US$ COMMITMENT--$3,500,000) (50,411)
--------
- ------------------------------------------------------------
FOREIGN CURRENCY SOLD
- ------------------------------------------------------------
Y 453,040,000
July 1999 $ 37,846
PHP 22,908,000
August 1999 (90)
THB 29,784,000
September 1999 (10,449)
- ------------------------------------------------------------
(US$ COMMITMENT--$5,187,960) 27,307
--------
- ------------------------------------------------------------
UNREALIZED DEPRECIATION ON FORWARD FOREIGN $(23,104)
EXCHANGE CONTRACTS--NET
========
- ------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
191
<PAGE> 193
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$161,247,360) (Note
1a)....................................................... $171,054,100
Options purchased, at value (cost--$1,247,720) (Notes 1a &
1b)....................................................... 1,775,574
Interest rate swaps, at value (Notes 1b & 3)................ 45,657
Cash........................................................ 122,102
Foreign cash (Note 1c)...................................... 1,982,385
Receivables:
Securities sold........................................... $5,277,624
Dividends................................................. 662,763
Capital shares sold....................................... 331,847
Options written (Note 1b)................................. 227,487
Forward foreign exchange contracts (Note 1b).............. 27,991
Interest.................................................. 10,149 6,537,861
----------
Prepaid expenses and other assets........................... 1,316,713
------------
Total assets................................................ 182,834,392
------------
- --------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$299,087)
(Notes 1a & 1b)........................................... 182,099
Unrealized depreciation on forward foreign exchange
contracts (Note 1b)....................................... 23,104
Payables:
Securities purchased...................................... 4,806,687
Options purchased (Note 1b)............................... 314,503
Capital shares redeemed................................... 309,034
Investment adviser (Note 2)............................... 119,113
Variation margin (Note 1b)................................ 46,918
Interest rate swap contracts (Note 1b & 3)................ 17,642
Forward foreign exchange contracts (Note 1b).............. 689 5,614,586
----------
Accrued expenses............................................ 202,142
------------
Total liabilities........................................... 6,021,931
------------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $176,812,461
============
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 1,555,450
Paid-in capital in excess of par............................ 182,304,869
Undistributed investment income--net........................ 1,419,643
Accumulated distributions in excess of realized capital
gains on investments and foreign currency
transactions--net (Note 1f)............................... (19,303,127)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 10,835,626
------------
NET ASSETS.................................................. $176,812,461
============
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $176,812,461 and 15,554,499
shares outstanding........................................ $ 11.37
============
- --------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
192
<PAGE> 194
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $228,183 foreign withholding tax)......... $ 1,924,427
Interest and discount earned................................ 285,408
Other income................................................ 531,955
-----------
Total income................................................ 2,741,790
-----------
- ----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 676,167
Custodian fees.............................................. 95,123
Accounting services (Note 2)................................ 18,253
Interest rate swap expense (Notes 1b & 3)................... 17,642
Pricing services............................................ 14,563
Professional fees........................................... 11,844
Printing and shareholder reports............................ 10,658
Transfer agent fees (Note 2)................................ 2,692
Directors' fees and expenses................................ 2,174
Other....................................................... 5,283
-----------
Total expenses.............................................. 854,399
-----------
Investment income--net...................................... 1,887,391
-----------
- ----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain (loss) from:
Investments--net.......................................... 12,414,678
Foreign currency transactions--net........................ (96,009) 12,318,669
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 3,621,575
Foreign currency transactions--net........................ 205,433 3,827,008
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 16,145,677
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $18,033,068
===========
- ----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
193
<PAGE> 195
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 1,887,391 $ 6,431,295
Realized gain (loss) on investments and foreign currency
transactions--net......................................... 12,318,669 (25,283,812)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 3,827,008 53,994,815
------------ ------------
Net increase in net assets resulting from operations........ 18,033,068 35,142,298
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (7,349,905) (3,758,390)
Realized gain on investments--net:
Class A................................................... -- (1,207,095)
In excess of realized gain on investments--net..............
Class A................................................... -- (30,361,238)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (7,349,905) (35,326,723)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (27,327,505) (231,581,631)
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (16,644,342) (231,766,056)
Beginning of period......................................... 193,456,803 425,222,859
------------ ------------
End of period*.............................................. $176,812,461 $193,456,803
============ ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,419,643 $ 6,882,157
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
\
194
<PAGE> 196
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS 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, 1999+ 1998+ 1997+ 1996+ 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.68 $ 10.80 $ 11.63 $ 11.06 $ 10.90
-------- -------- -------- -------- --------
Investment income--net.............................. .11 .21 .20 .23 .20
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............ .99 .56 (.71) .49 .37
-------- -------- -------- -------- --------
Total from investment operations.................... 1.10 .77 (.51) .72 .57
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.41) (.09) (.23) (.15) (.01)
Realized gain on investments--net................. -- (.03) (.09) -- (.17)
In excess of realized gain on investments--net.... -- (.77) -- -- (.23)
-------- -------- -------- -------- --------
Total dividends and distributions................... (.41) (.89) (.32) (.15) (.41)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 11.37 $ 10.68 $ 10.80 $ 11.63 $ 11.06
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 10.58%++ 7.80% (4.55%) 6.62% 5.48%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .95%* .89% .90% .89% .89%
======== ======== ======== ======== ========
Investment income--net.............................. 2.09%* 2.03% 1.69% 1.96% 1.95%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $176,812 $193,457 $425,223 $349,080 $265,602
======== ======== ======== ======== ========
Portfolio turnover.................................. 79.44% 126.23% 127.96% 49.87% 100.02%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
195
<PAGE> 197
- --------------------------------------------------------------------------------
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.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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.
- - Interest rate swaps--The Fund is authorized to enter into equity swap
agreements, which are over-the-counter contracts in which one party agrees to
make periodic payments based on the change in market value of a specified equity
security, basket of equity securities or equity index in return for periodic
payments based on a fixed or variable interest rate of the change in market
value of a different equity security, basket of equity securities or equity
index. Swap agreements may be used to obtain exposure to an equity or market
without owning or taking physical custody of securities in circumstances in
which direct investment is restricted by local law or is otherwise impractical.
- - 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.
196
<PAGE> 198
- --------------------------------------------------------------------------------
- - 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.
- - 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. Distributions in excess of realized
capital gains are due primarily to differing tax treatments for futures
transactions and 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 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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $4,834 in commissions
on the execution of portfolio security transactions.
For the six months ended June 30, 1999, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $18 for providing security price
quotations to compute the Fund's net asset value.
Financial Data Services, Inc. ("FDS"), 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.
197
<PAGE> 199
- --------------------------------------------------------------------------------
Certain officers and/or directors of the Company are officers and/or directors
of MLAM, PSI, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $137,112,928 and $174,326,958, respectively.
Net realized gains (losses) for the six months ended June 30, 1999 and net
unrealized gains (losses) as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Investments:
Long-term.......................... $12,351,502 $ 9,805,972
Short-term......................... -- 768
Financial futures contracts........ 194,723 271,792
Interest rate swaps................ -- 45,657
Options written.................... -- 49,388
Options purchased.................. (131,547) 599,374
----------- -----------
Total investments................... 12,414,678 10,772,951
----------- -----------
Currency transactions:
Options written.................... -- 67,600
Options purchased.................. (60,885) (71,520)
Foreign currency transactions...... (323,783) 89,699
Forward foreign exchange
contracts........................ 288,659 (23,104)
----------- -----------
Total currency transactions......... (96,009) 62,675
----------- -----------
Total............................... $12,318,669 $10,835,626
=========== ===========
- ---------------------------------------------------------------------
</TABLE>
The Fund has entered into the following equity swaps as of June 30, 1999:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Interest Paid
--------------------
Notional Return Current Expiration
Amount Received Rate Type Date
- ----------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500,000 Price return+ 6.495% Variable* 10/28/1999
$3,280,275 Price return plus
net dividends++ 3.081% Variable** 11/22/1999
- ----------------------------------------------------------------
</TABLE>
+ The Fund receives the price return of the Hang Seng China Affiliated
Corporations Index.
++ The Fund receives the price return plus net dividends of the European ex UK
Small-Cap Basket.
* 3-month US$ LIBOR plus 1.50% at reset date.
** 3-month 1 Euribor plus 0.50% at reset date.
Transactions in options written for the six months ended June 30, 1999 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.................. 8,000,000 $ 71,600
Options written....................... 850 107,045
--------- --------
Outstanding call options written,
end of period........................ 8,000,850 $178,645
========= ========
- ---------------------------------------------------------------------
</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....................... 850 $120,442
--- --------
Outstanding put options written,
end of period........................ 850 $120,442
=== ========
- ---------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $10,455,502, of which $17,346,990 related to appreciated securities
and $6,891,488 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments, net of options for Federal income tax purposes
was $162,195,993.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$27,327,505 and $231,581,631 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended June 30, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 2,051,782 $ 22,001,295
Shares issued to shareholders in
reinvestment of dividends........... 701,327 7,349,905
---------- ------------
Total issued......................... 2,753,109 29,351,200
Shares redeemed...................... (5,310,034) (56,678,705)
---------- ------------
Net decrease......................... (2,556,925) $(27,327,505)
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold........................ 3,679,012 $ 38,581,146
Shares issued to shareholders in
reinvestment of dividends and
distributions..................... 3,547,854 35,326,722
----------- -------------
Total issued....................... 7,226,866 73,907,868
Shares redeemed.................... (28,489,652) (305,489,499)
----------- -------------
Net decrease....................... (21,262,786) $(231,581,631)
=========== =============
- -----------------------------------------------------------------
</TABLE>
5. COMMITMENTS:
At June 30, 1999, 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 $299,000 and $32,000, respectively.
6. CAPITAL LOSS CARRYFORWARD:
At December 31, 1998, the Fund had a net capital loss carryforward of
approximately $28,034,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
198
<PAGE> 200
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The Fund's performance rebounded during the first half of 1999. Commodity prices
and the stocks of resource companies continued to enjoy strong recoveries from
the lows reached following the recessions in Asian and other emerging markets.
All commodity groups delivered double-digit gains 1999 year-to-date, with the
only exception being the gold sector, which is suffering from the lack of
inflationary pressures and central bank selling.
During the six months ended June 30, 1999, the Fund's Class A Shares had a
total return of +25.79%. The Fund outperformed the +18.14% total return of the
unmanaged Morgan Stanley Capital International (MSCI) Natural Resource Fund
Index, and on a trailing 12-month basis ended June 30, 1999, the Fund's Class A
Shares' total return exceeded that of the Lipper Natural Resources Fund Average
of +2.50%.
The recovery in resource stocks and strong Fund performance confirmed our
belief that resource stock prices had discounted problems facing the sector. As
world economic conditions continued to show signs of improvement, resource
investments continued to offer the potential for positive returns. This is
particularly true in selected energy and paper/forest product investments.
Increased exposure to energy investments, particularly North American natural
gas producers and oil service stocks, helped the Fund's investment results. Ten
of our independent oil and gas production and oil service stocks delivered
exceptionally strong total returns. The surplus of natural gas in storage
resulting from the historically warm winter has continued to decline, and
storage is similar to levels in 1998. Production continues to decline from the
low level of drilling, so we believe that gas prices could rebound if normal
winter weather patterns prevail in the upcoming heating season. We continued to
add to our holdings of natural gas stocks since we believe that natural gas
prices could rise sharply given current industry supply and demand dynamics,
while we continued to reduce holdings of large-capitalization international oil
companies. Consolidation activity in the group has pushed valuation levels to
the high end of historic ranges. This provides an element of risk given our less
favorable near-term outlook for their refining and chemical operations. While we
have added to our oil service holdings, we are reluctant to add to current
positions given the lack of earnings visibility, as well as concerns that oil
industry consolidation may mute overall service activity. Proceeds from the sale
of our larger oil positions were directed to domestic integrated oil companies,
independent gas producers and natural gas pipelines with exploration programs.
We continued to increase our exposure to the paper and forest products
industry. Positive supply and demand fundamentals continued to evolve in the
forest and paper products area, as capital spending has been pared in the wake
of the Asian crisis. In addition, merger and acquisition activity continues in
the group which has resulted in further capacity closures. Containerboard prices
currently are approaching the levels seen in 1997, prior to the onset of the
Asian recession. In addition, the increase in pulp prices may filter into the
pricing of other grades.
We dramatically increased our paper weighting over the past six months. We
initiated holdings in St. Laurent Paperboard Inc. and Tembec Inc., two low-cost
Canadian producers of containerboard and pulp. We also initiated holdings in
Abitibi-Consolidated Inc., Westvaco Corporation and Smurfit Jefferson Group PLC.
Assets for the purchase of these holdings came from the sale of Champion
International Corp., Consolidated Paper, Bowater Inc. and the partial sale of
Riverside Forest Products Limited. Appreciation in these stocks had eroded their
valuation support. The larger-capitalization paper stocks have appreciated over
50% off their lows of last year. However, past cyclical moves in the group
suggest the possibility for additional significant gains.
Chemical stocks have rebounded with the improvement in international economic
conditions. However, we continue to be concerned about new capacity additions
scheduled to start production, as well as the impact of rising energy-based
feedstock costs. Therefore, we have further underweighted the Fund's exposure to
the chemical group. We sold our E.I. duPont de Nemours & Co. position since we
believed that the stock price reflected the potential of its life-sciences
division. We also sold our fertilizer producer IMC Global Inc. The dramatic
decline in farm income may have dimmed near-term prospects, and new capacity
additions are becoming visible on the investment horizon. We are in the process
of reviewing our chemical weighting in light of improved global commodities;
however, we believe that this area could lag investments in other resource
sectors.
We have continued to be selective sellers of metal and mining issues, but
returned Freeport McMoRan Copper & Gold Inc. to our metals
199
<PAGE> 201
- --------------------------------------------------------------------------------
holdings. We also added to our holding in Australian copper producer M.I.M.
Holdings Limited The base metals group has rebounded in sympathy with optimism
about recovering economies. However, a number of temporary capacity closures
have resulted in a commodity short-squeeze. Should prices continue to rise, we
fear that these idled mines could return to production and mute a recovery in
the sector. We eliminated many of our Japanese mining holdings when their stock
prices recovered with the overall market rally in Japan, although in hindsight
we could have let the positions run further.
While gold stocks did not hurt Fund performance in relative terms in 1998, the
group began to diverge from other resource stocks in 1999. A two-day rally in
early May, sparked by inflationary fears from remarks by Federal Reserve Board
Chairman Alan Greenspan, was stopped cold upon the announcement the United
Kingdom would sell half its gold reserves. Given fears of further central bank
sales, we dramatically sold the bulk of our gold holdings. The current weighting
of 2% of net assets puts the Fund closer to gold's weighting in the unmanaged
MSCI Natural Resource Index, and below the weighting held by most of our
competitors in the resource fund universe. The reduced gold exposure helped to
improve our performance.
Should the trend in improving global economic conditions persist, we believe
that continued positive investment results are possible during the remainder of
the year. However, we expect our strong concentrations in natural gas and
selected forest and paper stocks to deliver strong results that are somewhat
insulated from global market conditions. Our investment focus on companies
subject to improving supply and demand conditions have generated strong relative
and absolute returns. With the process of restructuring the Fund nearly
complete, we are optimistic that resource investments will deliver a positive
contribution to a diversified investment portfolio.
IN CONCLUSION
We appreciate your investment in Natural Resources Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Robert Shearer
Robert M. Shearer
Senior Vice President and Portfolio Manager
July 28, 1999
200
<PAGE> 202
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +9.60%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +4.03
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +3.86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +9.60% +25.79%
- ------------------------------------------------------------------------------------------
</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.
