<PAGE> 1
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE
-------------------------------------------------------------------------
SERIES FUNDS, INC.
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Balanced Fund................ 1
Basic Value Focus Fund................ 14
Capital Focus Fund.................... 28
Developing Capital Markets Focus
Fund................................ 43
Domestic Money Market Fund............ 64
Global Bond Focus Fund................ 75
Global Growth Focus Fund.............. 89
Global Strategy Focus Fund............ 104
Global Utility Focus Fund............. 122
Government Bond Fund.................. 136
High Current Income Fund.............. 148
Index 500 Fund........................ 165
International Equity Focus Fund....... 180
Natural Resources Focus Fund.......... 202
Prime Bond Fund....................... 215
Quality Equity Fund................... 230
Reserve Assets Fund...................
Special Value Focus Fund.............. 243
</TABLE>
Annual Report
December 31, 1999
<PAGE> 2
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the 30-year
Treasury bond yield hit a two-year high over concerns of the continued strength
of the economy and potential future action by the Federal Reserve Board.
FISCAL YEAR IN REVIEW
For the year ended December 31, 1999, the Fund's Class A Shares had a total
return of +8.73%. This compares to the +21.04% total return for the Standard &
Poor's 500 Index for the same 12-month period.
As was the case in 1998, the US equity sector had a positive impact on Fund
returns during the fiscal year ended December 31, 1999. The stock market again
was characterized by the significant outperformance of a narrow group of
equities, specifically the shares of technology companies. The Fund benefited
because we had allocated the largest portion of its equity assets to the
technology sector during the year. However, the Fund's return was held down by
the negative overall return produced by US fixed-income securities for the year
as a whole.
PORTFOLIO MATTERS
As of December 31, 1999, the Fund's asset allocation was: US stocks, 55% of
net assets; US bonds, 39%; and cash reserves, 6%.
We increased the Fund's US equity representation slightly from 52% of net
assets to 55% during the six months ended December 31, 1999. Technology remained
the largest single group represented in the portfolio, accounting for nearly
one-third of the Fund's US equity assets. This commitment reflects our
continuing emphasis on the shares of companies where we believe a consistent and
above-average rate of earnings growth will be extended over the next several
years and where valuations appear reasonable relative to earnings growth
potential. Consistent with this focus are the Fund's significant commitments in
consumer staples, communication services, financials and health care.
We reduced the Fund's commitment to US bonds from 44% of net assets to 39%
during the six months ended December 31, 1999. Late in 1999, we took advantage
of an interest rate rise to extend the Fund's average duration to 6.7 years,
after reducing the duration earlier in the second half of 1999. In our opinion,
the Federal Reserve Board is likely to tighten monetary policy in 2000 until the
US economy slows down. Such a slowdown will ease fears of a resurgence of
inflation and enable intermediate-term--long-term US interest rates to decline,
in our view.
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
February 7, 2000
1
<PAGE> 3
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Standard & Poor's 500 Index and a
Weighted Index. Beginning and ending values are:
<TABLE>
<CAPTION>
12/89 12/99
<S> <C> <C>
American Balanced Fund+--
Class A Shares* $10,000 $26,910
Standard & Poor's 500 Index++ $10,000 $53,277
Weighted Index+++ $10,000 $27,062
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
+American Balanced Fund invests in a balanced portfolio of fixed-income and
equity securities.
++This unmanaged broad-based Index is comprised of US common stocks.
+++This unmanaged Index, which is an equally weighted blend of the Three-Month
Treasury Bill Index, the Merrill Lynch US Corporate and Government Master Index
and the S&P 500 Index, is comprised of US Treasury bills maturing in up to three
months, investment-grade bonds and common stocks.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 + 8.73%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +13.90
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/99 +10.41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +3.98% +8.73%
- -----------------------------------------------------------------------------------------
</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 DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE 13,645 United Technologies Corporation........... $ 886,925 0.5%
- ----------------------------------------------------------------------------------------------------------------------
APPLICATION DEVELOPMENT 13,700 +Siebel Systems, Inc. .................... 1,154,225 0.7
SOFTWARE
- ----------------------------------------------------------------------------------------------------------------------
BANKING 12,871 Bank of America Corporation............... 645,963 0.4
17,800 The Bank of New York Company, Inc. ....... 712,000 0.4
5,200 The Chase Manhattan Corporation........... 403,975 0.3
------------ -----
1,761,938 1.1
- ----------------------------------------------------------------------------------------------------------------------
BEVERAGES 19,900 The Coca-Cola Company..................... 1,159,175 0.7
38,000 PepsiCo, Inc. ............................ 1,339,500 0.8
------------ -----
2,498,675 1.5
- ----------------------------------------------------------------------------------------------------------------------
BROADCASTING--CABLE 50,018 +AT&T Corp.--Liberty Media Group (Class
A)...................................... 2,838,521 1.7
6,900 +UnitedGlobalCom Inc. (Class A)........... 484,725 0.3
------------ -----
3,323,246 2.0
- ----------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 13,600 +American Tower Corporation (Class A)..... 415,650 0.2
- ----------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 3,100 +Oracle Corporation....................... 347,200 0.2
- ----------------------------------------------------------------------------------------------------------------------
CABLE 73,800 +Charter Communications, Inc. (Class A)... 1,614,375 1.0
- ----------------------------------------------------------------------------------------------------------------------
CHEMICALS 12,550 E.I. du Pont de Nemours and Company....... 826,731 0.5
27,000 Rohm and Haas Company..................... 1,098,563 0.7
------------ -----
1,925,294 1.2
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 9,350 +Convergys Corporation.................... 287,512 0.2
- ----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 40,575 +MCI WorldCom Inc. ....................... 2,150,475 1.3
- ----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 5,400 +America Online, Inc. .................... 407,362 0.2
38,150 +Cisco Systems, Inc. ..................... 4,084,434 2.5
------------ -----
4,491,796 2.7
- ----------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 1,700 +i2 Technologies, Inc. ................... 330,863 0.2
5,400 +Symantec Corporation..................... 316,575 0.2
1,000 +Yahoo! Inc. ............................. 432,688 0.2
------------ -----
1,080,126 0.6
- ----------------------------------------------------------------------------------------------------------------------
COMPUTERS 9,400 Compaq Computer Corporation............... 254,387 0.1
7,400 +EMC Corporation.......................... 808,450 0.5
3,000 +Gateway Inc. ............................ 216,187 0.1
12,485 International Business Machines
Corporation............................. 1,348,380 0.8
16,200 +Sun Microsystems, Inc. .................. 1,253,475 0.8
22,900 Tandy Corporation......................... 1,126,394 0.7
------------ -----
5,007,273 3.0
- ----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 22,900 The Dial Corporation...................... 556,756 0.4
12,300 Honeywell International Inc. ............. 709,556 0.4
------------ -----
1,266,312 0.8
- ----------------------------------------------------------------------------------------------------------------------
COSMETICS 17,700 The Gillette Company...................... 729,019 0.4
- ----------------------------------------------------------------------------------------------------------------------
ELECTRIC & GAS 22,400 +Calpine Corporation...................... 1,433,600 0.9
- ----------------------------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS 6,800 +The AES Corporation...................... 508,300 0.3
- ----------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 18,170 General Electric Company.................. 2,811,808 1.7
13,150 Intel Corporation......................... 1,081,588 0.7
12,790 Motorola, Inc. ........................... 1,883,328 1.1
------------ -----
5,776,724 3.5
- ----------------------------------------------------------------------------------------------------------------------
ELECTRONICS 1,200 +Broadcom Corporation (Class A)........... 326,775 0.2
4,700 Texas Instruments Incorporated............ 455,313 0.3
------------ -----
782,088 0.5
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL SERVICES 10,400 Associates First Capital Corporation
(Class A)............................... $ 285,350 0.2%
29,400 Citigroup Inc. ........................... 1,633,537 1.0
22,200 Wells Fargo Company....................... 897,713 0.5
------------ -----
2,816,600 1.7
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--CONSUMER 14,400 Household International, Inc. ............ 536,400 0.3
- ----------------------------------------------------------------------------------------------------------------------
FOOD 32,900 +Keebler Foods Company.................... 925,313 0.6
- ----------------------------------------------------------------------------------------------------------------------
HEALTHCARE--PRODUCTS & 19,700 Columbia/HCA Healthcare Corporation....... 577,456 0.3
SERVICES
- ----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 16,600 Colgate-Palmolive Company................. 1,079,000 0.6
7,100 The Procter & Gamble Company.............. 777,894 0.5
------------ -----
1,856,894 1.1
- ----------------------------------------------------------------------------------------------------------------------
INFORMATION PROCESSING 16,800 +Unisys Corporation....................... 536,550 0.3
- ----------------------------------------------------------------------------------------------------------------------
INSURANCE 14,200 AXA Financial, Inc. ...................... 481,025 0.3
6,000 American International Group, Inc. ....... 648,750 0.4
6,800 +Clear Channel Communications, Inc. ...... 606,900 0.3
------------ -----
1,736,675 1.0
- ----------------------------------------------------------------------------------------------------------------------
INTERNETWORKING 1,100 +InfoSpace.com, Inc. ..................... 235,331 0.1
3,200 +Inktomi Corporation...................... 283,600 0.2
1,900 +Internet Capital Group, Inc. ............ 322,169 0.2
------------ -----
841,100 0.5
- ----------------------------------------------------------------------------------------------------------------------
LASER SYSTEMS & COMPONENTS 22,600 +JDS Uniphase Corporation................. 3,644,250 2.2
- ----------------------------------------------------------------------------------------------------------------------
MACHINERY 4,400 Caterpillar Inc. ......................... 207,075 0.1
- ----------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 13,550 Johnson & Johnson......................... 1,261,844 0.8
- ----------------------------------------------------------------------------------------------------------------------
METAL 21,400 Alcoa Inc. ............................... 1,776,200 1.1
- ----------------------------------------------------------------------------------------------------------------------
NATURAL GAS 30,700 Enron Corp. .............................. 1,362,312 0.8