201
<PAGE> 203
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALUMINUM 2,978 Alcoa Inc. ................... $ 81,282 $ 184,264 1.1%
- -----------------------------------------------------------------------------------------------------------------------
CANADIAN INDEPENDENTS 10,800 Alberta Energy Company
Ltd. ....................... 234,892 345,676 2.2
35,900 +Canadian Hunter Exploration
Ltd. ....................... 248,636 539,302 3.4
8,509 +Northrock Resources Ltd. .... 70,100 89,247 0.6
12,100 +Rio Alto Exploration Ltd. ... 114,277 182,998 1.2
----------- ----------- -----
667,905 1,157,223 7.4
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 5,400 Air Products and Chemicals,
Inc. ....................... 154,427 217,350 1.4
5,300 Imperial Chemical Industries
PLC (ADR)*.................. 259,138 210,675 1.3
----------- ----------- -----
413,565 428,025 2.7
- -----------------------------------------------------------------------------------------------------------------------
COAL 7,900 +CONSOL Energy Inc. .......... 115,950 94,800 0.6
- -----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCES 20,000 Asahi Glass Company, Limited.. 240,000 129,774 0.8
COMPANIES
4,800 Ashland Inc. ................. 203,468 192,600 1.2
----------- ----------- -----
443,468 322,374 2.0
- -----------------------------------------------------------------------------------------------------------------------
GOLD 130,837 Acacia Resources Limited...... 207,179 151,552 1.0
17,500 Ashanti Goldfields Company
Ltd. (GDR)**................ 434,367 119,000 0.7
66,500 Delta Gold NL................. 119,815 94,635 0.6
119,000 Normandy Mining Limited....... 134,688 79,239 0.5
----------- ----------- -----
896,049 444,426 2.8
- -----------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL COMPANIES 3,300 Amerada Hess Corporation...... 179,969 196,350 1.2
1,409 BP Amoco PLC (ADR)*........... 53,760 152,876 1.0
5,200 Chevron Corporation........... 438,789 494,975 3.1
6,000 ENI SpA (ADR)*................ 280,500 360,000 2.3
2,300 Elf Aquitaine SA (ADR)*....... 84,245 169,194 1.1
1,900 Exxon Corporation............. 135,582 146,537 0.9
2,500 Mobil Corporation............. 196,925 247,500 1.5
5,400 Phillips Petroleum Company.... 241,954 271,687 1.7
2,900 Royal Dutch Petroleum Company
(NY Registered Shares)...... 160,724 174,725 1.1
3,900 +Total, SA 'B'................ 238,317 502,819 3.2
8,900 USX-Marathon Group............ 263,630 289,806 1.8
----------- ----------- -----
2,274,395 3,006,469 18.9
- -----------------------------------------------------------------------------------------------------------------------
METALS & MINING 323,741 +Centaur Mining and
Exploration Limited......... 445,291 56,785 0.4
10,225 +Freeport-McMoRan Copper &
Gold, Inc. (Class B)........ 149,620 183,411 1.2
215,200 M.I.M. Holdings Limited....... 263,853 152,412 1.0
47,225 +Minsur, SA................... 111,555 100,569 0.6
15,700 Noranda, Inc. ................ 197,084 206,104 1.3
14,800 Outokumpu Oyj................. 263,036 166,256 1.0
1,500 Phelps Dodge Corporation...... 87,489 92,906 0.6
150 +Stillwater Mining Company.... 3,369 4,903 0.0
44,300 WMC Limited................... 271,967 190,301 1.2
26,300 +Zimbabwe Platinum Mines
Limited..................... 14,555 5,919 0.0
----------- ----------- -----
1,807,819 1,159,566 7.3
- -----------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 5,700 Anadarko Petroleum
Corporation................. 152,633 209,831 1.3
9,000 Apache Corporation............ 253,191 351,000 2.2
4,500 +Barrett Resources
Corporation................. 72,131 172,687 1.1
5,812 Burlington Resources Inc. .... 166,711 251,369 1.6
15,400 Cabot Oil & Gas Corporation
(Class A)................... 238,777 286,825 1.8
</TABLE>
202
<PAGE> 204
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 10,400 +Chieftain International,
(CONCLUDED) Inc. ....................... $ 233,254 $ 182,000 1.1%
10,325 Devon Energy Corporation...... 303,528 369,119 2.3
15,300 Enron Oil & Gas Company....... 314,632 309,825 1.9
7,366 Kerr-McGee Corporation........ 334,093 369,681 2.3
11,200 +Meridian Resource
Corporation................. 68,028 43,400 0.3
4,800 Texaco Inc. .................. 267,484 300,000 1.9
16,100 Union Pacific Resources Group
Inc. ....................... 179,912 262,631 1.6
7,900 Unocal Corporation............ 285,787 313,038 2.0
6,700 Vastar Resources, Inc. ....... 282,902 351,331 2.2
----------- ----------- -----
3,153,063 3,772,737 23.6
- -----------------------------------------------------------------------------------------------------------------------
OIL SERVICES 5,400 Baker Hughes Incorporated..... 160,027 180,900 1.1
4,000 Coastal Corporation........... 160,711 160,000 1.0
4,700 Coflexip, SA (ADR)*........... 91,760 205,625 1.3
4,700 +Cooper Cameron Corporation... 170,601 174,194 1.1
5,300 Equitable Resources, Inc. .... 160,696 200,075 1.3
6,200 Helmerich & Payne, Inc. ...... 154,637 147,637 0.9
4,900 McDermott International,
Inc. ....................... 171,287 138,425 0.9
5,900 +Noble Drilling Corporation... 185,985 116,156 0.7
8,200 +Stolt Comex Seaway, SA....... 203,059 88,662 0.5
4,100 +Stolt Comex Seaway, SA
(ADR)*...................... 50,429 43,563 0.3
3,400 Transocean Offshore Inc. ..... 109,394 89,250 0.6
6,400 +Weatherford International,
Inc. ....................... 273,186 234,400 1.5
----------- ----------- -----
1,891,772 1,778,887 11.2
- -----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 19,000 Abitibi-Consolidated Inc. .... 199,698 217,282 1.4
8,466 Aracruz Celulose SA (ADR)*.... 135,818 186,252 1.2
38,804 Nexfor Inc. .................. 171,465 238,947 1.5
39,600 +Slocan Forest Products
Ltd. ....................... 401,080 286,724 1.8
144,700 Smurfit Jefferson Group PLC... 386,469 341,941 2.1
17,480 +Smurfit-Stone Container
Corporation................. 219,080 358,340 2.2
30,400 +St. Laurent Paperboard
Inc. ....................... 268,762 384,680 2.4
19,700 +Tembec Inc. 'A'.............. 125,565 157,968 1.0
5,400 Westvaco Corporation.......... 148,696 156,600 1.0
----------- ----------- -----
2,056,633 2,328,734 14.6
- -----------------------------------------------------------------------------------------------------------------------
PLANTATIONS 136,000 Golden Hope Plantations
Berhad++.................... 240,608 116,674 0.7
90,000 Kuala Lumpur Kepong Berhad++.. 120,553 123,158 0.8
----------- ----------- -----
361,161 239,832 1.5
- -----------------------------------------------------------------------------------------------------------------------
REFINING 3,700 Sun Co. ...................... 103,215 111,694 0.7
- -----------------------------------------------------------------------------------------------------------------------
STEEL 26,000 LTV Corporation............... 149,458 173,875 1.1
- -----------------------------------------------------------------------------------------------------------------------
WOOD PRODUCTS 18,000 +Riverside Forest Products
Limited..................... 236,109 211,328 1.3
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 14,651,844 15,414,234 96.8
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
203
<PAGE> 205
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER*** $527,000 General Motors Acceptance
Corp., 5.63% due
7/01/1999................... $ 526,918 $ 526,918 3.3%
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 526,918 526,918 3.3
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............. $15,178,762 15,941,152 100.1
===========
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (14,977) (0.1)
----------- -----
NET ASSETS.................... $15,926,175 100.0%
=========== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
+ Non-income producing security.
++ Effective February 16, 1999, the Fund's Board of Directors adopted a change
in valuation for Malaysian securities. The Fund will utilize a Malaysian
exchange rate of 3.80 and record an estimated exit tax on the value of any
investments made before February 15, 1999, based upon its value as of August 31,
1998, by 30% through March 31, 1999, 20% from April 1, 1999 through May 31, 1999
and 10% from June 1, 1999 through August 31, 1999. These changes are due to the
capital controls implemented by the Malaysian government, which froze the
Malaysian ringgit at 3.80 until September 1, 1999 and initiated a tax at various
rates, as described above, on any funds repatriated from Malaysia.
See Notes to Financial Statements.
204
<PAGE> 206
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$15,178,762) (Note
1a)....................................................... $15,941,152
Cash........................................................ 347
Foreign cash (Note 1c)...................................... 632
Dividends receivable........................................ 29,129
Prepaid expenses and other assets........................... 1,405
-----------
Total assets................................................ 15,972,665
-----------
- ----------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser (Note 2)............................... $9,410
Capital shares redeemed................................... 3,230 12,640
------
Accrued expenses and other liabilities...................... 33,850
-----------
Total liabilities........................................... 46,490
-----------
- ----------------------------------------------------------------------------------
NET ASSETS.................................................. $15,926,175
===========
- ----------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 168,000
Paid-in capital in excess of par............................ 18,838,976
Undistributed investment income--net........................ 75,809
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (1,591,737)
Accumulated distributions in excess of realized gains on
investments and foreign currency transactions--net (Note
1f)....................................................... (2,308,824)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 743,951
-----------
NET ASSETS.................................................. $15,926,175
===========
- ----------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $15,926,175 and 1,680,001
shares outstanding........................................ $ 9.48
===========
- ----------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
205
<PAGE> 207
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1E):
Dividends (net of $9,051 foreign withholding tax)........... $ 136,933
Interest and discount earned................................ 10,579
-----------
Total income................................................ 147,512
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 49,258
Custodian fees.............................................. 9,838
Professional fees........................................... 2,678
Accounting services (Note 2)................................ 2,625
Pricing services............................................ 2,625
Transfer agent fees (Note 2)................................ 2,604
Printing and shareholder reports............................ 964
Directors' fees and expenses................................ 175
Other....................................................... 253
-----------
Total expenses.............................................. 71,020
-----------
Investment income--net...................................... 76,492
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized loss from:
Investments--net.......................................... (1,589,917)
Foreign currency transactions--net........................ (1,821) (1,591,738)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 4,998,966
Foreign currency transactions--net........................ (18,738) 4,980,228
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 3,388,490
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 3,464,982
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
206
<PAGE> 208
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 76,492 $ 282,701
Realized loss on investments and foreign currency
transactions--net......................................... (1,591,738) (2,061,246)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 4,980,228 (1,338,941)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ 3,464,982 (3,117,486)
----------- ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (232,680) (450,433)
Realized gain on investments--net:
Class A................................................... -- (1,396,020)
In excess of realized gain on investments--net:
Class A................................................... -- (2,282,798)
----------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (232,680) (4,129,251)
----------- ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (2,846,205) (4,192,551)
----------- ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 386,097 (11,439,288)
Beginning of period......................................... 15,540,078 26,979,366
----------- ------------
End of period*.............................................. $15,926,175 $ 15,540,078
=========== ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 75,809 $ 231,997
=========== ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
207
<PAGE> 209
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES 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, 1999+ 1998+ 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 7.65 $ 10.66 $ 13.12 $ 11.95 $ 10.82
------- ------- ------- ------- -------
Investment income--net............................... .04 .12 .14 .18 .20
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............. 1.90 (1.50) (1.68) 1.40 1.15
------- ------- ------- ------- -------
Total from investment operations..................... 1.94 (1.38) (1.54) 1.58 1.35
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net............................. (.11) (.18) (.06) (.20) (.19)
Realized gain on investments--net.................. -- (.55) (.86) (.21) (.03)
In excess of realized gain on investments--net..... -- (.90) -- -- --
------- ------- ------- ------- -------
Total dividends and distributions.................... (.11) (1.63) (.92) (.41) (.22)
------- ------- ------- ------- -------
Net asset value, end of period....................... $ 9.48 $ 7.65 $ 10.66 $ 13.12 $ 11.95
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 25.79%++ (15.30%) (12.52%) 13.52% 12.65%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .94%* .88% .81% .78% .78%
======= ======= ======= ======= =======
Investment income--net............................... 1.01%* 1.36% .99% 1.43% 1.75%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $15,926 $15,540 $26,979 $45,197 $43,102
======= ======= ======= ======= =======
Portfolio turnover................................... 31.40% 29.65% 20.93% 31.11% 30.15%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
208
<PAGE> 210
- --------------------------------------------------------------------------------
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. The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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 and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(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.
- - 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.
209
<PAGE> 211
- --------------------------------------------------------------------------------
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. 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 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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $1,931 in commissions on the
execution of portfolio security transactions.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $4,583,097 and $5,997,797, respectively.
Net realized losses for the six months ended June 30, 1999 and net unrealized
gains (losses) as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
- -------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $(1,589,917) $762,390
Foreign currency transactions....... (1,821) (18,439)
----------- --------
Total............................... $(1,591,738) $743,951
=========== ========
- -------------------------------------------------------------------
</TABLE>
210
<PAGE> 212
- --------------------------------------------------------------------------------
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $762,390, of which $2,781,621 related to appreciated securities and
$2,019,231 related to depreciated securities. At June 30, 1999, the aggregate
cost of investments for Federal income tax purposes was $15,178,762.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$2,846,205 and $4,192,551 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 7,223 $ 61,998
Shares issued to shareholders in
reinvestment of dividends.............. 30,616 232,680
-------- -----------
Total issued............................ 37,839 294,678
Shares redeemed......................... (388,775) (3,140,883)
-------- -----------
Net decrease............................ (350,936) $(2,846,205)
======== ===========
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 15,178 $ 129,809
Shares issued to shareholders in
reinvestment of dividends and
distributions.......................... 456,271 4,129,251
-------- -----------
Total issued............................ 471,449 4,259,060
Shares redeemed......................... (971,059) (8,451,611)
-------- -----------
Net decrease............................ (499,610) $(4,192,551)
======== ===========
- -----------------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1998, the Fund had a net capital loss carryforward of
approximately $1,939,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
211
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. In Japan, there are not yet clear signs that
Japan's economy is improving. There were growing signs of improvement in some
emerging economies (most notably South Korea and Mexico), although concerns
remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
MARKET OVERVIEW
During the six months ended June 30, 1999, the US fixed-income market was
characterized by a shift in investor psychology that saw a flight-to-quality
mentality transformed into a flight-from-quality bias. Specifically, interest
rates trended higher and the yield curve flattened as investors priced in the
possibility that the Federal Reserve Board would seek to tighten monetary policy
by mid-year. The Federal Reserve Board's shift in policy toward a tightening
bias was being driven by its concern that the domestic economy was growing at a
pace sufficient to rekindle the inflationary fires. Furthermore, many investors
were convinced that the liquidity problems that had developed as a result of
both the deterioration of the emerging market economies and the excessive amount
of financial leverage in the system were now behind us. On June 30, 1999, the
Federal Reserve Board raised its overnight funds rate by 0.25% to 5.00% and
simultaneously shifted to a neutral posture.
As we entered the six-month period ended June 30, 1999, the overall tone of
the Treasury market was relatively upbeat since most investors were expecting
technical conditions to remain strong and the Federal Reserve Board to continue
on an accommodative road as the domestic economy began to feel the negative
impact of the rising trade deficit. Although the Federal Reserve Board had moved
from an accommodative bias to a neutral posture, investors still believed it was
possible for the Federal Funds rate to reach 4% by mid-year since the economic
environment slowed down. However, this optimism would not last as first quarter
US gross domestic product growth rose an unexpectedly strong 4.5%, spurred on by
consumer spending, which jumped 6.7%. Clearly, consumers were benefiting from a
low unemployment rate and the wealth effect generated from a booming stock
market.
Overseas, Asian countries, which had been at the heart of the crises in 1998,
exhibited the beginnings of economic recovery. This global recovery led to fears
of a rekindling of inflation. Commodities, such as copper, gained in price. More
importantly, the price of oil surged, spurred on mainly by an agreement by the
OPEC Countries to limit production, but also on expectations of increased demand
by recovering economies. While the reported producer price index for April
showed only a 0.2% increase (excluding food and energy), the core consumer price
index (CPI) rose a greater-than-expected 0.7%, well above expectations and the
largest increase since April 1989. At this point, most investors believed the
Federal Reserve Board would raise short-term interest rates by at least 25 basis
points (0.25%) at the late June Federal Open Market Committee (FOMC) meeting.