- ----------------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES 19,300 Burlington Resources Inc. ................ 638,106 0.4
- ----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 15,974 Exxon Mobil Corporation................... 1,286,890 0.8
34,000 Shell Transport & Trading Company
(ADR)(a)................................ 1,674,500 1.0
------------ -----
2,961,390 1.8
- ----------------------------------------------------------------------------------------------------------------------
OIL SERVICES 15,900 Schlumberger Limited...................... 894,375 0.5
3,078 Transocean Sedco Forex Inc. .............. 103,698 0.1
------------ -----
998,073 0.6
- ----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 18,600 International Paper Company............... 1,049,738 0.6
- ----------------------------------------------------------------------------------------------------------------------
PETROLEUM 20,700 Unocal Corporation........................ 694,744 0.4
- ----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 7,950 American Home Products Corporation........ 313,528 0.2
24,150 Bristol-Myers Squibb Company.............. 1,550,128 0.9
16,300 Cardinal Health, Inc. .................... 780,362 0.5
2,700 Eli Lilly and Company..................... 179,550 0.1
19,200 Merck & Co., Inc. ........................ 1,287,600 0.8
25,100 Pfizer Inc. .............................. 814,181 0.5
7,600 Pharmacia & Upjohn, Inc. ................. 342,000 0.2
------------ -----
5,267,349 3.2
- ----------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 31,100 +AMFM Inc. ............................... 2,433,575 1.5
- ----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 22,800 McDonald's Corporation.................... 919,125 0.6
- ----------------------------------------------------------------------------------------------------------------------
RETAIL 12,400 +Federated Department Stores, Inc. ....... 626,975 0.4
19,800 Lowe's Companies, Inc. ................... 1,183,050 0.7
28,400 +Safeway Inc. ............................ 1,009,975 0.6
24,800 Wal-Mart Stores, Inc. .................... 1,714,300 1.0
------------ -----
4,534,300 2.7
- ----------------------------------------------------------------------------------------------------------------------
SCIENTIFIC EQUIPMENT 14,100 Millipore Corporation..................... 544,613 0.3
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOFTWARE 30,950 +Microsoft Corporation.................... $ 3,611,478 2.2%
9,000 +Network Associates, Inc. ................ 239,625 0.1
------------ -----
3,851,103 2.3
- ----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 11,000 +3Com Corporation......................... 516,313 0.3
45,107 AT&T Corp. ............................... 2,289,180 1.4
7,400 +Adelphia Business Solutions, Inc. ....... 350,112 0.2
11,900 +Amdocs Limited........................... 410,550 0.2
34,000 GTE Corporation........................... 2,399,125 1.4
13,200 +Global TeleSystems Group, Inc. .......... 457,050 0.3
10,150 Lucent Technologies Inc. ................. 759,347 0.4
------------ -----
7,181,677 4.2
- ----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION SERVICES 4,400 United Parcel Service, Inc. (Class B)..... 303,600 0.2
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATION 40,928 SBC Communications Inc. .................. 1,995,221 1.2
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 21,500 Public Service Enterprise Group
Incorporated............................ 748,469 0.4
- ----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATION-- 8,000 +Nextel Communications, Inc. (Class A).... 824,500 0.5
DOMESTIC PAGING & CELLULAR
6,400 +Sprint Corp. (PCS Group)................. 656,000 0.4
------------ -----
1,480,500 0.9
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$65,531,737) 91,121,005 54.7
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT FIXED-INCOME INVESTMENTS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL SERVICES $ 3,000,000 General Electric Capital Corp., 8.75% due
5/21/2007............................... 3,240,720 2.0
- ----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 1,384,103 Federal Home Loan Mortgage Corporation
MORTGAGE-BACKED OBLIGATIONS* Participation Certificates--
Gold Program #10036, 7.50%
due 6/01/2007........................... 1,399,289 0.8
- ----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY Federal National Mortgage Association:
OBLIGATIONS
7,760,000 5.625% due 3/15/2001...................... 7,688,453 4.6
5,550,000 5.25% due 1/15/2009....................... 4,895,267 2.9
24,000,000 6.375% due 6/15/2009...................... 22,916,160 13.8
US Treasury Bonds:
2,500,000 5.25% due 11/15/2028...................... 2,059,375 1.2
14,700,000 6.125% due 8/15/2029...................... 14,013,216 8.4
US Treasury Notes:
4,800,000 5% due 4/30/2001.......................... 4,729,488 2.9
3,800,000 5.75% due 6/30/2001....................... 3,776,250 2.3
------------ -----
60,078,209 36.1
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
(COST--$66,589,689) 64,718,218 38.9
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Face
AMOUNT SHORT-TERM SECURITIES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER** $ 4,284,000 General Motors Acceptance Corp., 5% due
1/03/2000............................... $ 4,282,215 2.6%
- ----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 5,500,000 Federal Home Loan Mortgage Corporation,
OBLIGATIONS** 5.70% due 1/14/2000..................... 5,487,808 3.3
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$9,770,023) 9,770,023 5.9
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$141,891,449).... 165,609,246 99.5
OTHER ASSETS LESS LIABILITIES............. 796,133 0.5
------------ -----
NET ASSETS................................ $166,405,379 100.0%
============ =====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
** 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.
+ 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 DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$141,891,449)....... $165,609,246
Cash........................................................ 1,758
Receivables:
Securities sold........................................... $8,649,748
Interest.................................................. 760,893
Dividends................................................. 57,371 9,468,012
----------
Prepaid expenses and other assets........................... 12,561
------------
Total assets................................................ 175,091,577
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 8,522,867
Investment adviser........................................ 86,330
Capital shares redeemed................................... 49,810 8,659,007
----------
Accrued expenses and other liabilities...................... 27,191
------------
Total liabilities........................................... 8,686,198
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $166,405,379
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 1,124,124
Paid-in capital in excess of par............................ 140,283,134
Undistributed investment income--net........................ 2,043
Undistributed realized capital gains on investments--net.... 1,278,281
Unrealized appreciation on investments--net................. 23,717,797
------------
NET ASSETS.................................................. $166,405,379
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $166,405,379 and 11,241,243
shares outstanding........................................ $ 14.80
============
- ---------------------------------------------------------------------------------------
</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 YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 4,892,065
Dividends (net of $4,600 foreign withholding tax)........... 830,242
-----------
Total income................................................ 5,722,307
-----------
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $951,542
Accounting services......................................... 31,530
Custodian fees.............................................. 24,602
Professional fees........................................... 24,347
Printing and shareholder reports............................ 14,198
Transfer agent fees......................................... 5,011
Directors' fees and expenses................................ 4,001
Pricing services............................................ 1,012
Other....................................................... 2,985
--------
Total expenses.............................................. 1,059,228
-----------
Investment income--net...................................... 4,663,079
-----------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized gain on investments--net........................... 11,119,754
Change in unrealized appreciation on investments--net....... (1,634,882)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $14,147,951
===========
- -------------------------------------------------------------------------------------
</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 YEAR ENDED
DECEMBER 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 4,663,079 $ 4,504,403
Realized gain on investments--net........................... 11,119,754 16,072,309
Change in unrealized appreciation on investments--net....... (1,634,882) 3,510,679
------------ ------------
Net increase in net assets resulting from operations........ 14,147,951 24,087,391
------------ ------------
- ------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (9,159,666) (6,345,486)
Realized gain on investments--net:
Class A................................................... (25,700,159) (15,410,418)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (34,859,825) (21,755,904)
------------ ------------
- ------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ 32,782 (9,994,020)
------------ ------------
- ------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (20,679,092) (7,662,533)
Beginning of year........................................... 187,084,471 194,747,004
------------ ------------
End of year*................................................ $166,405,379 $187,084,471
============ ============
- ------------------------------------------------------------------------------------------
* Undistributed investment income--net................... $ 2,043 $ 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
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. --------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................... $ 16.74 $ 16.59 $ 16.01 $ 15.17 $ 13.08
-------- -------- -------- -------- --------
Investment income--net................................... .45 .40 .54 .53 .59
Realized and unrealized gain on investments--net......... .83 1.60 1.87 .89 2.06
-------- -------- -------- -------- --------
Total from investment operations......................... 1.28 2.00 2.41 1.42 2.65
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net................................. (.85) (.54) (.27) (.56) (.56)
Realized gain on investments--net...................... (2.37) (1.31) (1.56) (.02) --
-------- -------- -------- -------- --------
Total dividends and distributions........................ (3.22) (1.85) (1.83) (.58) (.56)
-------- -------- -------- -------- --------
Net asset value, end of year............................. $ 14.80 $ 16.74 $ 16.59 $ 16.01 $ 15.17
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....................... 8.73% 13.56% 17.11% 9.73% 20.81%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. .61% .62% .60% .60% .61%
======== ======== ======== ======== ========
Investment income--net................................... 2.70% 2.37% 3.17% 3.39% 4.22%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................... $166,405 $187,084 $194,747 $212,047 $212,912
======== ======== ======== ======== ========
Portfolio turnover....................................... 105.48% 102.47% 136.71% 236.50% 38.40%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
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. 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.