Although investors were relieved to see a complete reversal of April's
inflationary picture in May and June (particularly as the CPI was unchanged),
most investors still believed the Federal Reserve Board would remain committed
to a course of tighter monetary policy. The forward market, which had priced in
approximately 120 basis points (1.20%) prior to the most recent inflationary
release, still projected a 50 basis point--75 basis point aggregate move by the
Federal Reserve Board at mid-month. The yield on the 30-year Treasury bond,
which began the year at 5%, traded to a high of 6.17% in June. At that time we
were not surprised by the Federal Reserve Board's increase of 25 basis points at
its June 30, 1999 FOMC meeting, followed by a wait and see attitude to gauge the
212
<PAGE> 214
- --------------------------------------------------------------------------------
strength of the economy and any inflationary pressures that may build.
PORTFOLIO MATTERS
The Fund's investment strategy can best be labeled as cautiously optimistic.
From a duration perspective, we have maintained a slightly lower (0.05
year--0.20 year) profile than the benchmark Merrill Lynch Corporate Master
(C0A0) Index considering the bias toward higher interest rates during much of
the six-month period. Given the negative prevailing investor sentiment, we
raised our yield expectations relative to the trading band for the 30-year bond
to 5.75%--6.25% by the second quarter. If the yield of the bond reached the
higher end of our range, we expected to go slightly long relative to the Index
since we were not looking for interest rates to trend higher over the long term.
In essence, we believed that the foundation for a slowdown in the economy had
already been laid given the higher prevailing interest rates and the impact
exacted by recent stock market activity on the relationship of wealth to
spending.
Consistent with recent strategy, we continued to seek higher coupon issues
with a spread to US Treasury Securities given our outlook for the near-term
direction of interest rates. We also remained committed to bigger, more liquid
issues. Our Treasury holdings have been kept to a minimum as we have focused on
the need to build current income. Furthermore, productivity and the correlation
to corporate profitability should be sufficient enough to sustain the overall
trend toward tighter yield spreads, although spreads during May exhibited
approximately 25 basis points of widening. Subsequent to the Federal Reserve
Board move, spreads had begun to trend inward, although spreads will widen in
the third quarter as new underwritings increase significantly. Corporate
issuance remained very active, with investor demand enthusiastic. In fact, the
majority of the new transactions have been significantly oversubscribed and well
received.
With respect to security-specific issues, we began to add to several sectors
including energy-related issuers, paper producers and chemical companies. We
also added asset-backed securities and commercial mortgage-backed securities.
These sectors experienced improved economics yet still retained very attractive
yield advantages relative to Treasury securities. It was our intent to bring
these sectors up to a neutral benchmark weighting, although finding securities
has lately proved a challenge as a result of small supply and sporadic new
issuance in these sectors. During the later part of the period, we slightly
reduced the Fund's position in real estate investment trusts given the strong
performance this group experienced during early 1999. However, we still have an
overweighted position relative to the Index since we believe this sector will
continue to perform well, although we expect to bring this position closer to a
neutral posture as spreads compress. Retailing is another sector we have moved
to overweight, given the strong economic fundamentals characterizing that
industry.
INVESTMENT OUTLOOK
Going forward, we have formulated an investment strategy around our belief that
while the Federal Reserve Board may find it necessary to tighten interest rates
one more time in 1999, the long-term trend will be toward lower interest rates
as the economy slows. In line with this, we would expect to extend duration if
bond yields were to move toward the high end of our expected trading range.
However, given the high level of investor nervousness, we will continue to
emphasize higher coupons and liquid issues and corporate sectors trading at or
near the wide side of the historic spread relationships.
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
strategy with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Christopher G. Ayoub
Christopher G. Ayoub
Senior Vice President and Portfolio Manager
July 28, 1999
213
<PAGE> 215
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +0.96%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +7.13
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +7.63
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +0.96% -2.48%
</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.
214
<PAGE> 216
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<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 $ 3,000,000 Aames Mortgage Trust, 5.912%
SECURITIES+--8.1% due 9/15/2028............... $ 3,000,000 $ 2,985,360
NR* Aaa 5,000,000 Bear Stearns Commercial
Mortgage Securities,
1999-WF2-A2, 7.08%
due 6/15/2009............... 4,999,351 4,998,437
NR* Baa2 6,000,000 Bistro Trust 1998-1000, 6.58%
due 3/26/2001++............. 5,999,760 5,838,120
AA+ Aa3 5,000,000 Continental Airlines, 7.056%
due 9/15/2009............... 5,000,000 5,018,150
NR* Aaa 3,000,000 DLJ Commercial Mortgage Corp.,
6.46%
due 1/10/2009............... 3,044,531 2,901,300
Federal Home Loan Mortgage
Corporation:
AAA Aaa 8,000,000 6% due 10/15/2018............. 8,126,875 7,960,000
AAA Aaa 5,962,155 6.30% due 5/15/2026........... 5,881,107 5,814,949
A A3 6,000,000 First Dominion Funding I,
5.71% due 7/10/2013++....... 5,977,422 5,653,125
AAA Aaa 5,500,000 IMC Home Equity Loan Trust,
6.36% due 8/20/2022......... 5,498,934 5,469,915
------------ ------------
47,527,980 46,639,356
- ---------------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--7.2% Bank of New York Co., Inc.:
A A2 4,000,000 7.625% due 7/15/2002.......... 4,306,000 4,136,200
A A2 2,000,000 7.875% due 11/15/2002......... 2,213,400 2,087,160
A Aa3 500,000 Boatman's Bancshares, 9.25%
due 11/01/2001.............. 547,990 530,160
A+ A1 2,000,000 First Interstate, 11.25% due
3/27/2001................... 2,354,060 2,162,440
BBB+ a1 1,000,000 First Union Institution
Capital I, 8.04% due
12/01/2026.................. 1,060,960 1,006,620
BBB+ a2 8,000,000 Fleet Capital Trust II, 7.92%
due 12/11/2026.............. 7,922,070 7,859,760
BBB+ A3 3,000,000 Great Western Bank, 9.875% due
6/15/2001................... 3,325,350 3,193,920
BBB+ a2 1,000,000 HSBC Americas Capital Trust,
7.808% due 12/15/2026++..... 988,460 937,318
A- A3 3,000,000 HSBC Americas Inc., 7% due
11/01/2006.................. 2,974,800 2,949,630
A- A2 1,750,000 Key Bank NA, 7.55% due
9/15/2006................... 1,899,572 1,802,780
A- a2 3,000,000 Mellon Capital II, 7.995% due
1/15/2027................... 2,860,410 3,019,800
Merita Bank Ltd.:
A- A2 1,500,000 6.50% due 1/15/2006....... 1,454,700 1,446,450
A- A2 2,500,000 6.50% due 4/01/2009....... 2,498,975 2,368,600
A Aa3 5,000,000 NationsBank NA, 6.50% due
8/15/2003................... 4,755,150 5,007,600
BBB- Baa3 3,000,000 Providian National Bank, 6.65%
due 2/01/2004............... 2,995,980 2,900,190
------------ ------------
42,157,877 41,408,628
- ---------------------------------------------------------------------------------------------------------------------------
FINANCE--11.9% BBB Baa3 3,500,000 AT&T Capital Corp., 7.50% due
11/15/2000.................. 3,496,745 3,526,040
AA- Aa3 10,000,000 Associates Corporation of
North America, 6.45% due
10/15/2001.................. 10,269,000 10,047,700
A- aa3 6,100,000 CIT Capital Trust I, 7.70% due
2/15/2027................... 6,072,184 5,745,572
A+ Aa3 4,490,000 CIT Group Holdings, Inc.,
7.125% due 6/17/2002........ 4,704,083 4,574,636
A+ Aa3 4,350,000 Commercial Credit Co., 10% due
5/15/2009................... 5,569,174 5,239,488
BBB+ Baa2 5,000,000 Erac USA Finance Company,
6.375% due 5/15/2003++...... 4,996,550 4,893,185
A- Baa1 2,500,000 Finova Capital Corp., 6.25%
due 11/01/2002.............. 2,490,425 2,476,525
</TABLE>
215
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<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 A A1 $ 2,000,000 Ford Motor Company, 8.90% due
(CONCLUDED) 1/15/2032................... $ 2,471,480 $ 2,340,860
Ford Motor Credit Company:
A A1 3,000,000 8.20% due 2/15/2002........... 3,197,310 3,129,270
A A1 2,500,000 7.75% due 3/15/2005........... 2,497,725 2,615,800
AAA Aaa 3,245,000 General Electric Capital
Corp., 8.125% due
5/15/2012................... 3,449,052 3,637,223
General Motors Acceptance
Corp.:
A A2 5,000,000 7.70% due 4/15/2016........... 5,455,750 5,152,250
A A2 4,000,000 8.80% due 3/01/2021........... 4,689,040 4,596,440
A A2 1,500,000 Household Finance Corp., 6%
due 5/01/2004............... 1,499,670 1,453,354
BBB Baa3 3,000,000 Newcourt Credit Group, 6.875%
due 2/16/2005++............. 2,989,830 2,902,197
A+ Aa3 6,000,000 Norwest Corp., 6.50% due
6/01/2005................... 5,878,860 5,900,460
------------ ------------
69,726,878 68,231,000
- ---------------------------------------------------------------------------------------------------------------------------
FINANCE-- A aa3 2,000,000 Citigroup Capital II, 7.75%
OTHER--10.1% due 12/01/2036.............. 2,003,400 2,005,868
AA- Aa2 1,000,000 Citigroup Inc., 9.50% due
3/01/2002................... 1,084,200 1,074,064
BBB- Baa2 3,000,000 Commercial Net Lease Realty,
7.125% due 3/15/2008........ 2,991,870 2,725,470
A+ Aa3 3,500,000 Dean Witter, Discover & Co.,
6.75% due 8/15/2000......... 3,486,805 3,526,250
A- A3 4,500,000 Donaldson Lufkin & Jenrette
Inc., 6.875%
due 11/01/2005.............. 4,477,950 4,438,530
A A2 1,500,000 Equitable Life Assurance
Society of the US, 7.70%
due 12/01/2015++............ 1,489,740 1,550,137
AAA Aaa 1,600,000 Florida Windstorm Under,
7.125% due 2/25/2019++...... 1,591,216 1,535,037
BBB- Baa3 2,000,000 Hospitality Properties Trust,
7% due 3/01/2008............ 1,996,400 1,792,560
Lehman Brothers Holdings,
Inc.:
A Baa1 4,000,000 6.50% due 10/01/2002.......... 3,996,200 3,946,640
A Baa1 1,000,000 7.125% due 9/15/2003.......... 1,016,680 1,000,980
A Baa1 1,000,000 6.625% due 2/05/2006.......... 977,960 973,700
A Baa1 1,500,000 7.20% due 8/15/2009........... 1,532,580 1,452,930
AA Aa2 5,500,000 MBIA, Inc., 7.15% due
7/15/2027................... 5,486,525 5,254,700
A+ Aa3 500,000 Morgan Stanley, Dean Witter,
Discover & Co., 6.125%
due 10/01/2003.............. 503,710 492,710
Paine Webber Group Inc.:
BBB+ Baa1 3,000,000 9.25% due 12/15/2001.......... 3,501,570 3,173,100
BBB+ Baa1 2,000,000 8.875% due 3/15/2005.......... 2,012,540 2,164,120
A+ A2 4,500,000 Prudential Insurance Co.,
6.375% due 7/23/2006++...... 4,480,110 4,309,911
Salomon Smith Barney Holdings,
Inc.:
A Aa3 2,000,000 5.875% due 2/01/2001.......... 1,993,680 1,990,184
A Aa3 2,000,000 6.625% due 11/15/2003......... 1,988,320 1,992,312
BBB+ Baa1 4,250,000 Simon Debartolo Group LP,
7.375% due 6/15/2018........ 4,233,735 3,883,880
BBB Baa2 6,200,000 Spieker Properties LP, 7.35%
due 12/01/2017.............. 6,255,658 5,723,146
BBB Baa3 3,000,000 Storage USA, 7.45% due
7/01/2018................... 2,996,460 2,645,121
------------ ------------
60,097,309 57,651,350
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
216
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<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--CONSUMER Anheuser-Busch Companies Inc.:
GOODS--5.3%
A+ A1 $ 2,500,000 8.75% due 12/01/1999.......... $ 2,839,090 $ 2,532,275
A+ A1 5,000,000 7.375% due 7/01/2023.......... 5,127,300 4,794,100
A A2 5,500,000 Avon Products Inc., 6.25% due
5/01/2018++++............... 5,493,180 5,431,437
BBB- Baa3 4,000,000 Flowers Industries Inc., 7.15%
due 4/15/2028............... 3,978,800 3,542,120
A+ A1 3,500,000 Hershey Foods Co., 8.80% due
2/15/2021................... 4,690,735 4,049,955
A A1 3,000,000 Pepsico, Inc., 5.75% due
1/02/2003................... 2,984,820 2,927,748
A A2 4,000,000 Phillip Morris Companies,
Inc., 9% due 1/01/2001...... 4,071,540 4,153,560
BBB- Baa2 3,000,000 RJ Reynolds Tobacco Holdings,
7.75% due 5/15/2006++....... 2,908,350 2,878,953
------------ ------------
32,093,815 30,310,148
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--ENERGY--6.6% BBB+ Baa1 7,000,000 Apache Finance Property Ltd.,
7% due 3/15/2009............ 6,953,590 6,840,589
A A2 1,500,000 Atlantic Richfield, 5.90% due
4/15/2009................... 1,494,885 1,404,300
AA+ Aa1 2,000,000 BP America Inc., 9.375% due
11/01/2000.................. 2,204,960 2,086,240
CMS Panhandle Holding Co.++:
BBB- Baa3 3,000,000 6.125% due 3/15/2004.......... 2,990,520 2,918,301
BBB- Baa3 2,000,000 7% due 7/15/2029.............. 1,980,680 1,848,276
BBB Baa2 2,500,000 Coastal Corp., 6.375% due
2/01/2009................... 2,492,600 2,349,160
AA- Aa3 3,000,000 Dresser Industries, Inc.,
7.60% due 8/15/2096......... 2,991,270 3,025,860
A- A3 2,000,000 Murphy Oil Corporation, 7.05%
due 5/01/2029............... 1,993,580 1,884,820
Occidental Petroleum Corp.:
BBB Baa3 4,500,000 6.50% due 4/01/2005........... 4,474,350 4,343,220
BBB Baa3 4,000,000 7.65% due 2/15/2006........... 3,993,080 4,042,280
BBB Baa3 2,000,000 (MOPPRS), 6.40% due
4/01/2013++............... 1,997,860 1,949,284
Texaco Capital Inc.:
A+ A1 1,500,000 9% due 12/15/1999............. 1,731,670 1,521,840
A+ A1 1,000,000 5.50% due 1/15/2009........... 991,330 917,046
BBB+ Baa1 1,500,000 Union Oil Company of
California, 7.50% due
2/15/2029................... 1,477,155 1,457,733
BBB+ Baa1 1,500,000 Vastar Resources Inc., 6.50%
due 4/01/2009............... 1,537,080 1,452,885
------------ ------------
39,304,610 38,041,834
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A A2 3,500,000 AlliedSignal Inc., 6.20% due
MANUFACTURING--5.7% 2/01/2008................... 3,495,310 3,316,670
BBB+ A3 5,500,000 Applied Materials Inc., 7.125%
due 10/15/2017.............. 5,462,380 5,062,860
A- Baa1 2,000,000 The B.F. Goodrich Company, 7%
due 4/15/2038............... 1,988,220 1,785,480
A+ A2 2,000,000 Danaher Corp., 6% due
10/15/2008.................. 1,989,260 1,858,860
BBB- Baa3 2,000,000 Equistar Chemicals LP, 8.75%
due 2/15/2009++............. 2,060,300 2,021,414
BBB- Baa2 1,500,000 Georgia-Pacific Group, 7.25%
due 6/01/2028............... 1,492,545 1,404,900
A+ A1 2,000,000 International Business
Machines Corp., 6.50% due
1/15/2028................... 2,062,680 1,849,400
BBB- Baa2 3,000,000 Jones Apparel Group, 7.875%
due 6/15/2006++............. 2,989,680 3,009,339
</TABLE>
217
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<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-- BBB+ Baa1 $ 2,500,000 Martin Marietta Corp., 6.50%
MANUFACTURING due 4/15/2003............... $ 2,515,325 $ 2,468,850
(CONCLUDED) BBB Baa1 3,500,000 Raytheon Company, 6.50% due
7/15/2005................... 3,536,820 3,458,588
A- A3 4,610,000 Rohm & Haas Company, 6.95% due
7/15/2004++................. 4,601,379 4,601,379
BBB Baa2 2,000,000 Union Carbide Corp., 6.25% due
6/15/2003................... 1,970,040 1,950,880
------------ ------------
34,163,939 32,788,620
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- BBB- Baa3 6,445,000 CBS Corporation, 7.15% due
SERVICES--13.5% 5/20/2005................... 6,713,885 6,428,888
A A2 4,000,000 Carnival Corp., 7.70% due
7/15/2004................... 4,208,480 4,174,000
Comcast Cable Communications:
BBB Baa3 3,000,000 6.20% due 11/15/2008.......... 2,992,050 2,790,360