(f) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $5,764 have been reclassified between undistributed net
realized capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
11
<PAGE> 13
- --------------------------------------------------------------------------------
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 .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 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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $16,293 in commissions
on the execution of portfolio security transactions
For the year ended December 31, 1999, Merrill Lynch Security Pricing Service,
an 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
year ended December 31, 1999 were $174,637,275 and $205,824,078, respectively.
Net realized gains for the year ended December 31, 1999 and net unrealized
gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $11,119,754 $23,717,797
----------- -----------
Total.................................. $11,119,754 $23,717,797
=========== ===========
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $23,613,687, of which $27,855,267 related to appreciated
securities and $4,241,580 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$141,995,559.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- ------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 86,550 $ 1,314,138
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 2,357,608 34,859,825
---------- ------------
Total issued........................... 2,444,158 36,173,963
Shares redeemed........................ (2,378,305) (36,141,181)
---------- ------------
Net increase........................... 65,853 $ 32,782
========== ============
- ------------------------------------------------------------------
</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.--AMERICAN BALANCED FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
AMERICAN BALANCED FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of American Balanced Fund of Merrill Lynch Variable
Series Funds, Inc. as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and broker. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Balanced
Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
13
<PAGE> 15
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the 30-year
Treasury bond yield hit a two-year high over concerns of the continued strength
of the economy and potential future action by the Federal Reserve Board.
FISCAL YEAR IN REVIEW
Basic Value Focus Fund enjoyed a particularly good year in terms of
performance, especially in light of the continued challenging environment for
value investing. During the fiscal year ended December 31, 1999, the Fund's
Class A and Class B Shares had total returns of +21.12% and +20.97%,
respectively, matching the total return of 21.04% for the unmanaged Standard &
Poor's 500 Index. The Fund outperformed the average total return of +14.79% of
the Lipper Variable Annuity Growth and Income group for the same period. We
achieved this performance as a result of a substantial positive impact from our
holdings in select technology stocks. For example, Integrated Device Technology,
Inc., a leading semiconductor communication maker, posted a 383% stock price
gain in 1999. Motorola, Inc.'s stock advanced 141% in response to the boom in
sales of wireless handsets. Our longstanding Novell, Inc. holding appreciated
117% following the company's continued turnaround. Our ownership of
Hewlett-Packard Company, International Business Machines Corporation and 3Com
Corporation also aided performance.
Financials, including both banks and insurance companies, were poor performers
as a result of rising interest rates and company-specific earning shortfalls. We
carried an underweight position in the group for most of the year, but began to
significantly add to our holdings in the fourth quarter. We believe the stage is
set for accelerated bank and insurance company consolidation in 2000 following
recent Government deregulation and the expiration of pooling accounting on
December 31, 2000. Positions in financials that we either added to or initiated
during the period included Bank One Corporation, First Union Corporation, Ace
Limited, The Allstate Corporation, Mellon Financial Corporation, UnumProvident
Corporation, The CIT Group, Inc., Associates First Capital Corporation and The
St. Paul Companies Inc. All of these companies were trading at attractive
valuations, and we expect a more favorable environment for financials in 2000.
Other new positions included Crown Cork & Seal Company, Inc., Sara Lee
Corporation, Columbia/HCA Healthcare Corporation, Burlington Resources Inc.,
Sunoco, Inc., Unisys Corporation, SBC Communications Inc., American National
Insurance Company, Becton, Dickinson and Company and American Home Products
Corporation. In addition, we bought and sold United Parcel Services Inc. and
Agilent Technologies Inc. during the period.
IN CONCLUSION
Thank you for your investment in Basic Value Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to serving your investment
needs in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Kevin M. Rendino
Kevin Rendino
Senior Vice President and Portfolio Manager
February 7, 2000
14
<PAGE> 16
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A AND CLASS B SHARES
- --------------------------------------------------------------------------------
[VARIABLE SERIES BASIC VALUE FOCUS GRAPH]
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Standard & Poor's 500 Index and the
Lipper Multi-Cap Value Average. Beginning and ending values are:
<TABLE>
<CAPTION>
7/01/93** 12/99
<S> <C> <C>
Basic Value Focus Fund+--
Class A Shares* $10,000 $27,142
Standard & Poor's 500 Index++ $10,000 $37,465
Lipper Multi-Cap Value Average $10,000 $25,045
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class B Shares
compared to growth of an investment in the Standard & Poor's 500 Index and the
Lipper Multi-Cap Value Average. Beginning and ending values are:
<TABLE>
<CAPTION>
11/03/97** 12/99
<S> <C> <C>
Basic Value Focus Fund+--
Class B Shares* $10,000 $13,178
Standard & Poor's 500 Index++ $10,000 $16,133
Lipper Multi-Cap Value Average $10,000 $12,010
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+Basic Value Focus Fund invests primarily in equities that Fund management
believes are undervalued.
++This unmanaged broad-based Index is comprised of common stocks.
+++This average is comprised of funds that seek long-term growth
of capital by investing in companies that are considered to be undervalued
relative to a major unmanaged stock index based on price/current earnings, book
value, asset value, or other factors.
Past performance is not predictive of future performance.
15
<PAGE> 17
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +21.12%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +19.35
- --------------------------------------------------------------------------------
Inception (7/01/93) to 12/31/99 +16.60
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +20.97%
- --------------------------------------------------------------------------------
Inception (11/03/97) to 12/31/99 +13.64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -0.87% +21.12%
- -----------------------------------------------------------------------------------------
Class B Shares -0.94 +20.97
- -----------------------------------------------------------------------------------------
</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.
16
<PAGE> 18
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOW PRICE TO BOOK VALUE
- ----------------------------------------------------------------------------------------------------------------------
INSURANCE 1,450,000 Ace Limited............................... $ 24,196,875 2.3%
BANKING & FINANCIALS 750,000 The Bank of Tokyo Mitsubishi, Ltd.
(ADR)*.................................. 10,453,125 1.0
ENERGY 600,000 Burlington Resources Inc. ................ 19,837,500 1.9
BANKING & FINANCIALS 900,000 The CIT Group, Inc. (Class A)............. 19,012,500 1.8
PAPER & FOREST PRODUCTS 300,000 Champion International Corporation........ 18,581,250 1.7
HEALTHCARE 660,000 Columbia/HCA Healthcare Corporation....... 19,346,250 1.8
SEMICONDUCTORS 600,000 +Integrated Device Technology, Inc. ...... 17,362,500 1.6
AEROSPACE & DEFENSE 760,000 Lockheed Martin Corporation............... 16,625,000 1.6
BASIC INDUSTRIES 500,000 Newmont Mining Corporation................ 12,250,000 1.2
AEROSPACE & DEFENSE 300,000 Northrop Grumman Corporation.............. 16,218,750 1.5
COMPUTER SERVICES 1,500,000 +Scitex Corporation Ltd. (Ordinary)....... 21,562,500 2.0
BEVERAGE & ENTERTAINMENT 350,000 The Seagram Company Ltd. ................. 15,728,125 1.5
INSURANCE 800,000 The St. Paul Companies, Inc. ............. 26,950,000 2.5
ENERGY 500,000 Sunoco, Inc. ............................. 11,750,000 1.1
-------------- -----
249,874,375 23.5
- ----------------------------------------------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO
- ----------------------------------------------------------------------------------------------------------------------
INSURANCE 1,000,000 The Allstate Corporation.................. 24,000,000 2.3
BANKING & FINANCIALS 700,000 Bank One Corporation...................... 22,443,750 2.1
HEALTHCARE 400,260 Becton, Dickinson and Company............. 10,706,955 1.0
BANKING & FINANCIALS 200,000 The Chase Manhattan Corporation........... 15,537,500 1.5
INFORMATION PROCESSING 900,000 Compaq Computer Corporation............... 24,356,250 2.3
CONTAINERS 1,400,000 Crown Cork & Seal Company, Inc. .......... 31,325,000 3.0
FARMING & CONSTRUCTION 400,000 Deere & Company........................... 17,350,000 1.6
EQUIPMENT
AUTOMOTIVE 1,000,000 Delphi Automotive Systems Corporation..... 15,750,000 1.5
OIL SERVICES 700,000 Diamond Offshore Drilling, Inc. .......... 21,393,750 2.0
CHEMICALS 275,000 E.I. du Pont de Nemours and Company....... 18,115,625 1.7
CAPITAL EQUIPMENT 200,000 Eaton Corporation......................... 14,525,000 1.4
ELECTRICAL EQUIPMENT 300,000 Emerson Electric Co. ..................... 17,212,500 1.6
AUTOMOTIVE 200,000 General Motors Corporation................ 14,537,500 1.4
OIL SERVICES 400,000 Halliburton Company....................... 16,100,000 1.5
CHEMICALS 700,000 Hercules Incorporated..................... 19,512,500 1.8
PUBLISHING 400,000 Knight-Ridder, Inc. ...................... 23,800,000 2.2
ELECTRICAL EQUIPMENT 138,000 Koninklijke (Royal) Philips Electronics NV
(NY Registered Shares).................. 18,630,000 1.8
BANKING & FINANCIALS 500,000 Mellon Financial Corporation.............. 17,031,250 1.6
TOBACCO 600,000 Philip Morris Companies Inc. ............. 13,912,500 1.3
FARMING & CONSTRUCTION 400,000 Potash Corporation of Saskatchewan
EQUIPMENT Inc. ................................... 19,275,000 1.8
OIL SERVICES 1,000,000 +Rowan Companies, Inc. ................... 21,687,500 2.0
CONSUMER STAPLES 800,000 Sara Lee Corporation...................... 17,650,000 1.7
TECHNOLOGY 300,000 +Unisys Corporation....................... 9,581,250 0.9
INSURANCE 395,890 UnumProvident Corporation................. 12,693,223 1.2
-------------- -----
437,127,053 41.2
- ----------------------------------------------------------------------------------------------------------------------
ABOVE-AVERAGE YIELD
- ----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 300,000 AT&T Corp. ............................... 15,225,000 1.4