BBB Baa3 2,000,000 8.875% due 5/01/2017.......... 2,230,060 2,244,456
A- Baa1 8,000,000 Computer Associates
International, 6.25% due
4/15/2003................... 7,984,960 7,735,440
Dillard's Inc.:
BBB Baa1 3,000,000 9.125% due 8/01/2011.......... 3,240,150 3,308,640
BBB Baa1 1,500,000 7.85% due 10/01/2012.......... 1,677,420 1,519,050
A A2 1,707,016 +Disney Custom Repackaged
Asset Vehicle-403, 6.85% due
1/10/2007++................. 1,705,872 1,702,236
A+ A1 7,000,000 Electronic Data Systems Corp.,
6.85% due 5/15/2000++....... 6,994,470 7,040,327
A- A3 1,500,000 Hertz Corporation, 6.50% due
5/15/2006................... 1,497,435 1,455,585
AAA Aaa 3,000,000 Johnson & Johnson, 8.72% due
11/01/2024.................. 3,000,000 3,391,590
A A1 615,000 May Department Stores Co.,
8.30% due 7/15/2026......... 702,742 651,642
BBB- Baa3 4,000,000 News America Inc., 7.25% due
5/18/2018................... 4,186,640 3,729,584
A A2 4,000,000 Nordstrom, Inc., 6.95% due
3/15/2028................... 4,051,840 3,757,520
A- A2 7,000,000 Sears Roebuck Acceptance
Corp., 6.82% due
10/17/2002.................. 7,014,280 7,092,750
AA- A2 2,500,000 TCI Communications Inc., 8.75%
due 8/01/2015............... 2,932,650 2,832,325
BBB Baa2 4,000,000 Time Warner Entertainment Co.,
8.375% due 3/15/2023........ 4,618,120 4,332,680
BBB Baa3 5,500,000 Time Warner Inc., 6.625% due
5/15/2029................... 5,448,245 4,852,100
BBB+ Baa2 1,000,000 USA Waste Services, 7% due
7/15/2028................... 988,870 935,140
AA Aa2 7,000,000 Wal-Mart Stores, Inc., 8.50%
due 9/15/2024............... 7,036,810 7,660,590
------------ ------------
79,224,979 77,634,903
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- BBB+ Baa2 2,750,000 Burlington North Santa Fe,
TRANSPORTATION--3.6% 6.75% due 3/15/2029......... 2,732,455 2,507,973
BBB Baa2 5,500,000 CSX Corp., 7.90% due
5/01/2017................... 6,252,895 5,670,225
BBB- Baa3 3,500,000 Delta Airlines, 9.75% due
5/15/2021................... 4,372,620 4,141,690
Southwest Airlines Co.:
A- A3 3,000,000 9.40% due 7/01/2001........... 3,420,210 3,163,470
A- A3 4,000,000 8% due 3/01/2005.............. 3,980,450 4,195,680
A- A3 1,000,000 7.875% due 9/01/2007.......... 992,600 1,046,970
------------ ------------
21,751,230 20,726,008
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
218
<PAGE> 220
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<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>
SUPRANATIONAL**--0.3% AAA Aaa $ 1,500,000 International Bank for
Reconstruction &
Development, 5.625% due
3/17/2003(1)................ $ 1,494,975 $ 1,470,465
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES-- AA+ Aa3 2,450,000 Ameritech Capital Funding,
COMMUNICATIONS--6.6% 6.45% due 1/15/2018......... 2,572,745 2,280,460
BB Ba2 7,725,000 Frontier Corp., 6% due
10/15/2013++................ 7,873,444 7,233,999
AA- A2 6,000,000 GTE California, Inc., 8.07%
due 4/15/2024............... 6,412,380 6,119,640
GTE Corp.:
A Baa1 1,500,000 9.375% due 12/01/2000......... 1,647,090 1,567,740
A Baa1 1,500,000 6.84% due 4/15/2018........... 1,541,970 1,431,450
AAA Aa1 3,000,000 Indiana Bell Telephone Co.,
Inc., 7.30% due 8/15/2026... 3,030,280 3,018,120
MCI WorldCom Inc.:
A- A3 2,500,000 7.75% due 4/01/2007........... 2,722,350 2,618,125
A- A3 5,300,000 6.125% due 4/15/2012++........ 5,285,849 5,264,808
Southwestern Bell
Telecommunications Corp.:
AA Aa3 1,000,000 6.125% due 3/01/2000.......... 1,005,000 1,002,550
AA Aa3 1,000,000 6.625% due 4/01/2005.......... 958,450 1,007,400
AA Aa3 2,000,000 6.375% due 11/15/2007......... 2,009,520 1,956,180
Sprint Capital Corporation:
BBB+ Baa1 1,500,000 5.70% due 11/15/2003.......... 1,499,745 1,437,555
BBB+ Baa1 3,000,000 6.125% due 11/15/2008......... 2,888,100 2,768,670
------------ ------------
39,446,923 37,706,697
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC--5.6% AAA Aaa 8,000,000 Cleveland Electric/Toledo
Edison, 7.13% due
7/01/2007................... 8,392,720 7,996,640
BBB+ Baa1 2,000,000 Conectiv Inc., 6.73% due
6/01/2006................... 2,000,000 1,991,040
AA- Aa3 5,950,000 Florida Power Corp., 6.875%
due 2/01/2008............... 6,504,481 5,977,608
A A1 3,000,000 Mississippi Power Co., 6.05%
due 5/01/2003............... 3,067,440 2,961,990
AA- A1 1,500,000 Pacific Gas and Electric
Company, 6.25% due
8/01/2003................... 1,527,975 1,480,170
A- A3 2,000,000 Pennsylvania Power & Light
Co., 6.125% due
5/01/2006++................. 1,998,800 2,001,240
BBB Baa3 2,000,000 Texas Utilities Company, 5.94%
due 10/15/2011++............ 2,000,000 1,979,220
A A2 7,500,000 Virginia Electric & Power Co.,
8.625% due 10/01/2024....... 7,416,540 7,831,200
------------ ------------
32,907,956 32,219,108
- ---------------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES**--9.9% BBB- Baa3 5,000,000 Abitibi-Consolidated Inc.,
6.95% due 4/01/2008(3)...... 4,990,300 4,730,750
BBB A3 1,500,000 AmVescap PLC, 6.375% due
5/15/2003(1)................ 1,497,285 1,476,570
A+ A1 6,000,000 Australia & New Zealand
Banking Group Ltd., 7.55%
due 9/15/2006(1)............ 5,990,880 6,095,460
A- Baa1 3,000,000 Enersis SA, 6.90% due
12/01/2006(3)............... 2,992,260 2,714,340
Fairfax Financial Holdings
Ltd.(1):
BBB+ Baa3 7,000,000 7.375% due 3/15/2006.......... 6,963,110 6,778,611
BBB+ Baa3 4,000,000 7.375% due 4/15/2018.......... 3,991,280 3,603,440
A A1 2,000,000 Ford Capital BV, 9.50% due
6/01/2010(1)................ 2,217,880 2,317,160
A- A3 4,000,000 Israel Electric Corp. Ltd.,
7.75% due 3/01/2009(3)++.... 3,995,880 3,955,640
</TABLE>
219
<PAGE> 221
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<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>
YANKEE CORPORATES** Korea Development Bank(1):
(CONCLUDED) BBB- Baa3 $ 3,000,000 7.125% due 4/22/2004.......... $ 2,978,100 $ 2,929,065
BBB- Baa3 2,500,000 7.375% due 9/17/2004.......... 2,501,175 2,428,000
A A2 5,000,000 Norsk Hydro A/S, 6.70% due
1/15/2018(3)................ 4,974,400 4,512,905
BBB Baa3 5,000,000 Petro Geo-Services ASA, 7.125%
due 3/30/2028(3)............ 4,633,800 4,477,750
A+ Aa3 2,000,000 Sony Corporation, 6.125% due
3/04/2003(3)................ 1,995,760 1,986,440
BBB Baa2 1,000,000 Telecom de Puerto Rico, 6.15%
due 5/15/2002++(3).......... 999,770 989,617
A- A2 1,000,000 Trans-Canada Pipelines, 6.43%
due 3/15/2029(3)............ 1,021,740 990,440
Tyco International
Group SA(3):
A- Baa1 2,500,000 5.875% due 11/01/2004......... 2,498,975 2,412,545
A- Baa1 3,500,000 7% due 6/15/2028.............. 3,474,765 3,249,995
A A2 1,000,000 WMC Finance (USA) Ltd., 6.75%
due 12/01/2006(1)........... 1,014,800 972,430
------------ ------------
58,732,160 56,621,158
- ---------------------------------------------------------------------------------------------------------------------------
YANKEE SOVEREIGN**--1.6% AA- Aa3 1,000,000 Province of Manitoba, 5.50%
due 10/01/2008(2)........... 993,620 914,480
AA- Aa3 1,000,000 Province of Ontario, 5.50% due
10/01/2008(2)............... 994,080 920,240
Province of Quebec(2):
A+ A2 3,500,000 8.80% due 4/15/2003........... 3,944,780 3,764,810
A+ A2 3,500,000 7.125% due 2/09/2024.......... 3,645,635 3,407,565
------------ ------------
9,578,115 9,007,095
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS &
NOTES--96.0% 568,208,746 550,456,370
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Bonds & Notes:
OBLIGATIONS--0.9% AAA Aaa 1,000,000 4.75% due 2/15/2004........... 983,906 961,870
AAA Aaa 2,000,000 5.25% due 5/15/2004........... 1,951,719 1,965,320
AAA Aaa 1,000,000 7.25% due 5/15/2004........... 1,107,188 1,061,870
AAA Aaa 1,000,000 6.125% due 11/15/2027......... 1,107,344 993,280
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT
OBLIGATIONS--0.9% 5,150,157 4,982,340
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE 13,861,000 Warburg Dillon Read LLC,
AGREEMENTS***--2.4% purchased on 6/30/1999 to
yield 4.80% to 7/01/1999.... 13,861,000 13,861,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM
SECURITIES--2.4% 13,861,000 13,861,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.3%...... $587,219,903 569,299,710
============
OTHER ASSETS LESS
LIABILITIES--0.7%........... 4,257,113
------------
NET ASSETS--100.0%............ $573,556,823
============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* 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 & Agency 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.
++ Floating rate note.
</TABLE>
See Notes to Financial Statements.
220
<PAGE> 222
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$587,219,903) (Note
1a)....................................................... $569,299,710
Cash........................................................ 138
Receivables:
Securities sold........................................... $19,878,652
Interest.................................................. 9,486,201
Capital shares sold....................................... 25,454 29,390,307
-----------
Prepaid expenses and other assets........................... 45,578
------------
Total assets................................................ 598,735,733
------------
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 24,561,748
Capital shares redeemed................................... 306,413
Investment adviser (Note 2)............................... 216,606 25,084,767
-----------
Accrued expenses and other liabilities...................... 94,143
------------
Total liabilities........................................... 25,178,910
------------
- ----------------------------------------------------------------------------------------
NET ASSETS.................................................. $573,556,823
============
- ----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 4,951,349
Paid-in capital in excess of par............................ 595,506,999
Undistributed investment income--net........................ 3,417,689
Accumulated realized capital losses on investments--net
(Note 5).................................................. (12,399,021)
Unrealized depreciation on investments--net................. (17,920,193)
------------
NET ASSETS.................................................. $573,556,823
============
- ----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $573,556,823 and 49,513,493
shares outstanding........................................ $ 11.58
============
- ----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
221
<PAGE> 223
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and discount earned................................ $ 19,923,014
Other income................................................ 11,078
------------
Total income................................................ 19,934,092
------------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $1,214,753
Accounting services (Note 2)................................ 56,928
Professional fees........................................... 26,811
Printing and shareholder reports............................ 25,062
Custodian fees.............................................. 24,767
Directors' fees and expenses................................ 6,274
Pricing services............................................ 5,497
Transfer agent fees (Note 2)................................ 2,430
Registration fees........................................... 476
Other....................................................... 2,800
----------
Total expenses.............................................. 1,365,798
------------
Investment income--net...................................... 18,568,294
------------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET (NOTES 1d &
3):
Realized loss on investments--net........................... (3,568,767)
Change in unrealized appreciation/depreciation on
investments--net.......................................... (29,196,463)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(14,196,936)
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
222
<PAGE> 224
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 18,568,294 $ 35,431,023
Realized gain (loss) on investments--net.................... (3,568,767) 7,560,501
Change in unrealized appreciation/depreciation on
investments--net.......................................... (29,196,463) (1,000,179)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (14,196,936) 41,991,345
------------ ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (18,230,325) (35,531,406)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (18,230,325) (35,531,406)
------------ ------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions.............................................. 11,683,526 60,070,576
------------ ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (20,743,735) 66,530,515
Beginning of period......................................... 594,300,558 527,770,043
------------ ------------
End of period*.............................................. $573,556,823 $594,300,558
============ ============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 3,417,689 $ 3,079,720
============ ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
223
<PAGE> 225
- --------------------------------------------------------------------------------
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, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 12.25 $ 12.11 $ 11.91 $ 12.45 $ 11.12
-------- -------- -------- -------- --------
Investment income--net............................... .38 .77 .78 .80 .82
Realized and unrealized gain (loss) on
investments--net................................... (.68) .15 .20 (.55) 1.34
-------- -------- -------- -------- --------
Total from investment operations..................... (.30) .92 .98 .25 2.16
-------- -------- -------- -------- --------
Less dividends from investment income--net........... (.37) (.78) (.78) (.79) (.83)
-------- -------- -------- -------- --------
Net asset value, end of period....................... $ 11.58 $ 12.25 $ 12.11 $ 11.91 $ 12.45
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... (2.48%)+ 7.85% 8.64% 2.21% 20.14%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .47%* .48% .47% .49% .50%
======== ======== ======== ======== ========
Investment income--net............................... 6.39%* 6.35% 6.62% 6.67% 7.00%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $573,557 $594,301 $527,770 $538,394 $489,838
======== ======== ======== ======== ========
Portfolio turnover................................... 37.76% 103.24% 89.22% 91.88% 90.12%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Aggregate total investment return.
See Notes to Financial Statements.
224
<PAGE> 226
- --------------------------------------------------------------------------------
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.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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 and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company.
(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 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, 1999, the aggregate average
daily net assets of the Fund and the Company's High Current Income Fund was
approximately $1,100,383,000.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement that limits the operating expenses paid by the Fund,
225
<PAGE> 227
- --------------------------------------------------------------------------------
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, 1999, the Fund paid Merrill Lynch Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
$4,213 for providing security price quotations to compute the net asset value of
the Fund.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Company's transfer agent.
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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $224,387,767 and $213,507,659, respectively.