TELECOMMUNICATIONS 450,000 Alcatel (ADR)*............................ 20,250,000 1.9
HEALTHCARE 68,200 American Home Products Corporation........ 2,689,637 0.2
INSURANCE 200,000 American National Insurance Company....... 12,725,000 1.2
UTILITIES 600,000 Cinergy Corp. ............................ 14,475,000 1.4
BANKING & FINANCIALS 600,000 First Union Corporation................... 19,687,500 1.9
TELECOMMUNICATIONS 250,000 GTE Corporation........................... 17,640,625 1.7
FOODS 400,000 General Mills, Inc. ...................... 14,300,000 1.3
BANKING & FINANCIALS 901,064 National City Corporation................. 21,343,953 2.0
COMMUNICATIONS 200,000 SBC Communications Inc. .................. 9,750,000 0.9
</TABLE>
17
<PAGE> 19
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABOVE-AVERAGE YIELD (CONCLUDED)
- ----------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST 601,694 Simon Property Group, Inc. ............... $ 13,801,356 1.3%
ELECTRICAL EQUIPMENT 900,000 Thomas & Betts Corporation................ 28,687,500 2.7
OIL--DOMESTIC 791,000 Unocal Corporation........................ 26,547,938 2.5
-------------- -----
217,123,509 20.4
- ----------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS
- ----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 279,400 +3Com Corporation......................... 13,114,338 1.2
BANKING & FINANCIALS 600,000 Associates First Capital Corporation
(Class A)............................... 16,462,500 1.6
AEROSPACE & DEFENSE 400,000 The Boeing Company........................ 16,625,000 1.6
COMPUTER SERVICES 200,000 Hewlett-Packard Company................... 22,787,500 2.1
INFORMATION PROCESSING 150,378 International Business Machines
Corporation............................. 16,240,824 1.5
TELECOMMUNICATIONS 150,000 Motorola, Inc. ........................... 22,087,500 2.1
SOFTWARE 600,000 +Novell, Inc. ............................ 23,925,000 2.3
-------------- -----
131,242,662 12.4
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS (COST--$1,016,343,611) 1,035,367,599 97.5
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER ** $24,890,000 General Motors Acceptance Corp.,
5% due 1/03/2000........................ 24,879,629 2.3
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$24,879,629) 24,879,629 2.3
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$1,041,223,240).................. 1,060,247,228 99.8
OTHER ASSETS LESS LIABILITIES............. 1,688,683 0.2
-------------- -----
NET ASSETS................................ $1,061,935,911 100.0%
============== =====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* 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.
Categories of companies shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
18
<PAGE> 20
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$1,041,223,240)..... $1,060,247,228
Cash........................................................ 288
Receivables:
Dividends................................................. $2,051,292
Capital shares sold....................................... 659,308 2,710,600
----------
Prepaid expenses and other assets........................... 72,109
--------------
Total assets................................................ 1,063,030,225
--------------
- -----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser........................................ 594,390
Capital shares redeemed................................... 283,574
Securities purchased...................................... 7,475
Distributor............................................... 2,222 887,661
----------
Accrued expenses and other liabilities...................... 206,653
--------------
Total liabilities........................................... 1,094,314
--------------
- -----------------------------------------------------------------------------------------
NET ASSETS.................................................. $1,061,935,911
==============
- -----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized......................................... $ 7,666,773
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized......................................... 140,286
Paid-in capital in excess of par............................ 1,011,814,057
Undistributed investment income--net........................ 2,980
Undistributed realized capital gains on investments--net.... 23,287,827
Unrealized appreciation on investments--net................. 19,023,988
--------------
NET ASSETS.................................................. $1,061,935,911
==============
- -----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $1,042,884,583 and
76,667,730 shares outstanding............................. $ 13.60
==============
Class B--Based on net assets of $19,051,328 and 1,402,863
shares outstanding........................................ $ 13.58
==============
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE> 21
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $208,679 foreign withholding tax)......... $ 15,544,111
Interest and discount earned................................ 4,610,714
------------
Total income................................................ 20,154,825
------------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $5,383,645
Accounting services......................................... 162,285
Printing and shareholder reports............................ 85,921
Professional fees........................................... 85,485
Custodian fees.............................................. 79,426
Registration fees........................................... 71,947
Directors' fees and expenses................................ 17,401
Distribution fees--Class B.................................. 13,945
Transfer agent fees......................................... 4,907
Pricing services............................................ 4,126
Other....................................................... 11,202
----------
Expenses.................................................... 5,920,290
------------
Investment income--net...................................... 14,234,535
------------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET:
Realized gain on investments--net........................... 94,705,059
Change in unrealized appreciation/depreciation on
investments--net.......................................... 45,817,385
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $154,756,979
============
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 22
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 14,234,535 $ 9,493,627
Realized gain on investments--net........................... 94,705,059 118,772,730
Change in unrealized appreciation/depreciation on
investments--net.......................................... 45,817,385 (68,783,241)
-------------- -------------
Net increase in net assets resulting from operations........ 154,756,979 59,483,116
-------------- -------------
- --------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (23,452,307) (7,893,414)
Class B................................................... (272,872) (4,057)
Realized gain on investments--net:
Class A................................................... (187,394,822) (96,299,982)
Class B................................................... (1,741,999) (49,914)
-------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (212,862,000) (104,247,367)
-------------- -------------
- --------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 362,136,699 130,995,545
-------------- -------------
- --------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 304,031,678 86,231,294
Beginning of year........................................... 757,904,233 671,672,939
-------------- -------------
End of year*................................................ $1,061,935,911 $ 757,904,233
============== =============
- --------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 2,980 $ 9,493,624
============== =============
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
21
<PAGE> 23
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. ------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999+ 1998+ 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................... $ 14.67 $ 15.84 $ 14.74 $ 13.10 $ 11.10
---------- -------- -------- -------- --------
Investment income--net............................... .22 .19 .19 .17 .18
Realized and unrealized gain on investments--net..... 2.37 1.10 2.52 2.37 2.49
---------- -------- -------- -------- --------
Total from investment operations..................... 2.59 1.29 2.71 2.54 2.67
---------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................. (.38) (.19) (.09) (.18) (.19)
Realized gain on investments--net.................. (3.28) (2.27) (1.52) (.72) (.48)
---------- -------- -------- -------- --------
Total dividends and distributions.................... (3.66) (2.46) (1.61) (.90) (.67)
---------- -------- -------- -------- --------
Net asset value, end of year......................... $ 13.60 $ 14.67 $ 15.84 $ 14.74 $ 13.10
========== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share................... 21.12% 9.44% 20.62% 20.69% 25.49%
========== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .66% .66% .65% .66% .66%
========== ======== ======== ======== ========
Investment income--net............................... 1.59% 1.26% 1.36% 1.37% 1.68%
========== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)............... $1,042,885 $754,519 $671,325 $524,930 $306,463
========== ======== ======== ======== ========
Portfolio turnover................................... 86.46% 113.44% 95.52% 68.41% 74.10%
========== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
22
<PAGE> 24
- --------------------------------------------------------------------------------
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 FOR THE YEAR
PROVIDED IN THE FINANCIAL STATEMENTS. ENDED FOR THE PERIOD
DECEMBER 31,++ NOVEMBER 3, 1997+
----------------------- TO DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 14.65 $15.84 $15.89
------- ------- ------
Investment income--net............................................. .21 .16 .01
Realized and unrealized gain (loss) on investments--net............ 2.36 1.10 (.06)
------- ------- ------
Total from investment operations................................... 2.57 1.26 (.05)
------- ------- ------
Less dividends and distributions:
Investment income--net........................................... (.36) (.18) --
Realized gain on investments--net................................ (3.28) (2.27) --
------- ------- ------
Total dividends and distributions.................................. (3.64) (2.45) --
------- ------- ------
Net asset value, end of period..................................... $ 13.58 $14.65 $15.84
======= ======= ======
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................................. 20.97% 9.28% (0.31%)++
======= ======= ======
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................................... .81% .82% .82%*
======= ======= ======
Investment income--net............................................. 1.49% 1.12% 1.27%*
======= ======= ======
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................... $19,051 $3,385 $348
======= ======= ======
Portfolio turnover................................................. 86.46% 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.