Net realized losses for the six months ended June 30, 1999 and net unrealized
losses as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Losses Losses
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $(3,568,767) $(17,920,193)
----------- ------------
Total................................. $(3,568,767) $(17,920,193)
=========== ============
- --------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $17,920,193, of which $3,406,177 related to appreciated securities
and $21,326,370 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $587,219,903.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$11,683,526 and $60,070,576 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 1,582,248 $ 18,786,649
Shares issued to shareholders in
reinvestment of dividends............. 1,530,430 18,230,325
---------- ------------
Total issued........................... 3,112,678 37,016,974
Shares redeemed........................ (2,130,739) (25,333,448)
---------- ------------
Net increase........................... 981,939 $ 11,683,526
========== ============
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 5,551,338 $ 67,504,987
Shares issued to shareholders in
reinvestment of dividends............. 2,934,639 35,531,406
---------- ------------
Total issued........................... 8,485,977 103,036,393
Shares redeemed........................ (3,540,230) (42,965,817)
---------- ------------
Net increase........................... 4,945,747 $ 60,070,576
========== ============
- --------------------------------------------------------------------
</TABLE>
5. CAPITAL LOSS CARRYFORWARD:
At December 31,1998, the Fund had a net capital loss carryforward of
approximately $8,649,000, of which $7,112,000 expires in 2002, $856,000 expires
in 2003 and $681,000 expires in 2005. This amount will be available to offset
like amounts of any future taxable gains.
6. SUBSEQUENT EVENT:
On July 1, 1999, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.069025 per Class A Share payable on July 1, 1999 to
shareholders of record as of June 30, 1999.
226
<PAGE> 228
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. In Japan, there are not yet clear signs that
Japan's economy is improving. There were growing signs of improvement in some
emerging economies (most notably South Korea and Mexico), although concerns
remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
PORTFOLIO MATTERS
As of June 30, 1999, the Fund's asset allocation was: US stocks, 91% of net
assets and foreign stocks, 11%.
We modestly expanded the Fund's allocation to US equities from 89% of net
assets to 91% during the six months ended June 30, 1999. We continue to believe
that investors may favor the shares of companies that offer a high degree of
earnings visibility in a steady growth/low inflation economy. On this basis,
technology remained the largest single group represented among our US equity
commitments. Positions established in the technology sector during the past
three months include Sun Microsystems, Inc., Xerox Corporation and Siebel
Systems, Inc. Consumer staples, including healthcare and financial services,
also continued to account for a significant proportion of US equity assets. New
positions in the consumer staples group included Merck & Co., Inc., while
Citigroup Inc. and The Goldman Sachs Group, Inc. are examples of new positions
in the financial services sector.
We increased the Fund's foreign equity representation from 10% of net assets
to 11% during the first half of 1999. Our approach continues to reflect a
concentration on the shares of companies that we believe could add value to a
primarily US portfolio. The shares of Canadian and European companies continued
to predominate, although we also maintained commitments in Japanese, Asian and
Australian companies.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
July 28, 1999
227
<PAGE> 229
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +13.92%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +19.38
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +15.11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +13.92% +13.20%
- ------------------------------------------------------------------------------------------
</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.
228
<PAGE> 230
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE 98,525 United Technologies Corporation.... $ 3,685,936 $ 7,063,011 0.8%
- --------------------------------------------------------------------------------------------------------------------------
APPLICATION DEVELOPMENT
SOFTWARE 166,000 +Siebel Systems, Inc. ............. 6,208,108 10,997,500 1.3
- --------------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 310,700 Delphi Automotive Systems
Corporation...................... 5,443,713 5,767,369 0.7
- --------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE RENTAL & LEASING 94,450 The Hertz Corporation (Class A).... 3,774,774 5,855,900 0.7
- --------------------------------------------------------------------------------------------------------------------------
BANKING 205,836 Bank of America Corporation........ 11,887,016 15,090,352 1.7
194,400 The Bank of New York Company,
Inc. ............................ 1,664,550 7,132,050 0.8
------------ ------------ -----
13,551,566 22,222,402 2.5
- --------------------------------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 367,000 Mellon Bank Corporation............ 11,814,177 13,349,625 1.5
- --------------------------------------------------------------------------------------------------------------------------
BEVERAGES 295,300 PepsiCo, Inc. ..................... 11,551,644 11,424,419 1.3
- --------------------------------------------------------------------------------------------------------------------------
BROADCASTING--CABLE 412,684 AT&T Corp.--Liberty Media Group
(Class A)........................ 4,242,727 15,166,137 1.7
- --------------------------------------------------------------------------------------------------------------------------
BROADCASTING--MEDIA 49,800 +Clear Channel Communications,
Inc. ............................ 3,517,387 3,433,087 0.4
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 99,700 Eaton Corporation.................. 7,034,799 9,172,400 1.0
25,200 Hewlett-Packard Company............ 1,849,625 2,532,600 0.3
------------ ------------ -----
8,884,424 11,705,000 1.3
- --------------------------------------------------------------------------------------------------------------------------
CHEMICALS 93,800 E.I. du Pont de Nemours and
Company.......................... 5,888,460 6,407,712 0.7
215,000 Rohm and Haas Company.............. 8,152,984 9,218,125 1.1
------------ ------------ -----
14,041,444 15,625,837 1.8
- --------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 80,200 +America Online, Inc. ............. 7,720,174 8,862,100 1.0
309,400 +Cisco Systems, Inc. .............. 6,261,728 19,936,962 2.3
------------ ------------ -----
13,981,902 28,799,062 3.3
- --------------------------------------------------------------------------------------------------------------------------
COMPUTERS 120,250 +Dell Computer Corporation......... 3,737,851 4,441,734 0.5
93,900 +EMC Corporation................... 3,375,985 5,164,500 0.6
139,200 International Business Machines
Corporation...................... 8,816,597 17,991,600 2.1
30,700 +Sun Microsystems, Inc. ........... 1,880,553 2,114,463 0.2
249,600 Tandy Corporation.................. 7,020,482 12,199,200 1.4
------------ ------------ -----
24,831,468 41,911,497 4.8
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS 399,900 The Dial Corporation............... 8,328,619 14,871,281 1.7
- --------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 174,300 General Electric Company........... 16,551,691 19,695,900 2.3
91,400 PECO Energy Company................ 3,115,343 3,827,375 0.4
37,400 W. W. Grainger, Inc. .............. 2,011,263 2,012,587 0.2
------------ ------------ -----
21,678,297 25,535,862 2.9
- --------------------------------------------------------------------------------------------------------------------------
ELECTRONICS 168,000 Intel Corporation.................. 10,120,037 9,985,500 1.1
77,700 +Lattice Semiconductor
Corporation...................... 3,903,205 4,817,400 0.6
------------ ------------ -----
14,023,242 14,802,900 1.7
- --------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT 350,300 Premier Parks Inc. ................ 10,205,816 12,873,525 1.5
91,900 Royal Caribbean Cruises Ltd. ...... 2,206,109 4,020,625 0.5
73,100 The Walt Disney Company............ 2,566,569 2,252,394 0.2
------------ ------------ -----
14,978,494 19,146,544 2.2
- --------------------------------------------------------------------------------------------------------------------------
FINANCE 60,600 +The Goldman Sachs Group, Inc. .... 3,211,800 4,378,350 0.5
116,950 +TD Waterhouse Group, Inc. ........ 2,806,800 2,931,059 0.3
------------ ------------ -----
6,018,600 7,309,409 0.8
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 328,000 Associates First Capital
Corporation (Class A)............ 12,746,247 14,534,500 1.7
87,000 Citigroup Inc. .................... 3,990,342 4,132,500 0.5
51,000 Providian Financial Corporation.... 3,040,790 4,768,500 0.5
210,400 Wells Fargo Company................ 8,467,822 8,994,600 1.0
------------ ------------ -----
28,245,201 32,430,100 3.7
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
229
<PAGE> 231
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES--
CONSUMER 308,800 Household International, Inc. ..... $ 13,528,850 $ 14,629,400 1.7%
- --------------------------------------------------------------------------------------------------------------------------
FOODS 203,300 +Keebler Foods Company............. 5,912,109 6,175,238 0.7
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--AUSTRALIA* 117,400 The News Corporation Limited
(Convertible Preferred)
(ADR)**(9)....................... 3,940,100 3,705,438 0.4
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA* 278,300 +ATI Technologies Inc.(4).......... 4,359,273 4,491,443 0.5
128,000 Domtar, Inc.(7).................... 957,605 1,203,952 0.2
80,800 Nortel Networks Corporation(2)..... 4,352,211 7,014,450 0.8
------------ ------------ -----
9,669,089 12,709,845 1.5
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--FINLAND* 88,600 Nokia Oyj(2)....................... 4,067,131 7,761,449 0.9
68,900 UPM-Kymmene Oyj(7)................. 1,792,427 1,974,032 0.2
------------ ------------ -----
5,859,558 9,735,481 1.1
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--FRANCE* 79,200 STMicroelectronics NV (NY
Registered Shares)(8)............ 3,413,696 5,494,500 0.6
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--JAPAN* 321 Nippon Telegraph & Telephone
Corporation (NTT)(9)............. 2,525,888 3,741,197 0.4
94,500 Sony Corporation (ADR)**(1)........ 8,796,163 10,430,438 1.2
------------ ------------ -----
11,322,051 14,171,635 1.6
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--NETHERLANDS* 52,600 +ASM Lithography Holding NV(4)..... 2,113,636 3,041,156 0.4
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--SINGAPORE* 130,400 +Flextronics International
Ltd.(4).......................... 4,559,214 7,204,600 0.8
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--SWEDEN* 235,800 Telefonaktiebolaget LM Ericsson
(ADR)**(9)....................... 5,884,960 7,751,925 0.9
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--UNITED KINGDOM* 102,400 AstraZeneca Group PLC(3)........... 4,050,536 3,958,816 0.5
914,500 BP Amoco PLC(6).................... 14,510,344 16,380,797 1.9
214,500 Shell Transport & Trading Company
(ADR)**(5)....................... 7,812,014 9,947,438 1.1
------------ ------------ -----
26,372,894 30,287,051 3.5
- --------------------------------------------------------------------------------------------------------------------------
HARDWARE & TOOLS 71,675 The Black & Decker Corporation..... 3,698,094 4,524,484 0.5
- --------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 124,550 Colgate-Palmolive Company.......... 11,924,530 12,299,312 1.4
- --------------------------------------------------------------------------------------------------------------------------
INFORMATION PROCESSING 259,400 +Unisys Corporation................ 8,348,040 10,100,388 1.1
100,000 Xerox Corporation.................. 5,726,743 5,906,250 0.7
------------ ------------ -----
14,074,783 16,006,638 1.8
- --------------------------------------------------------------------------------------------------------------------------
INSTRUMENTS--SCIENTIFIC 90,500 Millipore Corporation.............. 1,881,378 3,670,906 0.4
- --------------------------------------------------------------------------------------------------------------------------
INSURANCE 66,000 American International Group,
Inc. ............................ 7,821,940 7,726,125 0.9
56,900 The Equitable Companies
Incorporated..................... 3,006,378 3,812,300 0.4
------------ ------------ -----
10,828,318 11,538,425 1.3
- --------------------------------------------------------------------------------------------------------------------------
LASER SYSTEMS & COMPONENTS 42,300 +JDS Uniphase Corporation.......... 4,222,515 7,021,800 0.8
- --------------------------------------------------------------------------------------------------------------------------
MACHINERY 57,200 Case Corporation................... 1,630,799 2,752,750 0.3
274,700 Ingersoll-Rand Company............. 8,261,132 17,752,488 2.0
------------ ------------ -----
9,891,931 20,505,238 2.3
- --------------------------------------------------------------------------------------------------------------------------
MACHINERY & EQUIPMENT 35,300 Caterpillar Inc. .................. 1,958,945 2,118,000 0.2
- --------------------------------------------------------------------------------------------------------------------------
MANUFACTURING 143,600 Tyco International Ltd. ........... 7,513,076 13,606,100 1.6
- --------------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 146,950 Johnson & Johnson.................. 12,178,382 14,401,100 1.6
- --------------------------------------------------------------------------------------------------------------------------
METALS 136,700 Alcoa Inc. ........................ 5,415,745 8,458,312 1.0
- --------------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 202,500 Enron Corp. ....................... 9,281,192 16,554,375 1.9
- --------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 129,400 Mobil Corporation.................. 10,731,792 12,810,600 1.5
- --------------------------------------------------------------------------------------------------------------------------
OIL SERVICES 96,200 Schlumberger Limited............... 5,906,508 6,126,738 0.7
- --------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 83,800 International Paper Company........ 4,067,170 4,231,900 0.5
- --------------------------------------------------------------------------------------------------------------------------
PETROLEUM 271,000 Unocal Corporation................. 10,503,446 10,738,375 1.2
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
230
<PAGE> 232
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1a) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PHARMACEUTICALS 213,000 American Home Products
Corporation...................... $ 12,485,613 $ 12,247,500 1.4%
284,000 Bristol-Myers Squibb Company....... 13,499,186 20,004,250 2.3
157,800 Cardinal Health, Inc. ............. 10,928,524 10,118,925 1.1
55,400 Merck & Co., Inc. ................. 3,881,324 4,099,600 0.5
98,400 Pfizer Inc. ....................... 12,826,039 10,799,400 1.2
126,200 Pharmacia & Upjohn, Inc. .......... 7,439,859 7,169,738 0.8
------------ ------------ -----
61,060,545 64,439,413 7.3
- --------------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 564,300 +Capstar Broadcasting Corporation
(Class A)........................ 10,842,368 15,447,712 1.8
- --------------------------------------------------------------------------------------------------------------------------
RETAIL 68,600 +Best Buy Co., Inc. ............... 3,439,224 4,630,500 0.5
117,200 Dayton Hudson Corporation.......... 8,135,726 7,618,000 0.9
36,700 +Federated Department Stores,
Inc. ............................ 1,947,302 1,942,806 0.2
197,500 +Safeway Inc. ..................... 6,156,977 9,776,250 1.1
273,200 Wal-Mart Stores, Inc. ............. 5,638,693 13,181,900 1.5
------------ ------------ -----
25,317,922 37,149,456 4.2
- --------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 145,100 Lowe's Companies, Inc. ............ 5,281,869 8,225,356 0.9
- --------------------------------------------------------------------------------------------------------------------------
SAVINGS & LOAN ASSOCIATIONS 222,200 GreenPoint Financial Corp. ........ 8,915,775 7,290,938 0.8
- --------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 99,500 +Applied Materials, Inc. .......... 6,544,098 7,350,562 0.8
148,800 Motorola, Inc. .................... 8,746,883 14,098,800 1.6
------------ ------------ -----
15,290,981 21,449,362 2.4
- --------------------------------------------------------------------------------------------------------------------------
SERVICES 260,400 +Quintiles Transnational Corp. .... 11,353,230 10,920,525 1.2
- --------------------------------------------------------------------------------------------------------------------------
SOFTWARE 358,600 +Microsoft Corporation............. 27,996,803 32,318,825 3.7
50,000 +Transaction Systems Architects,
Inc. (Class A)................... 2,008,125 1,950,000 0.2
------------ ------------ -----
30,004,928 34,268,825 3.9
- --------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 242,979 AT&T Corp. ........................ 5,223,112 13,561,265 1.6
229,200 +American Tower Corporation (Class
A)............................... 5,760,411 5,500,800 0.6
183,200 GTE Corporation.................... 9,434,382 13,877,400 1.6
126,000 Lucent Technologies Inc. .......... 6,948,009 8,497,125 1.0
240,200 +MCI WorldCom, Inc. ............... 7,793,628 20,657,200 2.3
------------ ------------ -----
35,159,542 62,093,790 7.1
- --------------------------------------------------------------------------------------------------------------------------
TOBACCO 186,600 Philip Morris Companies Inc. ...... 8,146,592 7,498,988 0.9
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATION 230,400 Ameritech Corporation.............. 11,146,172 16,934,400 1.9
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 176,400 Public Service Enterprise Group
Incorporated..................... 6,853,768 7,210,350 0.8
- --------------------------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 193,000 Waste Management, Inc. ............ 8,189,493 10,373,750 1.2
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.................. $673,018,870 890,238,379 101.4
============
UNREALIZED APPRECIATION ON FORWARD
FOREIGN EXCHANGE
CONTRACTS--NET***................ 161,152 0.0
LIABILITIES IN EXCESS OF OTHER
ASSETS........................... (12,196,278) (1.4)
------------ -----
NET ASSETS......................... $878,203,253 100.0%
============ =====
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Corresponding industry groups for foreign securities:
(1) Appliances
(2) Communications Equipment
(3) Drugs
(4) Electronics Components
(5) Oil--Integrated
(6) Oil--Related
(7) Paper & Forest Products
(8) Semiconductors
(9) Telecommunications
** American Depositary Receipts (ADR).
231
<PAGE> 233
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
*** Forward foreign exchange contracts as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION
FOREIGN CURRENCY SOLD EXPIRATION DATE (NOTE 1b)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
C$ 15,800,000 July 1999 $161,152
- ----------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET
(US$ COMMITMENT--$10,856,122) $161,152
========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
232
<PAGE> 234
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$673,018,870) (Note
1a)....................................................... $890,238,379
Unrealized appreciation on forward foreign exchange
contracts (Note 1b)....................................... 161,152
Foreign cash (Note 1c)...................................... 37,499
Receivables:
Securities sold........................................... $16,799,405
Dividends................................................. 482,283
Forward foreign exchange contracts (Note 1b).............. 397,220 17,678,908
-----------
Prepaid expenses and other assets........................... 57,492
------------
Total assets................................................ 908,173,430
------------
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 16,020,414
Securities purchased...................................... 11,648,515
Custodian bank (Note 1g).................................. 1,694,143
Investment adviser (Note 2)............................... 337,041
Forward foreign exchange contracts (Note 1b).............. 129,049 29,829,162
-----------
Accrued expenses and other liabilities...................... 141,015
------------
Total liabilities........................................... 29,970,177
------------
- ----------------------------------------------------------------------------------------
NET ASSETS.................................................. $878,203,253
============
- ----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized+........................................ $ 2,266,255
Paid-in capital in excess of par............................ 583,052,018
Undistributed investment income--net........................ 2,148,819
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 73,355,782
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 217,380,379
------------
NET ASSETS.................................................. $878,203,253
============
- ----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $878,203,253 and 22,662,553
shares outstanding........................................ $ 38.75
============
- ----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
233
<PAGE> 235
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $88,619 foreign withholding tax).......... $ 4,069,412
Interest and discount earned................................ 186,084
------------
Total income................................................ 4,255,496
------------
- ----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $ 1,856,444
Accounting services (Note 2)................................ 86,925
Custodian fees.............................................. 47,400
Printing and shareholder reports............................ 46,639
Professional fees........................................... 39,387
Directors' fees and expenses................................ 9,321
Transfer agent fees (Note 2)................................ 2,673
Pricing services............................................ 1,075
Other....................................................... 5,058
-----------
Total expenses.............................................. 2,094,922
------------
Investment income--net...................................... 2,160,574
------------
- ----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET (NOTES 1b, 1c, 1e & 3):
Realized gain from:
Investments--net.......................................... 72,932,185
Foreign currency transactions--net........................ 423,622 73,355,807
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 31,549,998
Foreign currency transactions--net........................ 255,662 31,805,660
----------- ------------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 105,161,467
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $107,322,041
============
- ----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
234
<PAGE> 236
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 2,160,574 $ 8,231,369
Realized gain on investments and foreign currency
transactions--net......................................... 73,355,807 80,712,384
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 31,805,660 36,226,100
------------ -------------
Net increase in net assets resulting from operations........ 107,322,041 125,169,853
------------ -------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1f):
Investment income--net:
Class A................................................... (7,727,398) (8,061,972)
Realized gain on investments--net:
Class A................................................... (80,017,893) (115,958,721)
------------ -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (87,745,291) (124,020,693)
------------ -------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from capital share
transactions.............................................. (4,270,574) (13,316,065)
------------ -------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 15,306,176 (12,166,905)
Beginning of period......................................... 862,897,077 875,063,982
------------ -------------
End of period*.............................................. $878,203,253 $ 862,897,077
============ =============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 2,148,819 $ 7,715,643
============ =============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
235
<PAGE> 237
- --------------------------------------------------------------------------------
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, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 38.12 $ 38.42 $ 32.83 $ 32.76 $ 27.74
-------- -------- -------- -------- --------
Investment income--net................................. .09 .34 .41 .58 .58
Realized and unrealized gain on investments and foreign
currency transactions--net........................... 4.42 4.80 6.94 4.44 5.48
-------- -------- -------- -------- --------
Total from investment operations....................... 4.51 5.14 7.35 5.02 6.06
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................... (.34) (.35) (.22) (.66) (.45)
Realized gain on investments--net.................... (3.54) (5.09) (1.54) (4.29) (.59)
-------- -------- -------- -------- --------
Total dividends and distributions...................... (3.88) (5.44) (1.76) (4.95) (1.04)
-------- -------- -------- -------- --------
Net asset value, end of period......................... $ 38.75 $ 38.12 $ 38.42 $ 32.83 $ 32.76
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..................... 13.20%++ 15.58% 23.70% 17.90% 22.61%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... .49%* .49% .48% .49% .51%
======== ======== ======== ======== ========
Investment income--net................................. .51%* .95% 1.16% 1.89% 1.94%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $878,203 $862,897 $875,064 $794,275 $644,551
======== ======== ======== ======== ========
Portfolio turnover..................................... 47.40% 100.29% 100.08% 88.30% 140.32%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
236
<PAGE> 238
- --------------------------------------------------------------------------------
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. The Fund's
financial statements are prepared in accordance with generally accepted
accounting principles, which may require the use of management accruals and
estimates. 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 that 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 that
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. In the case of options traded in the over-the-counter
market, valuation is the last asked price. Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(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.
- - 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
237
<PAGE> 239
- --------------------------------------------------------------------------------
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.
(g) Custodian bank--The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft which resulted from management's estimate of
available cash.
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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $69,922 in commissions on the
execution of portfolio security transactions.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $405,724,558 and $481,079,092, respectively.
Net realized gains (losses) for the six months ended June 30, 1999 and net
unrealized gains (losses) as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------
<S> <C> <C>
Long-term investments............. $72,932,185 $217,219,509
Forward foreign exchange
contracts........................ 511,314 161,152
Foreign currency transactions..... (87,692) (282)
----------- ------------
Total............................. $73,355,807 $217,380,379
=========== ============
- --------------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $217,219,509, of which $225,191,522 related to appreciated securities
and $7,972,013 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $673,018,870.
4. CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share transactions were
$4,270,574 and $13,316,065 for the six months ended June 30, 1999 and the year
ended December 31, 1998, respectively.
238
<PAGE> 240
- --------------------------------------------------------------------------------
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 125,697 $ 4,416,160
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 2,570,914 87,745,291
---------- -------------
Total issued......................... 2,696,611 92,161,451
Shares redeemed...................... (2,668,034) (96,432,025)
---------- -------------
Net increase (decrease).............. 28,577 $ (4,270,574)
========== =============
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold......................... 384,573 $ 13,339,188
Shares issued to shareholders in
reinvestment of dividends and
distributions...................... 3,754,789 124,020,693
---------- -------------
Total issued........................ 4,139,362 137,359,881
Shares redeemed..................... (4,278,868) (150,675,946)
---------- -------------
Net decrease........................ (139,506) $ (13,316,065)
========== =============
- -----------------------------------------------------------------
</TABLE>
239
<PAGE> 241
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 1999, Reserve Assets Fund's net
annualized yield for Class A Shares was 4.47%. The Fund's 7-day yield as of June
30, 1999 was 4.44%. The average portfolio maturity was 71 days at June 30, 1999,
compared to 69 days at December 31, 1998.
THE ENVIRONMENT
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. Meanwhile, Japan reported its first quarter of
positive economic growth in more than a year. Some other emerging economies
(most notably South Korea and Mexico) are also showing some signs of
improvement, although concerns remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
We continue to concentrate Fund investments in one-month commercial paper,
10-month--12-month intermediate-term notes and floating rate money market
instruments. We believe that this barbell strategy, coupled with one-third of
the Fund's assets in floating rate paper, is appropriate at this time. We
employed this strategy as we consider the possibility of an additional Federal
Reserve Board tightening in the near term but with low probability of
significant intervention as the year 2000 approaches.
Longer term, we are slightly positive on the outlook for interest rates and
believe that current yields have sufficiently discounted negative news. In the
near term, we will continue to evaluate economic data as it becomes available,
responding accordingly to any necessary shifts.
The Fund's composition at the end of June and as of our last report is
detailed below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
6/30/99 12/31/98
- ----------------------------------------------------------------
<S> <C> <C>
Bank Notes................................ 13.7% 13.1%
Certificates of Deposit................... 1.2 --
Certificates of Deposit--Yankee........... 2.8 --
Commercial Paper.......................... 34.8 34.5
Corporate Notes........................... 35.2 24.7
Funding Agreements........................ 4.7 4.7
Repurchase Agreements..................... -- 3.0
US Government, Agency & Instrumentality
Obligations--Discount.................... 2.1 6.6
US Government, Agency & Instrumentality
Obligations--Non-Discount................ 6.2 12.9
Other Assets Less Liabilities............. -- 0.5
Liabilities in Excess of Other Assets..... (0.7) --
----- -----
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,
/a/ Terry K. Glenn
Terry K. Glenn
President
/s/ Jacqueline Rogers
Jacqueline Rogers
Vice President and Portfolio Manager
July 28, 1999
240
<PAGE> 242
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--13.7% $ 100,000 First USA Bank NA+........................ 6.50 % 12/23/1999 $ 100,267
250,000 First USA Bank NA+........................ 5.35 1/21/2000 250,320
500,000 First Union National Bank+................ 4.91 8/20/1999 499,889
100,000 First Union National Bank+................ 5.15 8/30/1999 100,000
200,000 First Union National Bank+................ 5.15 9/01/1999 200,000
500,000 Harris Trust & Savings+................... 4.91 4/06/2000 500,090
200,000 NationsBank NA+........................... 4.92 3/16/2000 199,992
250,000 NationsBank NA+........................... 4.91 4/05/2000 249,925
300,000 PNC Bank NA+.............................. 5.01 11/03/1999 299,894
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$2,400,797) 2,400,377
- -------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 250,000 Fleet National Bank NA+................... 4.90 4/17/2000 249,905
DEPOSIT--1.2%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$249,906) 249,905
- -------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 250,000 Bayerische Hypo-und Vereinsbank AG+....... 5.27 3/03/2000 248,965
DEPOSIT--YANKEE--2.8% 250,000 Commerzbank AG, NY+....................... 5.085 2/17/2000 248,765
100,000 Societe Generale, NY+..................... 5.18 2/28/2000 99,536
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT--YANKEE (COST--$599,794) 597,266
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--34.8% 354,000 Alpine Securitization Corporation......... 5.17 7/01/1999 354,000
398,000 Alpine Securitization Corporation......... 5.17 7/06/1999 397,714
387,000 American Honda Finance Corp. ............. 4.98 7/07/1999 386,679
250,000 Amsterdam Funding Corp.................... 5.35 7/27/1999 249,034
500,000 Apreco, Inc. ............................. 4.83 7/28/1999 498,162
250,000 Atlantis One Funding Corp. ............... 4.88 8/13/1999 248,539
679,000 Countrywide Home Loans, Inc. ............. 5.05 7/07/1999 678,428
164,000 Den Norske Bank ASA....................... 4.85 7/07/1999 163,868
615,000 Den Norske Bank ASA....................... 4.90 7/07/1999 614,505
100,000 Finova Capital Corp. ..................... 4.98 8/20/1999 99,308
200,000 Finova Capital Corp. ..................... 4.90 10/07/1999 197,054
450,000 Finova Capital Corp. ..................... 4.88 10/15/1999 442,824
250,000 Grand Funding Corp. ...................... 4.88 7/09/1999 249,729
525,000 International Securitization Corp. ....... 5.05 7/21/1999 523,527
1,000,000 Lehman Brothers Holdings Inc. ............ 4.97 7/07/1999 999,172
342,000 Lexington Parker Capital Company, LLC..... 4.84 10/07/1999 336,962
449,000 Park Avenue Receivables Corp. ............ 5.85 7/01/1999 449,000
480,000 Thames Asset Global Securitization........ 4.83 7/07/1999 479,614
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$7,369,662) 7,368,119
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE 1,000,000 Abbey National Treasury Services PLC+..... 4.94 8/17/1999 999,898
NOTES--35.2% 100,000 Associates Corporation of North America... 6.625 7/15/1999 100,053
100,000 Associates Corporation of North America... 6.75 10/15/1999 100,275
250,000 Associates Corporation of North America... 7.45 3/28/2000 252,585
150,000 Associates Corporation of North America... 6.375 6/15/2000 150,655
500,000 Bank America Corporation+................. 5.04 10/15/1999 500,176
150,000 Bear Stearns Companies, Inc.+............. 5.124 1/20/2000 150,009
100,000 Beneficial Corp........................... 8.375 12/29/1999 101,214
300,000 CIT Group Holdings, Inc. (The)............ 6.10 8/09/1999 300,166
250,000 CIT Group Holdings, Inc. (The)............ 6.70 5/02/2000 251,254
500,000 Caterpillar Inc.+......................... 5.03 1/20/2000 499,977
250,000 Deutsche Pfandbrief und Hypotheknbank..... 7.00 7/10/2000 252,382
550,000 Ford Motor Credit Company................. 8.375 1/15/2000 557,133
200,000 Ford Motor Credit Company+................ 4.95 5/05/2000 200,000
250,000 General Electric Capital Corp.+........... 4.845 4/17/2000 249,732
250,000 General Electric Capital Corp.+........... 4.945 5/03/2000 249,907
100,000 General Electric Capital Corp.+........... 4.95 5/12/2000 99,944
</TABLE>
241
<PAGE> 243
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE
NOTES
(CONCLUDED) $ 150,000 General Motors Acceptance Corp.+.......... 4.96 % 7/20/2000 $ 149,944
100,000 General Motors Acceptance Corp.+.......... 5.201 12/01/2000 99,952
100,000 General Motors Acceptance Corp.+.......... 5.077 2/27/2001 100,094
100,000 Goldman Sachs Group, Inc.+................ 5.00 7/12/2000 100,000
200,000 Household Finance Corp.+.................. 5.28 3/13/2000 199,089
250,000 Liberty Lighthouse US Capital Co. LLC+.... 4.98 10/08/1999 249,980
200,000 PepsiCo, Inc.............................. 5.875 6/01/2000 199,628
1,000,000 Restructured Asset Securities with
Enhanced Returns, Series 1998-MM-7-1+... 4.99 8/13/1999 1,000,000
500,000 Toyota Motor Credit Corp.+................ 5.011 9/23/1999 499,854
250,000 Wells Fargo & Co.......................... 5.225 4/10/2000 248,700
100,000 Xerox Credit Corp.+....................... 4.87 4/06/2000 99,940
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$7,970,795) 7,962,541
- -------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--4.7% 1,000,000 Jackson National Life Insurance Co. ...... 4.95 5/01/2000 1,000,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$1,000,000) 1,000,000
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS-- 400,000 US Treasury Bills......................... 3.80 10/14/1999 394,587
DISCOUNT--2.1% 50,000 US Treasury Bills......................... 3.81 10/14/1999 49,323
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS--DISCOUNT
(COST--$445,011) 443,910
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY & 100,000 Federal Home Loan Bank+................... 5.419 9/02/1999 99,991
INSTRUMENTALITY
OBLIGATIONS-- 100,000 Federal Home Loan Mortgage Corporation+... 5.25 1/19/2001 99,166
NON-DISCOUNT--6.2% 200,000 Federal National Mortgage Association+.... 5.294 7/30/1999 199,987
200,000 Federal National Mortgage Association+.... 5.07 12/14/2000 197,908
75,000 Federal National Mortgage Association+.... 5.21 1/26/2001 74,277
100,000 Student Loan Marketing Association+....... 4.50 8/02/1999 99,941
250,000 Student Loan Marketing Association+....... 5.334 2/04/2000 249,964
100,000 US Treasury Notes......................... 4.625 11/30/2000 98,875
100,000 US Treasury Notes......................... 4.625 12/31/2000 98,781
100,000 US Treasury Notes......................... 4.50 1/31/2001 98,500
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$1,324,872) 1,317,390
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$21,360,837)--100.7%............. 21,339,508
LIABILITIES IN EXCESS OF OTHER
ASSETS--(0.7)%.......................... (142,420)
-----------
NET ASSETS--100.0%........................ $21,197,088
===========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government, Agency & Instrumentality
Obligations are traded on a discount basis; the interest rates shown reflect 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, 1999.
+ Variable rate notes.
See Notes to Financial Statements.