23
<PAGE> 25
- --------------------------------------------------------------------------------
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. 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. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. The
24
<PAGE> 26
- --------------------------------------------------------------------------------
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 .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 .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 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 expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by MLAM which, in turn, will be reimbursed by MLLA.
For the year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $99,074 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
year ended December 31, 1999 were $940,489,981 and $695,769,340, respectively.
Net realized gains for the year ended December 31, 1999 and net unrealized
gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $94,704,482 $19,023,988
Short-term investments................. 577 --
----------- -----------
Total.................................. $94,705,059 $19,023,988
=========== ===========
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $16,977,379, of which $124,251,868 related to appreciated
securities and $107,274,489 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$1,043,269,849.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$362,136,699 and $130,995,545 for the years ended December 31, 1999 and December
31, 1998, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 14,232,382 $208,442,472
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 16,528,814 210,847,138
---------- ------------
Total issued......................... 30,761,196 419,289,610
Shares redeemed...................... (5,518,194) (73,688,238)
---------- ------------
Net increase......................... 25,243,002 $345,601,372
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Dollar
Ended 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 Year Dollar
Ended December 31, 1999 Shares Amount
- ------------------------------------------------------------------
<S> <C> <C>
Shares sold......................... 1,060,559 $15,129,101
Shares issued to shareholders in
reinvestment of dividends and
distributions...................... 154,375 2,014,871
--------- -----------
Total issued........................ 1,214,934 17,143,972
Shares redeemed..................... (43,045) (608,645)
--------- -----------
Net increase........................ 1,171,889 $16,535,327
========= ===========
- ------------------------------------------------------------------
</TABLE>
25
<PAGE> 27
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class B Shares for the Year Dollar
Ended 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>
26
<PAGE> 28
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
BASIC VALUE FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Basic Value Focus Fund of Merrill Lynch Variable
Series Funds, Inc. as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Basic Value Focus
Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
27
<PAGE> 29
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
The fiscal year ended December 31, 1999 proved to be a challenging one for
Capital Focus Fund. While each individual asset class within the Fund performed
respectably against its benchmark, the value style of investing that we espouse
significantly underperformed the growth style of investing as positive equity
performance remained heavily concentrated in the large-capitalization technology
sector of the market. Outside the technology sector, the broader equity market
struggled. The unmanaged Russell 1000 Value Index rose a mere 7.3% in 1999,
while the unmanaged Russell 1000 Growth Index recorded a +33.2% return and the
technology-laden National Association of Securities Dealers Automated Quotations
Composite Index (NASDAQ) appreciated over 85%. Excluding technology, the average
stock in the Standard & Poor's 500 (S&P 500) Index gained just 2% for the year.
Furthermore, the average stock on the New York Stock Exchange and NASDAQ fell
24% from its 52-week high. While we admire many of these leading technology
companies whose stocks performed so handsomely in 1999, the dauntingly high
valuation levels they commanded in the marketplace largely precluded us from
owning them in the Capital Focus Fund and consequently impaired our relative
performance results for the year. Within the fixed-income portion of the
portfolio, the relatively short average duration we maintained proved
beneficial, as intermediate-term domestic interest rates rose throughout the
year.
MARKET REVIEW
The performance of the US financial markets during the last half of the
six-month period ended December 31, 1999 continued to be dictated by investors'
changing perceptions about the pace of economic growth, the future rate of
inflation and the associated course of action by the Federal Reserve Board. In
early fall, the US equity market continued its summer-long decline as a
weakening of the US dollar against the Japanese yen, a significant widening of
both the trade and current account deficits and a number of high profile
earnings disappointments kept stock prices under pressure. The weak dollar
prompted concerns over threats to Japan's fragile economic recovery and the
potential for accelerated repatriation of US investments. The bulging trade
deficit coupled with rising commodity prices and still robust US economic
activity suggested the Federal Reserve Board could increase short-term interest
rates for the third time this year. Finally, announced earnings shortfalls for
many prominent companies, particularly in the consumer arena, raised concerns
over the sustainability of corporate earnings growth. However, by late fall
evidence of a slowdown in the interest rate-sensitive housing sector, coupled
with declines in durable goods orders and moderate labor cost growth, suggested
inflation remained well-contained and the Federal Reserve Board was unlikely to
increase interest rates again, driving the stock market to a solid advance.
Stocks provided a strong finish to a strong year with a powerful rally in
November and December, driven by a select group of large-capitalization
technology companies whose share prices continued to benefit from expectations
of rapid growth, a cessation of Year 2000-related concerns and the impact of
momentum-driven investors.
While many market indexes approached or exceeded new highs at the end of
December, the broader equity market continued to struggle. Resuscitated global
economies and a doubling in oil prices precipitated inflationary fears and drove
bond yields higher. In addition, the Federal Reserve Board gave clear indication
of its intent to further increase interest rates to moderate economic growth.
Rising interest rates typically compress stock valuations, creating a difficult
condition for the average equity. In addition, the value style of investing
continued to dramatically underperform the growth style of investing. For the
December quarter, the S&P 500 Index generated a +14.88% total return. The US
bond market continued to struggle between the positive implications of
consistently benign inflationary measures and the perceived negative implication
of continued rapid economic growth. Despite record oil price increases and
employment levels, the US gross domestic product deflator did not even muster a
1.5% gain. Investors continued to believe strong economic growth would prove
inflationary, and bid the yield on long-term Treasury bonds to a 27-month high.
As a result, for the six-month period the unmanaged Merrill Lynch Domestic Bond
Master Index recorded a +0.55% total return. The Fund's Class A Shares generated
a total return of -1.92% for the six months ended December 31, 1999.
PORTFOLIO MATTERS
We continued to maintain a conservative asset allocation posture within the
Fund, with 60.2% of net assets invested in equities, 32.9% in fixed-income
securities and 6.9% in cash equivalents
28
<PAGE> 30
- --------------------------------------------------------------------------------
at December 31, 1999. This reflected our view that the strong performance of
many stock market indexes masks a significant deterioration in underlying
fundamental trends, which is likely to impair the market's ability to sustain
this recent advance. Many of the factors that have propelled the market higher
over the past several years have begun to abate. For example, interest rates,
commodity prices and the Japanese yen have all risen, the liquidity condition
has deteriorated, and non-US markets offer attractive investment alternatives.
Meanwhile, valuations remain near record high levels. This combination of
deteriorating fundamentals and high valuations does not represent a formula for
further significant advances in share prices, in our view. We continued to take
advantage of the significant volatility in many individual stocks and industry
groups to enhance the return potential of the equity portfolio. Meanwhile, bonds
continued to represent good value with inflation adjusted interest rates at
historically high levels and inflationary pressures remaining moderate.
Within the equity component of the Fund, during the six-month period we
continued to adjust our holdings to seek to enhance quality and limit any risk.
We added six new investments, increased positions in 11 holdings, reduced
positions in 13 holdings and eliminated six stocks from the portfolio. Notable
among the new positions was Alcatel, a global manufacturer of telecommunications
equipment, which enjoys strong market shares in some of this industry's fastest
growth segments. Alcatel sells at a discount to its peers on virtually all
valuation measures. While this has been justified in the past by the company's
inconsistent financial performance, we believe this valuation disparity is
likely to narrow going forward as revenue growth accelerates and margins
improve, driven by business divestitures and cost reduction measures. With the
global telecommunications equipment market expected to grow at a double digit
pace over the next three years, driven by deregulation and rapid growth in data
demand and Internet usage, Alcatel now possesses the means to participate in
this advance. We also established a position in E.I. du Pont de Nemours and
Company, the global chemical and life sciences company, which maintains a
powerful portfolio of high-quality, high-market share proprietary products and
businesses. The company enjoys significant earnings leverage to rising global
economic activity in its cyclical businesses in addition to an accelerating
earnings and productivity program, which should begin to show tangible bottom
line benefits in 2000. In our view, the company's financial condition is sound,
subsequent to the divestiture of its energy business. The company generates free
cash flow and is repurchasing its own stock. Selling at less than 20 times year
2000 estimated earnings per share, yielding 2.5%, down 20% from its recent stock
price high with improving fundamentals and enhanced earnings quality, we believe
DuPont represents excellent value and is an attractive addition to the
portfolio.
We sold our position in Federal Mogul Corporation, the auto parts concern. The
original investment thesis on Federal Mogul anticipated significant value
creation from the company's strategy of acquiring other auto parts companies in
order to provide complete engine systems to auto manufacturers. Enhanced revenue
growth opportunities and significant cost reduction benefits from the
implementation of this strategy were expected to produce above-average earnings
growth and significant free cash flow. Unfortunately, intense pricing pressures
from the company's customer base and continued weakness in the important auto
after market resulted in stagnant revenues and earnings disappointments. While
the stock remains inexpensively valued, we believe this lack of top line growth
will impair the company's ability to improve shareholder returns. We decided to
eliminate our position in the stock. We also sold our position in General
Electric Company, the diversified conglomerate. After a greater-than 40% advance
in 1999, we viewed the company's shares as fairly valued at a multiple of about
40 times estimated earnings per share. We believe the company's superior
business and financial strengths are more than adequately reflected in this
valuation level, so we decided to eliminate the position.
Within the fixed-income portion of the portfolio, the relatively short
duration of our bonds continued to produce performance benefits as domestic
interest rates rose sharply during the period. We were also rewarded with a
substantial premium tender offer for one our holdings. We maintained the average
quality rating of our bonds at A2/A as rated by the major rating agencies. We
increased our position in investment-grade corporate bonds from 61.6% of
fixed-income assets at September 30, 1999 to 63.3% while we increased our US
Treasury position from 26.8% of fixed-income assets to 28.2%. High-yield
corporate bonds were unchanged at 8.5% of fixed-income assets. The average yield
to maturity of our bonds at December 31, 1999 was 7.57%, virtually unchanged
from September 30, 1999. Going forward, we anticipate further extending the
average maturity of our bonds from the current 5.4 years to take advantage of
the recent rise in interest rates.
29
<PAGE> 31
- --------------------------------------------------------------------------------
Capital Focus Fund invests in quality companies whose stocks are undervalued
in the view of Fund management. On average, the stocks in the Fund have
generated comparable returns on shareholder equity and have stronger balance
sheets while offering faster earnings growth than the average company as
measured by the S&P 500 Index. However, these same stocks sell at an average
price/earnings ratio of 20.8 times estimated year 2000 earnings per share as
compared to 29.7 times for the S&P 500 Index, at 5 times current book value per
share as compared to 7.2 times for the S&P 500 Index, and provide a 1.4%
dividend yield as compared to 1.1% for the S&P 500 Index.
IN CONCLUSION
We appreciate your investment in Capital Focus Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Kurt Schansinger
Kurt Schansinger
Senior Vice President and Portfolio Manager
February 7, 2000
30
<PAGE> 32
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Standard & Poor's 500 Index and the
Merrill Lynch Domestic Fixed-Income Master Index. Beginning and ending values
are:
<TABLE>
<CAPTION>
6/05/98** 12/99
<S> <C> <C>
Capital Focus Fund+--
Class A Shares* $10,000 $10,526
Standard & Poor's 500 Index++ $10,000 $13,469
Merrill Lynch Domestic
Fixed-Income Master Index+++ $10,000 $10,455
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+The Fund utilizes a fully managed investment policy through investments in
equity, debt (including money market) and convertible securities.
++This unmanaged broad-based Index is comprised of common stocks.
+++This unmanaged Index is comprised of the entire universe of domestic
investment-grade bonds, including US Treasury bonds, corporate bonds and
mortgages.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +7.85%
- --------------------------------------------------------------------------------
Inception (6/05/98) through 12/31/99 +3.31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -1.92% +7.85%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
31
<PAGE> 33
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE PERCENT OF
INDUSTRY AMOUNT BONDS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE & DEFENSE $ 500,000 Lockheed Martin Corporation, 7.95% due
12/01/2005................................. $ 492,795 1.5%
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 500,000 Airgas Inc., 7.14% due 3/08/2004............. 451,706 1.4
500,000 Monsanto Company, 5.75% due 12/01/2005(a).... 460,205 1.4
----------- -----
911,911 2.8
- -----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES 335,000 Kansas City Southern Industries, Inc., 7% due
12/15/2025................................. 316,964 1.0
- -----------------------------------------------------------------------------------------------------------------------
FINANCE 500,000 General Motors Acceptance Corp., 5.75% due
11/10/2003................................. 476,080 1.5
500,000 Household Finance Corporation, 6% due
5/01/2004.................................. 474,769 1.4
1,000,000 International Lease Finance Corp., 5.64% due
4/01/2002.................................. 970,700 2.9
----------- -----
1,921,549 5.8
- -----------------------------------------------------------------------------------------------------------------------
HOME--BUILDERS 500,000 Champion Enterprises, Inc., 7.625% due
5/15/2009.................................. 448,890 1.3
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 500,000 The Coastal Corporation, 6.50% due
6/01/2008.................................. 461,250 1.4
- -----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 250,000 R & B Falcon Corporation, 6.75% due
4/15/2005.................................. 224,375 0.7
- -----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 500,000 Occidental Petroleum Corp., 6.50% due
4/01/2005.................................. 477,245 1.4
- -----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 500,000 Champion International Corp., 6.65% due
12/15/2037................................. 463,720 1.4
- -----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 250,000 Northwest Airlines, Inc., 7.875% due
3/15/2008.................................. 210,922 0.6
- -----------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 500,000 Royal Caribbean Cruises Ltd., 7.25% due
8/15/2006.................................. 482,045 1.4
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS US Treasury Notes & Bonds:
1,000,000 5.875% due 11/15/2005........................ 970,780 2.9
1,000,000 5.625% due 2/15/2006......................... 956,720 2.9
500,000 3.625% due 1/15/2008......................... 495,810 1.5
250,000 6% due 2/15/2026............................. 228,710 0.7
500,000 5.50% due 8/15/2028.......................... 426,405 1.3
----------- -----
3,078,425 9.3
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 500,000 Sprint Capital Corporation, 6.90% due
5/01/2019.................................. 454,740 1.4
- -----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 500,000 Nextel Communications, Inc., 9.375% due
DOMESTIC PAGING & CELLULAR 11/15/2009(a).............................. 490,000 1.5
- -----------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES*** 500,000 Enersis SA, 6.60% due 12/01/2026(1).......... 475,435 1.4
- -----------------------------------------------------------------------------------------------------------------------
TOTAL BONDS (COST--$11,449,941) 10,910,266 32.9
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
HELD COMMON STOCKS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANKING 5,500 The Chase Manhattan Corporation.............. 427,281 1.3
10,000 Citigroup Inc. .............................. 555,625 1.7
15,000 Mellon Financial Corporation................. 510,938 1.5
----------- -----
1,493,844 4.5
- -----------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 17,500 Masco Corporation............................ 444,063 1.3
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 8,000 E.I. du Pont de Nemours and Company.......... 527,000 1.6
12,000 Monsanto Company............................. 427,500 1.3
----------- -----
954,500 2.9
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES/SOFTWARE 3,000 International Business Machines
Corporation................................ 324,000 1.0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 34
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTERS 21,000 Compaq Computer Corporation.................. $ 568,312 1.7%
- -----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 9,500 Honeywell International Inc. ................ 548,031 1.7
- -----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES 8,500 Kansas City Southern Industries, Inc. ....... 634,313 1.9
9,000 Rockwell International Corporation........... 430,875 1.3
9,500 United Technologies Corporation.............. 617,500 1.9
----------- -----
1,682,688 5.1
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 7,500 Federal National Mortgage Association........ 468,281 1.4
- -----------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 14,000 Diageo PLC (ADR)*............................ 448,000 1.3
- -----------------------------------------------------------------------------------------------------------------------
FOOTWEAR 10,000 Nike, Inc. (Class B)......................... 495,625 1.5
- -----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 15,000 Fortune Brands, Inc. ........................ 495,937 1.5
9,000 Kimberly-Clark Corporation................... 587,250 1.8
----------- -----
1,083,187 3.3
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE 5,000 American International Group, Inc. .......... 540,625 1.6
15,000 ITT Industries, Inc. ........................ 501,562 1.5
10,000 UnumProvident Corporation.................... 320,625 1.0
9,000 XL Capital Ltd. (Class A).................... 466,875 1.4
----------- -----
1,829,687 5.5
- -----------------------------------------------------------------------------------------------------------------------
LEISURE/HOTELS 10,000 Carnival Corporation......................... 478,125 1.5
20,000 +Harrah's Entertainment, Inc. ............... 528,750 1.6
----------- -----
1,006,875 3.1
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 16,000 The Coastal Corporation...................... 567,000 1.7
14,000 El Paso Energy Corporation................... 543,375 1.7
18,500 The Williams Companies, Inc. ................ 565,406 1.7
----------- -----
1,675,781 5.1
- -----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 12,500 Halliburton Company.......................... 503,125 1.5
- -----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 16,000 Unocal Corporation........................... 537,000 1.6
- -----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 7,500 Glaxo Wellcome PLC (ADR)*.................... 419,063 1.3
- -----------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 8,000 Eastman Kodak Company........................ 530,000 1.6
- -----------------------------------------------------------------------------------------------------------------------
PUBLISHING 12,000 The New York Times Company (Class A)......... 589,500 1.8
- -----------------------------------------------------------------------------------------------------------------------
RAILROADS 10,000 Union Pacific Corporation.................... 436,250 1.3
- -----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 11,000 McDonald's Corporation....................... 443,438 1.3
- -----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 4,000 Motorola, Inc. .............................. 589,000 1.8
- -----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 9,000 Bell Atlantic Corporation.................... 554,062 1.7
9,750 +MCI WorldCom Inc. .......................... 516,750 1.5
9,500 Telefonaktiebolaget LM Ericsson (ADR)*....... 623,438 1.9
----------- -----
1,694,250 5.1
- -----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS & 13,000 Alcatel (ADR)*............................... 585,000 1.8
EQUIPMENT
- -----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 5,500 +Nextel Communications, Inc. (Class A)....... 566,844 1.7
DOMESTIC PAGING & CELLULAR
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$17,753,040) 19,916,344 60.2
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 35
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE PERCENT OF
AMOUNT SHORT-TERM SECURITIES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER** $ 677,000 General Motors Acceptance Corp., 5% due
1/03/2000.................................. $ 676,718 2.1%
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY Federal Home Loan Mortgage Corporation:
OBLIGATIONS** 500,000 5.67% due 1/11/2000........................ 499,134 1.5
1,000,000 5.67% due 1/13/2000.......................... 997,953 3.0
----------- -----
1,497,087 4.5
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$2,173,805) 2,173,805 6.6
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$31,376,786)........ 33,000,415 99.7
OTHER ASSETS LESS LIABILITIES................ 83,807 0.3
----------- -----
NET ASSETS................................... $33,084,222 100.0%
=========== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
*** Corresponding industry groups for foreign securities:
(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.