242
<PAGE> 244
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$21,360,837*) (Note
1a)....................................................... $21,339,508
Cash........................................................ 212
Receivables:
Interest.................................................. $145,718
Capital shares sold....................................... 31,030 176,748
--------
Prepaid expenses and other assets........................... 1,774
-----------
Total assets................................................ 21,518,242
-----------
- ------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 307,639
Investment adviser (Note 2)............................... 8,637
Capital shares redeemed................................... 848 317,124
--------
Accrued expenses and other liabilities...................... 4,030
-----------
Total liabilities........................................... 321,154
-----------
- ------------------------------------------------------------------------------------
NET ASSETS.................................................. $21,197,088
===========
- ------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 500,000,000
shares authorized+........................................ $ 2,121,842
Paid-in capital in excess of par............................ 19,096,575
Unrealized depreciation on investments--net................. (21,329)
-----------
NET ASSETS.................................................. $21,197,088
===========
- ------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $21,197,088 and 21,218,417
shares outstanding........................................ $ 1.00
===========
- ------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. As of June 30, 1999, net unrealized
depreciation for Federal income tax purposes amounted to $21,329, of which $524
related to appreciated securities and $21,853 related to depreciated securities.
+ The Fund is also authorized to issue 500,000,000 Class B Shares.
See Notes to Financial Statements.
243
<PAGE> 245
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
INVESTMENT INCOME (NOTE 1d):
Interest and discount earned................................ $523,582
- --------------------------------------------------------------------------------
<S> <C> <C>
EXPENSES:
Investment advisory fees (Note 2)........................... $51,589
Custodian fees.............................................. 4,936
Professional fees........................................... 3,116
Transfer agent fees (Note 2)................................ 2,674
Accounting services (Note 2)................................ 2,210
Printing and shareholder reports............................ 692
Directors' fees and expenses................................ 251
Other....................................................... 268
-------
Total expenses.............................................. 65,736
--------
Investment income--net...................................... 457,846
--------
- --------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTE
1d):
Realized gain on investments--net........................... 1,062
Change in unrealized appreciation/depreciation on
investments--net.......................................... (21,364)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $437,544
========
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
244
<PAGE> 246
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 457,846 $ 1,083,752
Realized gain on investments--net........................... 1,062 6,717
Change in unrealized appreciation/depreciation on
investments--net.......................................... (21,364) (453)
----------- ------------
Net increase in net assets resulting from operations........ 437,544 1,090,016
----------- ------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (457,846) (1,083,752)
Realized capital gain on investments--net:
Class A................................................... (1,062) (6,717)
----------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (458,908) (1,090,469)
----------- ------------
- --------------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares............................ 4,897,667 9,448,388
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions (Note 1e)..... 459,089 1,090,589
----------- ------------
5,356,756 10,538,977
Cost of shares redeemed..................................... (5,476,430) (10,302,620)
----------- ------------
Net increase (decrease) in net assets derived from capital
share transactions........................................ (119,674) 236,357
----------- ------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (141,038) 235,904
Beginning of period......................................... 21,338,126 21,102,222
----------- ------------
End of period............................................... $21,197,088 $ 21,338,126
=========== ============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
245
<PAGE> 247
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS 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, 1999 1998 1997 1996 1995
<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.................................. .0216 .0496 .0506 .0501 .0543
Realized and unrealized gain (loss) on
investments--net...................................... (.0009) .0003 .0001 (.0005) .0018
------- ------- ------- ------- -------
Total from investment operations........................ .0207 .0499 .0507 .0496 .0561
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................ (.0216) (.0496) (.0506) (.0501) (.0543)
Realized gain on investments--net..................... (.0001) (.0003) (.0001) (.0001) (.0004)
------- ------- ------- ------- -------
Total dividends and distributions....................... (.0217) (.0499) (.0507) (.0502) (.0547)
------- ------- ------- ------- -------
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...................... 4.51%* 5.10% 5.19% 5.13% 5.61%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................ .64%* .68% .62% .61% .61%
======= ======= ======= ======= =======
Investment income and realized gain on
investments--net...................................... 4.45%* 4.96% 5.06% 4.96% 5.47%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $21,197 $21,338 $21,102 $22,885 $25,550
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
246
<PAGE> 248
- --------------------------------------------------------------------------------
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. The Fund's
financial statements are prepared in accordance with generally accepted
accounting principles, which may require the use of management accruals and
estimates. 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 with remaining maturities
of greater than sixty days are valued at the most recent bid price or yield
equivalent as obtained from dealers that make markets in such securities. As
securities transition from sixty-one to sixty days 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. Securities
maturing sixty days or less from their date of acquisition are valued at
amortized cost, which approximates market value. For the 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. Other investments for which market
quotations are not readily available are valued at their fair value as
determined in good faith by or under the direction of the Company's Board of
Directors.
(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 additions to such 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.
247
<PAGE> 249
- --------------------------------------------------------------------------------
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.
Financial Data Services, Inc. ("FDS"), 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, FDS, 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.
248
<PAGE> 250
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
JUNE 30, 1999--SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
There were some conflicting signals regarding the future direction of the US
economy during the six months ended June 30, 1999. However, on balance the
economic outlook continued to be positive. The US economic expansion is ongoing,
especially in the consumer sector. Economic growth is not occurring at
inflationary rates, although the Organization of Petroleum Exporting Countries
(OPEC) successfully engineered a near-term increase in the price of crude oil.
Against this backdrop, the US Federal Reserve Board raised the Federal Funds
rate 0.25% at its June 30, 1999 meeting. Outside of the United States, signs of
growth are less apparent in other major industrial economies. European equity
markets have entered a period of consolidation, and investors are looking for
evidence of an economic pickup. In Japan, there are not yet clear signs that
Japan's economy is improving. There were growing signs of improvement in some
emerging economies (most notably South Korea and Mexico), although concerns
remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the June
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
PORTFOLIO MATTERS
During the first half of 1999, the environment for small-capitalization stocks
gradually improved with the pace of US economic activity. Recent economic
indicators, including employment data and the Producer Price Index (PPI), seemed
to confirm a strengthening in the US economy. Accordingly, the yield on the
30-year US Government bond has increased by about 100 basis points (1.00%),
causing a steepening of the yield curve. A strengthening economy is generally
favorable for small cap stocks, particularly small cap value stocks. The
steepening yield curve is a positive indicator for the value style of investing
because it often serves as an implied inflation forecast. To the extent that the
Federal Reserve Board is able to sustain the economic expansion with modest
interest rate increases, we anticipate further gains for small cap stocks.
During the six-month period ended June 30, 1999, the Fund substantially
outperformed the unmanaged Russell 2000 Index. Total returns for the Fund's
Class A and Class B Shares were +19.58% and +19.48%, respectively, compared to
the total return of +9.28% for the Russell 2000 Index. Eleven out of twelve
economic sectors within the Russell 2000 benchmark index posted positive returns
in the first half of the year. The utility, energy, and transportation sectors
marked the sharpest gains, while the consumer staples sector declined. The
Fund's investment performance benefited from overweighted investments in the
energy and transportation sectors, and from underweighted investments in
financial services stocks. Sector positioning modestly benefited performance in
the six-month period; however, performance in excess of the Russell 2000 Index
resulted primarily from specific stock selection, as individual stocks sharply
outperformed their respective sectors in the benchmark index.
Individual stocks that most benefited the Fund's investment results included
one medical device company and two telecommunications related stocks. Shares of
VISX Incorporated, a developer of proprietary technologies and systems for laser
vision correction, appreciated sharply based on strong growth in laser
procedures. Rapid share price appreciation and the large size of the position
combined to make VISX, Inc. a leading contributor to Fund results during the
six-month period. We significantly reduced the Fund's holdings in VISX since the
shares exceeded our valuation target. Shares of DSP Communications also rallied
in the first half of 1999. Asian market demand rebounded and the company
announced several important new customer wins. The company designs chip sets
used in wireless devices. Shares of Triquint Semiconductor, Inc., a manufacturer
of high performance integrated circuits, were also strong as earnings surpassed
the range of analysts' estimates and demand for the company's specialized
manufacturing capacity increased. Fund performance in the period was hindered by
an investment in CHS Electronics, Inc., an international distributor of
microcomputers and related products. Shares of CHS Electronics declined abruptly
in the period on concerns about the company's accounting for vendor rebates and
general weakness among computer distribution stocks. We sold the Fund's entire
position in CHS Electronics, Inc. based on deteriorating fundamentals.
As small-capitalization stocks surged late in the six-month period, we
realized gains in stocks that had reached our internal price objectives, and
reinvested the proceeds in
249
<PAGE> 251
- --------------------------------------------------------------------------------
stocks where we believed the risk-adjusted returns would be greater. In general,
we further increased the level of Fund diversification, realizing gains in
overweighted technology and economically sensitive industries, and investing
some of the proceeds in underweighted financial services stocks and other
interest rate sensitive areas.
IN CONCLUSION
We thank you for your continued investment in Special Value Focus Fund of
Merrill Lynch Variable Series Funds, Inc., and we look forward to reviewing our
outlook and strategy with you again in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Daniel V. Szemis
Daniel V. Szemis
Senior Vice President and Co-Portfolio Manager
/s/ R. Elise Baum
R. Elise Baum
Senior Vice President and Co-Portfolio Manager
July 28, 1999
250
<PAGE> 252
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 + 1.87%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +15.59
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +11.08
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 6/30/99 +1.68%
- --------------------------------------------------------------------------------
Inception (10/23/97) through 6/30/99 -0.47
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 +1.87% +19.58%
- -----------------------------------------------------------------------------------------
Class B Shares +1.68 +19.48
- -----------------------------------------------------------------------------------------
</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.
251
<PAGE> 253
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
SECTOR* HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUTO & TRANSPORTATION 218,000 Air Express International
Corporation................. $ 4,506,503 $ 5,477,250 1.2%
255,400 Circle International Group,
Inc. ....................... 6,554,445 5,586,875 1.2
151,600 +Forward Air Corporation...... 1,107,749 4,254,275 0.9
9,000 +Gentex Corporation........... 111,690 252,000 0.1
11,100 +Keystone Automotive
Industries, Inc. ........... 176,209 191,475 0.0
208,300 +Landair Corporation.......... 1,315,580 833,200 0.2
67,700 Meritor Automotive, Inc. ..... 1,468,358 1,726,350 0.4
894,700 +Miller Industries, Inc. ..... 6,775,980 3,522,881 0.8
------------ ------------ -----
22,016,514 21,844,306 4.8
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 1,107,700 +APAC Customer Services
Inc. ....................... 8,357,955 3,600,025 0.8
620,600 +Boise Cascade Office Products
Corp. ...................... 8,702,093 7,292,050 1.6
265,000 +Boron, LePore & Associates,
Inc. ....................... 3,558,431 2,219,375 0.5
390,000 +Buffets, Inc................. 3,859,006 4,460,625 1.0
331,200 +Caribiner International,
Inc......................... 3,245,791 2,049,300 0.4
122,800 +The Cheesecake Factory
Incorporated................ 2,577,975 3,730,050 0.8
858,000 +Danka Business Systems PLC
(ADR)**..................... 6,589,610 4,638,563 1.0
560,650 +HA-LO Industries, Inc........ 7,221,899 5,536,419 1.2
715,700 Heilig-Meyers Company......... 9,893,330 4,875,706 1.1
100,400 +ITI Technologies, Inc........ 2,581,454 2,259,000 0.5
118,100 +Micro Warehouse, Inc......... 1,644,588 2,081,513 0.4
763,167 +Midway Games Inc............. 11,855,735 9,873,473 2.2
758,900 +Paxson Communications
Corporation................. 8,204,931 10,245,150 2.2
178,400 Pier 1 Imports, Inc........... 1,350,720 2,007,000 0.4
256,000 +SITEL Corporation............ 2,288,618 752,000 0.2
147,400 +Sodak Gaming, Inc............ 1,633,824 1,381,875 0.3
172,300 +Stein Mart, Inc.............. 1,608,135 1,561,469 0.3
60,600 +Suiza Foods Corporation...... 2,290,271 2,537,625 0.6
139,900 +Veterinary Centers of
America, Inc................ 1,896,454 1,888,650 0.4
520,500 WMS Industries Inc............ 3,258,147 8,848,500 1.9
------------ ------------ -----
92,618,967 81,838,368 17.8
- -----------------------------------------------------------------------------------------------------------------------
ENERGY 79,100 +Barrett Resources
Corporation................. 2,003,166 3,035,462 0.7
210,000 +Basin Exploration, Inc....... 3,278,690 4,213,125 0.9
32,800 +Evergreen Resources, Inc..... 721,600 826,150 0.2
100,500 +Louis Dreyfus Natural Gas
Corp. ...................... 1,916,997 2,167,031 0.5
79,900 +Newpark Resources, Inc....... 474,530 709,113 0.2
50,000 +Plains Resources Inc......... 748,212 950,000 0.2
59,100 +Stone Energy Corporation..... 1,752,851 2,504,363 0.5
129,000 +Tom Brown, Inc. ............. 1,603,086 1,999,500 0.4
------------ ------------ -----
12,499,132 16,404,744 3.6
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 47,350 American National Insurance
Company..................... 4,420,316 3,373,687 0.7
51,600 +BARRA, Inc................... 1,272,449 1,283,550 0.3
266,900 +Billing Concepts Corp. ...... 2,561,541 2,969,262 0.7
109,000 Brandywine Reality Trust...... 1,939,138 2,159,562 0.5
74,800 Camden Property Trust......... 1,925,656 2,075,700 0.5
240,900 Capitol Federal Financial..... 2,386,338 2,484,281 0.5
264,178 Charter One Financial, Inc.... 6,710,749 7,330,939 1.6
50,500 Commerce Bancorp, Inc......... 2,033,160 2,158,875 0.5
67,800 FelCor Lodging Trust Inc...... 1,471,401 1,406,850 0.3
99,400 Frontier Insurance Group,
Inc. ....................... 1,454,889 1,528,275 0.3
</TABLE>
252
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
SECTOR* HELD COMMON STOCKS COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES 63,000 HCC Insurance Holdings, Inc... $ 1,196,544 $ 1,429,312 0.3%
(CONCLUDED)
30,100 Investment Technology Group,
Inc......................... 860,524 974,487 0.2
15,100 Jeffreries Group, Inc......... 233,596 453,000 0.1
40,500 Kimco Realty Corporation...... 1,491,148 1,584,563 0.3
62,400 Meditrust Companies........... 937,772 815,100 0.2
17,600 National Data Corporation..... 616,990 752,400 0.2
187,100 PXRE Corporation.............. 4,954,722 3,391,188 0.7
174,000 Peoples Heritage Financial
Group, Inc.................. 3,450,922 3,273,375 0.7
195,800 +Primark Corporation.......... 4,787,912 5,494,638 1.2
------------ ------------ -----
44,705,767 44,939,044 9.8
- -----------------------------------------------------------------------------------------------------------------------
HEALTHCARE 137,300 +COR Therapeutics, Inc........ 1,501,776 2,008,012 0.4
110,000 +Covance Inc.................. 2,276,949 2,633,125 0.6
31,600 +DVI, Inc..................... 552,671 541,150 0.1
23,600 +Datascope Corp. ............. 644,544 758,150 0.2
317,600 +EndoSonics Corporation....... 1,994,809 2,203,350 0.5
31,000 +Gilead Sciences, Inc......... 849,148 1,615,875 0.3
425,600 +HCIA Inc..................... 5,221,652 3,644,200 0.8
1,221,400 +MedPartners, Inc............. 9,012,554 9,236,838 2.0
195,000 Mentor Corporation............ 3,012,650 3,631,875 0.8
291,000 +Nabi......................... 2,103,909 800,250 0.2
41,700 +NeoRx Corporation............ 269,850 63,853 0.0
67,700 +Neurogen Corporation......... 904,431 981,650 0.2
278,800 +Orthodontic Centers of
America, Inc................ 3,336,283 3,938,050 0.9
88,600 +Pharmacopeia, Inc............ 1,460,048 963,525 0.2
175,000 +Scios Inc.................... 1,232,798 568,750 0.1
423,400 Scottish Annuity & Life
Holdings, Ltd. ............. 5,440,528 4,551,550 1.0
15,000 +Sepracor Inc................. 1,098,921 1,215,000 0.3
85,500 +Sierra Health Services,
Inc......................... 1,774,125 1,234,406 0.3
42,800 +VISX, Incorporated........... 279,434 3,391,900 0.7
------------ ------------ -----
42,967,080 43,981,509 9.6
- -----------------------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING 190,300 A.M. Castle & Company......... 3,976,657 3,235,100 0.7
330,000 Apogee Enterprises, Inc....... 3,836,541 4,475,625 1.0
37,000 Carpenter Technology
Corporation................. 1,105,467 1,056,812 0.2
110,100 +Citation Corporation......... 1,577,950 1,768,481 0.4
354,600 Commonwealth Industries,
Inc......................... 6,572,961 4,432,500 1.0
39,600 +Dan River Inc. (Class A)..... 598,499 292,050 0.1
8,300 +Foamex International Inc..... 109,575 46,169 0.0
101,900 +Giant Cement Holding, Inc.... 2,179,103 2,299,119 0.5
152,800 Gibraltar Steel Corporation... 3,132,208 3,743,600 0.8
178,600 +Insituform Technologies, Inc.