34
<PAGE> 36
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $31,376,786)...... $33,000,415
Cash........................................................ 587
Receivables:
Securities sold........................................... $487,862
Interest.................................................. 152,486
Dividends................................................. 16,486
Capital shares sold....................................... 6,016 662,850
--------
Deferred organization expenses.............................. 5,467
Prepaid expenses and other assets........................... 2,482
-----------
Total assets................................................ 33,671,801
-----------
- ------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 555,376
Investment adviser........................................ 19,677 575,053
--------
Accrued expenses and other liabilities...................... 12,526
-----------
Total liabilities........................................... 587,579
-----------
- ------------------------------------------------------------------------------------
NET ASSETS.................................................. $33,084,222
===========
- ------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 325,161
Paid-in capital in excess of par............................ 31,008,799
Accumulated distributions in excess of investment
income--net............................................... (13,952)
Undistributed realized capital gains on investments--net.... 140,519
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 1,623,695
-----------
NET ASSETS.................................................. $33,084,222
===========
- ------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $33,084,222 and 3,251,609
shares outstanding........................................ $ 10.17
===========
- ------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
35
<PAGE> 37
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 789,965
Dividends (net of $3,036 foreign withholding tax)........... 251,593
----------
Total income................................................ 1,041,558
----------
- -----------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $189,315
Custodian fees.............................................. 14,148
Accounting services......................................... 6,764
Professional fees........................................... 5,475
Transfer agent fees......................................... 4,884
Printing and shareholders reports........................... 2,249
Amortization of organization expenses....................... 1,600
Directors' fees and expenses................................ 555
--------
Total expenses.............................................. 224,990
----------
Investment income--net...................................... 816,568
----------
- -----------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET:
Realized gain on investments--net........................... 578,626
Change in unrealized appreciation on:
Investments--net.......................................... 844,827
Foreign currency transactions--net........................ 52 844,879
-------- ----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 1,423,505
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,240,073
==========
- -----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
36
<PAGE> 38
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
YEAR ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSETS: DEC. 31, 1999 TO DEC. 31, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 816,568 $ 259,215
Realized gain (loss) on investments--net.................... 578,626 (435,558)
Change in unrealized appreciation on investments and foreign
currency transactions--net................................ 844,879 778,816
----------- -----------
Net increase in net assets resulting from operations........ 2,240,073 602,473
----------- -----------
- ----------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (1,076,650) --
In excess of investment income--net:
Class A................................................... (15,634) --
----------- -----------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (1,092,284) --
----------- -----------
- ----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 4,871,704 17,462,256
----------- -----------
- ----------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 6,019,493 18,064,729
Beginning of period......................................... 27,064,729 9,000,000
----------- -----------
End of period*.............................................. $33,084,222 $27,064,729
=========== ===========
- ----------------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ (13,952) $ 259,215
=========== ===========
- ----------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
37
<PAGE> 39
- --------------------------------------------------------------------------------
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 FOR THE PERIOD
FINANCIAL STATEMENTS. YEAR ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: DEC. 31, 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...................................... .26 .09
Realized and unrealized gain(loss) on investments and
foreign currency transactions--net........................ .50 (.33)
------- -------
Total from investment operations............................ .76 (.24)
------- -------
Less dividends:
Investment income--net.................................... (.34) --
In excess of investment income--net....................... (.01) --
------- -------
Total dividends............................................. (.35) --
------- -------
Net asset value, end of period.............................. $ 10.17 $ 9.76
======= =======
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 7.85% (2.40%)++
======= =======
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .71% .86%*
======= =======
Investment income--net...................................... 2.59% 2.54%*
======= =======
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $33,084 $27,065
======= =======
Portfolio turnover.......................................... 63.88% 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.
38
<PAGE> 40
- --------------------------------------------------------------------------------
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. 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.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a
39
<PAGE> 41
- --------------------------------------------------------------------------------
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. Distributions in excess
of investment income are due primarily to differing tax treatments for foreign
currency transactions.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $2,549 have been reclassified between undistributed net
realized capital gains and accumulated distributions in excess of net investment
income. These reclassifications have no effect on net assets or net asset value
per share.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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 .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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $1,920 in commissions
on the execution of portfolio security transactions.
During the year ended December 31, 1999, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $1,010 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
year ended December 31, 1999 were $23,035,239 and $18,900,382, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- -------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $578,652 $1,623,629
Short-term investments............... (26) --
Foreign currency transactions........ -- 66
-------- ----------
Total................................ $578,626 $1,623,695
======== ==========
- -------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $1,572,521, of which $3,188,177 related to appreciated
securities and $1,615,656 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$31,427,894.
40
<PAGE> 42
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 1,588,743 $ 16,190,590
Shares issued to shareholders in
reinvestment of dividends........... 109,615 1,092,284
---------- ------------
Total issued......................... 1,698,358 17,282,874
Shares redeemed...................... (1,218,373) (12,411,170)
---------- ------------
Net increase......................... 479,985 $ 4,871,704
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Period Dollar
June 5, 1998+ to 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.
41
<PAGE> 43
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--CAPITAL FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
CAPITAL FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Capital Focus Fund of Merrill Lynch Variable
Series Funds, Inc. as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets and the financial highlights
for the year then ended and for the period June 5, 1998 (commencement of
operations) to December 31, 1998. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Capital Focus Fund
of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
42
<PAGE> 44
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
During the 12-month period ended December 31, 1999, total returns for Merrill
Lynch Developing Capital Markets Focus Fund, Inc.'s Class A and Class B Shares
were +65.52% and +65.38%, respectively. The unmanaged Morgan Stanley Capital
International Emerging Markets Free (MSCI EMF) Index rose 66.41% during the same
period. There were several positive influences on performance during the fiscal
year ended December 31, 1999. Prominent among these was the Fund's large
weighting in South Korea (14.02% of net assets on average) during the year, and
the strong performance of our stock holdings in that market. Likewise, our
weighting of 11.85% of net assets on average in Mexico and the outperformance of
our holdings in that market were beneficial to performance. On the other hand,
the Fund's small position (0.73% of net assets on average) in the Russian market
was somewhat detrimental because it limited our participation in this market's
strong recovery. The Russian market rose 247.06% during the period as measured
by that country's component in the MSCI EMF Index.
INVESTMENT OVERVIEW
Emerging stock markets rose 66.41% in 1999. This increase more than reversed
two years of declines in these markets. We believe this rally was based on
fundamental factors, and we believe it can continue. These factors include: the
strength of US demand for goods, an upturn in the commodity cycle, the recovery
of several of the countries that were in crisis, the improved perception of risk
in emerging markets, and a revaluation of the companies involved in technology
and Internet-related businesses.
A factor that was an important impetus early in 1999 was the growth policy
bias in the world's major economies. Most notably, the monetary policy of the US
Federal Reserve Board was relatively easy and US demand was strong. This
reflationary bias was also pervasive in Europe and in Japan. Prices of some
commodities recovered and this was beneficial to producers and exporters. This
recovery supported portfolio holdings such as Companhia Vale do Rio Doce in
Brazil and Impala Platinum Holdings Limited in South Africa. The strength of US
demand for electronics goods benefited semiconductor makers such as Samsung
Electronics, the largest holding in our portfolio, and Taiwan Semiconductor
Manufacturing Company, an integrated circuit foundry.
A clear beneficiary of reflation has been Mexico because of its trading
relationship with the United States and its exports of oil. Mexican economic
growth projections were raised throughout 1999, supported by a recovery in
indicators such as industrial production, exports and retail sales. As these
came through, corporate earnings estimates were revised upward as well.
An example of a company whose earnings outlook has improved is Tubos de Acero
de Mexico SA (Tamsa), a Mexican seamless pipe producer. We believe it may
benefit from the cycle upswing of two commodities: oil and steel. For most of
1999, the stock had languished at all-time lows given the poor outlook for both
of these sectors. However, the recent surge in oil prices has prompted oil
companies to expand their rig drilling projects for 2000. This bodes well for
Tamsa as it dominates the deep well pipe market. We also like the fact that each
of a few producers affects the market in the seamless pipe industry, but does
not control it. This prevented the huge price declines witnessed earlier in 1999
for other more commodity-like steels. Tamsa is a subsidiary of the Italian DST
group, which controls more than 30% of the global market and therefore enjoys a
certain amount of price protection. Tamsa stock has begun to move given the
turnaround in sentiment, and we expect more positive news on the company in 2000
earnings.
During the period, another driving factor was evidence that the economies in
Asia were recovering and that critical reforms were being undertaken to prevent
a recurrence of the crises. The greatest progress in recovery was made by South
Korea at the same time that its banking sector is undergoing reforms.