(Class A)................... 1,435,706 3,828,737 0.8
382,000 Intermet Corporation.......... 5,350,284 5,730,000 1.2
124,800 +Novamerican Steel, Inc....... 1,448,747 1,372,800 0.3
246,000 +Paxar Corporation............ 3,532,266 2,214,000 0.5
99,000 Quanex Corporation............ 2,305,623 2,821,500 0.6
562,776 Ryerson Tull, Inc............. 9,514,748 12,697,634 2.8
464,600 +Shiloh Industries, Inc....... 8,067,380 6,678,625 1.5
238,000 +Wolverine Tube, Inc.......... 6,032,065 5,979,750 1.3
------------ ------------ -----
60,775,780 62,672,502 13.7
- -----------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS 629,800 +Metromedia International
Group, Inc.................. 7,216,277 4,723,500 1.0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
253
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (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 Corporation.............. $ 3,164,545 $ 1,142,562 0.3%
38,400 +ANTEC Corporation............ 1,092,083 1,224,000 0.3
125,700 +Allen Telecom Inc............ 2,050,371 1,351,275 0.3
287,250 Applied Industrial
Technologies, Inc........... 5,964,982 5,457,750 1.2
116,000 +BI, Incorporated............. 1,089,284 978,750 0.2
400,600 +Brown & Sharpe Manufacturing
Company (Class A)........... 5,138,075 2,178,262 0.5
90,000 +DONCASTERS PLC (ADR)**....... 2,167,473 1,575,000 0.3
249,300 +ESCO Electronics
Corporation................. 4,362,030 3,194,156 0.7
323,800 +Kent Electronics
Corporation................. 3,837,080 6,415,287 1.4
251,700 Oakwood Homes Corporation..... 4,828,912 3,303,563 0.7
66,600 The Ryland Group, Inc......... 1,084,834 1,977,188 0.4
67,300 +Toll Brothers, Inc........... 1,625,992 1,442,744 0.3
63,000 +Triumph Group, Inc........... 1,777,749 1,606,500 0.3
------------ ------------ -----
38,183,410 31,847,037 6.9
- -----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY 245,700 +Anixter International Inc.... 3,439,727 4,484,025 1.0
500,200 +Aspen Technology, Inc........ 5,887,785 5,814,825 1.3
264,900 Bell Industries, Inc.......... 2,382,050 1,175,494 0.3
194,800 +Black Box Corporation........ 5,638,287 9,764,350 2.1
60,226 +Brite Voice Systems, Inc..... 496,747 839,400 0.2
100,000 +C.P. Clare Corporation....... 1,272,312 531,250 0.1
164,100 +Cognos, Inc.................. 3,894,667 3,569,175 0.8
171,600 +The DII Group, Inc........... 3,871,462 6,359,925 1.4
592,700 +DSP Communications, Inc...... 8,864,539 17,114,212 3.7
231,700 +Harbinger Corporation........ 1,369,493 2,881,769 0.6
852,900 +Mentor Graphics Corporation.. 9,321,032 10,874,475 2.4
120,000 +NetManage, Inc............... 310,699 255,000 0.1
359,800 +Phoenix Technologies Ltd. ... 4,884,764 6,386,450 1.4
374,900 +Planar Systems Inc........... 3,970,037 2,858,613 0.6
45,200 +Rational Software
Corporation................. 668,612 1,488,775 0.3
191,000 +Read-Rite Corporation........ 2,245,023 1,181,813 0.3
282,600 Sensormatic Electronics
Corporation................. 2,495,833 3,938,738 0.9
126,500 +Sterling Commerce, Inc....... 3,797,408 4,617,250 1.0
31,000 +Storage Technology
Corporation................. 1,050,357 705,250 0.2
463,951 +Structural Dynamics Research
Corporation................. 7,840,419 8,438,109 1.8
29,300 +Summit Technology, Inc....... 469,679 644,600 0.1
633,900 +Sybase, Inc.................. 8,675,349 6,933,281 1.5
318,200 Telxon Corporation............ 6,157,585 2,525,713 0.5
64,500 +TriQuint Semiconductor,
Inc......................... 1,239,085 3,664,406 0.8
------------ ------------ -----
90,242,951 107,046,898 23.4
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES 316,600 +Applied Digital Access,
Inc......................... 2,460,145 1,404,912 0.3
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 413,686,023 416,702,820 90.9
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
254
<PAGE> 256
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1a) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER*** $ 7,000,000 CSW Credit Inc., 5.20% due
7/12/1999................... $ 6,987,867 $ 6,987,867 1.5%
15,000,000 Formosa Plastics Corporation,
4.89% due 7/21/1999......... 14,957,213 14,957,213 3.3
19,067,000 General Motors Acceptance
Corp., 5.63% due
7/01/1999................... 19,064,018 19,064,018 4.1
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 41,009,098 41,009,098 8.9
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............. $454,695,121 457,711,918 99.8
============
OTHER ASSETS LESS
LIABILITIES................. 814,343 0.2
------------ -----
NET ASSETS.................... $458,526,261 100.0%
============ =====
- -----------------------------------------------------------------------------------------------------------------------
</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
reflect the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
255
<PAGE> 257
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$454,695,121) (Note
1a)....................................................... $457,711,918
Receivables:
Securities sold........................................... $4,499,134
Dividends................................................. 96,389
Capital shares sold....................................... 75,261 4,670,784
----------
Prepaid expenses and other assets........................... 31,776
------------
Total assets................................................ 462,414,478
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 3,224,746
Investment adviser (Note 2)............................... 303,137
Capital shares redeemed................................... 292,799
Distributor (Note 2)...................................... 251 3,820,933
----------
Accrued expenses and other liabilities...................... 67,284
------------
Total liabilities........................................... 3,888,217
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $458,526,261
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... $ 2,132,759
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized......................................... 9,338
Paid-in capital in excess of par............................ 458,984,918
Undistributed investment income--net........................ 753,646
Accumulated realized capital losses on investments--net..... (6,371,197)
Unrealized appreciation on investments--net................. 3,016,797
------------
NET ASSETS.................................................. $458,526,261
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $456,527,567 and 21,327,590
shares outstanding........................................ $ 21.41
============
Class B--Based on net assets of $1,998,694 and 93,385 shares
outstanding............................................... $ 21.40
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
256
<PAGE> 258
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1c & 1d):
Interest and discount earned................................ $ 1,295,689
Dividends................................................... 1,176,588
-----------
Total income................................................ 2,472,277
-----------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........................... $1,583,899
Accounting services (Note 2)................................ 46,978
Custodian fees.............................................. 27,860
Printing and shareholder reports............................ 26,289
Professional fees........................................... 22,279
Directors' fees and expenses................................ 5,061
Transfer agent fees (Note 2)................................ 2,712
Distribution fees--Class B (Note 2)......................... 1,069
Pricing services............................................ 253
Other....................................................... 2,233
----------
Total expenses.............................................. 1,718,633
-----------
Investment income--net...................................... 753,644
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES
1b, 1d & 3):
Realized loss on investments--net........................... (5,243,974)
Change in unrealized appreciation/depreciation on
investments--net.......................................... 81,588,534
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $77,098,204
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
257
<PAGE> 259
- --------------------------------------------------------------------------------
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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 753,644 $ 625,435
Realized gain (loss) on investments--net.................... (5,243,974) 44,232,014
Change in unrealized appreciation/depreciation on
investments--net.......................................... 81,588,534 (71,727,863)
------------ -------------
Net increase (decrease) in net assets resulting from
operations................................................ 77,098,204 (26,870,414)
------------ -------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1e):
Investment income--net:
Class A................................................... (624,748) (1,476,063)
Class B................................................... (670) (726)
Realized gain on investments--net:
Class A................................................... (44,936,283) (109,791,778)
Class B................................................... (128,283) (56,535)
------------ -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (45,689,984) (111,325,102)
------------ -------------
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital
share transactions........................................ (20,666,514) 104,118,352
------------ -------------
- --------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 10,741,706 (34,077,164)
Beginning of period......................................... 447,784,555 481,861,719
------------ -------------
End of period*.............................................. $458,526,261 $ 447,784,555
============ =============
- --------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 753,646 $ 625,420
============ =============
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
258
<PAGE> 260
- --------------------------------------------------------------------------------
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, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 19.95 $ 27.75 $ 26.22 $ 27.98 $ 19.26
-------- -------- -------- -------- --------
Investment income--net................................. .03 .03 .09 .13 .17
Realized and unrealized gain (loss) on
investments--net..................................... 3.47 (1.41) 2.80 1.84 8.64
-------- -------- -------- -------- --------
Total from investment operations....................... 3.50 (1.38) 2.89 1.97 8.81
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................... (.03) (.09) (.08) (.14) (.09)
Realized gain on investments--net.................... (2.01) (6.33) (1.28) (3.59) --
-------- -------- -------- -------- --------
Total dividends and distributions...................... (2.04) (6.42) (1.36) (3.73) (.09)
-------- -------- -------- -------- --------
Net asset value, end of period......................... $ 21.41 $ 19.95 $ 27.75 $ 26.22 $ 27.98
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..................... 19.58%++ (6.50%) 11.72% 8.11% 45.90%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... .81%* .81% .80% .81% .81%
======== ======== ======== ======== ========
Investment income--net................................. .36%* .13% .32% .50% .72%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $456,527 $446,510 $481,614 $453,029 $339,921
======== ======== ======== ======== ========
Portfolio turnover..................................... 38.10% 56.29% 147.06% 80.84% 96.79%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
259
<PAGE> 261
- --------------------------------------------------------------------------------
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 FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED YEAR ENDED OCTOBER 23, 1997+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $19.94 $ 27.74 $ 31.23
------ ------- -------
Investment income--net.................................. .02 --+++ (.01)
Realized and unrealized gain (loss) on
investments--net...................................... 3.46 (1.39) (3.48)
------ ------- -------
Total from investment operations........................ 3.48 (1.39) (3.49)
------ ------- -------
Less dividends and distributions:
Investment income--net................................ (.01) (.08) --
Realized gain on investments--net..................... (2.01) (6.33) --
------ ------- -------
Total dividends and distributions....................... (2.02) (6.41) --
------ ------- -------
Net asset value, end of period.......................... $21.40 $ 19.94 $ 27.74
====== ======= =======
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................... 19.48%++ (6.52%) (11.18%)++
====== ======= =======
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................ .96%* .97% .96%*
====== ======= =======
Investment income (loss)--net........................... .21%* .02% (.24%)*
====== ======= =======
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $1,999 $ 1,275 $ 248
====== ======= =======
Portfolio turnover...................................... 38.10% 56.29% 147.06%
====== ======= =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
++ Aggregate total investment return.
See Notes to Financial Statements.
260
<PAGE> 262
- --------------------------------------------------------------------------------
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.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles, which may require the use of management accruals
and estimates. 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 that 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 that
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. In the case of options traded in the over-the-counter
market, valuation is the last asked price. Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(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.
261
<PAGE> 263
- --------------------------------------------------------------------------------
("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 the
"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, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $67,894 in commissions on the
execution of portfolio security transactions.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 1999 were $144,292,359 and $174,302,051, respectively.
Net realized losses for the six months ended June 30, 1999 and net unrealized
gains as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Realized Unrealized
Losses Gains
- -----------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $(5,243,895) $3,016,797
Short-term investments................ (79) --
----------- ----------
Total................................. $(5,243,974) $3,016,797
=========== ==========
- -----------------------------------------------------------------
</TABLE>
At June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $3,016,797, of which $67,806,222 related to appreciated securities
and $64,789,425 related to depreciated securities. At June 30, 1999, the
aggregate cost of investments for Federal income tax purposes was $454,695,121.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $(20,666,514) and $104,118,352 for the six months ended June 30, 1999 and
the year ended December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 497,554 $ 9,747,537
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 2,558,171 45,561,031
---------- ------------
Total issued.......................... 3,055,725 55,308,568
Shares redeemed....................... (4,109,303) (76,530,403)
---------- ------------
Net decrease.......................... (1,053,578) $(21,221,835)
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 3,050,526 $ 58,185,991
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 5,216,495 111,267,844
---------- ------------
Total issued......................... 8,267,021 169,453,835
Shares redeemed...................... (3,241,298) (66,488,266)
---------- ------------
Net increase......................... 5,025,723 $102,965,569
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Class B Shares for the Six Months Ended Dollar
June 30, 1999 Shares Amount
- -------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 31,353 $ 595,779
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 7,236 128,953
---------- ------------
Total issued.......................... 38,589 724,732
Shares redeemed....................... (9,097) (169,411)
---------- ------------
Net increase.......................... 29,492 $ 555,321
========== ============
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class B Shares for the Year Ended Dollar
December 31, 1998 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 66,283 $ 1,367,600
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 2,686 57,259
---------- ------------
Total issued......................... 68,969 1,424,859
Shares redeemed...................... (14,012) (272,076)
---------- ------------
Net increase......................... 54,957 $ 1,152,783
========== ============
- -----------------------------------------------------------------
</TABLE>
262
<PAGE> 264
- ---------------------------------------------------------
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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
- --------------------------------------
After more than 20 years of service,
Arthur Zeikel recently retired as
Chairman of Merrill Lynch Asset
Management, L.P. (MLAM). Mr. Zeikel
served as President of MLAM from 1977
to 1997 and as Chairman since December
1997. Mr. Zeikel is one of the
country's most respected leaders in
asset management and presided over the
growth of Merrill Lynch's asset
management business. During his
tenure, client assets under management
grew from $300 million to over $500
billion. Mr. Zeikel will remain on
Merrill Lynch Variable Series Funds,
Inc.'s Board of Directors. We are
pleased to announce that Terry K.
Glenn has been elected President and
Director of the Fund. Mr. Glenn has
held the position of Executive Vice
President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join
the Company's Board of Directors in
wishing him well in his retirement
from Merrill Lynch and are pleased
that he will continue as a member of
the Company's Board of Directors.
- --------------------------------------
DIRECTORS AND OFFICERS
Terry K. Glenn
President
Joe Grills
Director
Walter Mintz
Director
Robert S. Salomon Jr.
Director
Melvin R. Seiden
Director
Stephen B. Swensrud
Director
Arthur Zeikel
Director
Christopher G. Ayoub
Senior Vice President
R. Elise Baum
Senior Vice President
Lawrence R. Fuller
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
David Chesney
Vice President
Robert F. Murray
Vice President
Jacqueline L. Rogers
Vice President
Donald C. Burke
Vice President and
Treasurer
Allan J. Oster
Secretary
---------------------------------------
Gerald M. Richard, Treasurer and Norman
R. Harvey, Senior Vice President of
Merrill Lynch, Variable Series Funds,
Inc. have recently retired. Their
colleagues at Merrill Lynch Asset
Management, L.P. join the Company's
Board of Directors in wishing Mr.
Richard and Mr. Harvey well in their
retirements.
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<PAGE> 265
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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. An investment
in the Domestic Money Market Fund and Reserve Assets Fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation, any other Government
agency or MLAM. Although the money market Funds seek to preserve your investment
at $1.00 per share, it is possible to lose money by investing in the Funds.
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
#16897-6/99