Furthermore, important companies throughout the region were restructuring by
disposing of non-core assets. The Siam Cement Public Company Limited, one of our
holdings in Thailand, is an example.
At the same time, the perception of risk by international investors in the
emerging markets improved. This was evident in the successful issuances of
securities by entities from Brazil, Malaysia, South Korea and Thailand in
foreign markets. This allowed interest rates and the cost of capital to decline
and stocks to rally.
Finally, a unique factor in 1999 was the positive reassessment and revaluation
by investors of the telecommunications and technology companies in emerging
markets. The stocks of companies in related businesses -- including
43
<PAGE> 45
- --------------------------------------------------------------------------------
Internet service providers, software developers and cellular phone
operators--rallied strongly in 1999. Nearly every initial public offering in
this area was extremely successful. We expect the revaluation of these companies
to sustain their rallies, and we have positioned our Fund to participate in
several of them, including Videsh Sanchar Nigam Ltd. (VSNL).
VSNL is an Indian company whose core business is to provide international long
distance services. The company's monopoly position enables it to dominate access
to the Internet and to sell international bandwidth to Internet service
providers. The potential for VSNL to develop its Internet businesses is
extremely attractive to us, but its basic telephony business is compelling on
its own as it upgrades its network and as the Indian telephone traffic volume
expands. Furthermore, its valuation implies that is it one of the least
expensive telecommunications companies in the world.
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/ Grace Pineda
Grace Pineda
Senior Vice President and Portfolio Manager
February 7, 2000
44
<PAGE> 46
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A & CLASS B SHARES
- --------------------------------------------------------------------------------
[DEVELOPING CAPITAL MARKETS FOCUS FUND GRAPH]
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Morgan Stanley Capital International
EAFE Index and the Morgan Stanley Capital International Emerging Markets Free
Index. Beginning and ending values are:
<TABLE>
<CAPTION>
5/02/94** 12/99
<S> <C> <C>
Developing Capital Markets
Focus Fund+--Class A Shares* $10,000 $11,365
Morgan Stanley Capital
International EAFE Index++ $10,000 $18,268
Morgan Stanley Capital
International Emerging Markets
Free Index+++ $10,000 $11,480
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class B Shares
compared to growth of an investment in the Morgan Stanley Capital International
EAFE Index and the Morgan Stanley Capital International Emerging Markets Free
Index. Beginning and ending values are:
<TABLE>
<CAPTION>
11/3/97** 12/99
<S> <C> <C>
Developing Capital Markets
Focus Fund+--Class B Shares* $10,000 $11,557
Morgan Stanley Capital
International EAFE Index++ $10,000 $15,212
Morgan Stanley Capital
International Emerging Markets
Free Index+++ $10,000 $12,348
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+Developing Capital Markets Focus Fund primarily invests in securities,
principally equities, of issuers in countries having smaller capital markets.
++This unmanaged Index measures the total returns of developed foreign stock
markets in Europe, Asia and the Far East, calculated in US dollars. The starting
date for the Index in the Class A Shares graph is from 4/30/94 and in the Class
B Shares graph from 10/31/97.
+++This unmanaged Index measures the total returns of emerging foreign stock
markets in Europe, Asia and the Far East. The starting date for the Index in the
Class A Shares' graph is from 4/30/94 and in the Class B Shares' graph is from
10/31/97.
Past performance is not predictive of future performance.
45
<PAGE> 47
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +65.52%
- --------------------------------------------------------------------------------
Five Years ended 12/31/99 + 3.63
- --------------------------------------------------------------------------------
Inception (5/02/94) through 12/31/99 + 2.28
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +65.38%
- --------------------------------------------------------------------------------
Inception (11/03/97) through 12/31/99 + 6.93
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +21.63% +65.52%
- ------------------------------------------------------------------------------------------
Class B Shares +21.44 +65.38
- ------------------------------------------------------------------------------------------
</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.
46
<PAGE> 48
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
AFRICA INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOUTH AFRICA BANKING 45,705 Nedcor Limited.......................... $ 1,018,144 0.9%
-----------------------------------------------------------------------------------------------------
BEVERAGE & 54,300 Rembrandt Group Limited................. 517,395 0.5
TOBACCO 60,015 South African Breweries PLC............. 610,884 0.5
16 South African Breweries PLC (ADR)(a).... 163 0.0
------------ -----
1,128,442 1.0
-----------------------------------------------------------------------------------------------------
COMPUTERS 51,950 +Dimension Data Holdings Limited........ 326,060 0.3
-----------------------------------------------------------------------------------------------------
FOREST PRODUCTS 249,722 Nampak Limited.......................... 751,196 0.7
-----------------------------------------------------------------------------------------------------
GOLD MINES 22,777 AngloGold Limited (ADR)(a).............. 585,084 0.5
-----------------------------------------------------------------------------------------------------
HEALTH INSURANCE 146,932 +Sanlam Limited......................... 205,466 0.2
-----------------------------------------------------------------------------------------------------
HOLDING COMPANY 26,021 Impala Platinum Holdings Limited........ 1,053,533 1.0
-----------------------------------------------------------------------------------------------------
INSURANCE 24,599 De Beers (ADR)(a)....................... 711,834 0.7
732,574 FirstRand Limited....................... 1,048,236 1.0
13,932 Liberty Life Association of Africa
Limited............................... 160,841 0.1
13,503 Standard Bank Investment
Corporation Limited................... 56,098 0.0
------------ -----
1,977,009 1.8
-----------------------------------------------------------------------------------------------------
METALS-- NON- 268,775 Gencor Limited.......................... 1,169,062 1.1
FERROUS
-----------------------------------------------------------------------------------------------------
MINING 23,610 +Anglo American PLC..................... 1,520,254 1.4
-----------------------------------------------------------------------------------------------------
RETAIL 8,527 Edgars Consolidated Stores Limited...... 108,979 0.1
530,604 Metro Cash and Carry Limited............ 603,939 0.6
95,167 Pepkor Limited.......................... 448,755 0.4
------------ -----
1,161,673 1.1
-----------------------------------------------------------------------------------------------------
STEEL 155 Iscor Limited........................... 586 0.0
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA
(COST--$8,322,164) 10,896,509 10.0
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EUROPE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CZECH BANKING 9,947 +Komercni Banka AS...................... 161,475 0.1
REPUBLIC -----------------------------------------------------------------------------------------------------
TELEPHONE 18,309 +SPT Telecom AS......................... 295,686 0.3
NETWORKS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE CZECH REPUBLIC 457,161 0.4
- ---------------------------------------------------------------------------------------------------------------------------
GREECE BANKING 4,029 Alpha Credit Bank....................... 315,600 0.3
-----------------------------------------------------------------------------------------------------
BEVERAGE 8,007 Hellenic Bottling Co. .................. 184,055 0.2
-----------------------------------------------------------------------------------------------------
BUILDING & 3,280 Titan Cement Company.................... 195,751 0.2
CONSTRUCTION
-----------------------------------------------------------------------------------------------------
CELLULAR 8,457 +Panafon Hellenic Telecom Co. .......... 113,593 0.1
TELEPHONES
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 73,769 +Hellenic Telecommunication Organization
SA (OTE)(ADR)(a)...................... 880,617 0.8
15,350 +STET Hellas Telecommunications SA
(ADR)(a).............................. 464,337 0.4
------------ -----
1,344,954 1.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GREECE 2,153,953 2.0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPE SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HUNGARY BANKING 9,256 OTP Bank Rt. (GDR)(b)................... $ 534,534 0.5%
-----------------------------------------------------------------------------------------------------
OIL & GAS 27,036 +MOL Magyar Olaj-es Gazipari Rt.
PRODUCERS (GDR)(b).............................. 554,238 0.5
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 1,803 Magyar Tavkozlesi Rt. (ADR)(a).......... 64,908 0.1
217,468 Magyar Tavkozlesi Rt.--Matav............ 1,524,067 1.4
------------ -----
1,588,975 1.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY 2,677,747 2.5
- ---------------------------------------------------------------------------------------------------------------------------
POLAND BANKING 7,872 +Bank Polska Kasa Opieki Grupa Pekao
SA.................................... 102,355 0.1
24,449 Wielkopolski Bank Kredytowy SA.......... 165,756 0.2
------------ -----
268,111 0.3
-----------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS 10,667 +Elektrim Spolka Akcyjna SA............. 105,895 0.1
-----------------------------------------------------------------------------------------------------
FINANCIAL 7,700 Bank Rozwoju Eksportu SA (BRE).......... 244,237 0.2
SERVICES
-----------------------------------------------------------------------------------------------------
TELEPHONE 27,812 Telekomunikacja Polska SA............... 182,495 0.2
COMMUNICATIONS 23,300 Telekomunikacja Polska SA (GDR)(b)...... 145,625 0.1
------------ -----
328,120 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND 946,363 0.9
- ---------------------------------------------------------------------------------------------------------------------------
RUSSIA ELECTRICAL 32,000 +Lenenergo.............................. 3,680 0.0
COMPONENTS &
DISTRIBUTION
-----------------------------------------------------------------------------------------------------
ENERGY SOURCES 275,000 Irkutskenergo........................... 20,625 0.0
-----------------------------------------------------------------------------------------------------
OIL & RELATED 15,743 LUKoil Holding (ADR)(a)................. 818,636 0.8
51,761 Surgutneftegaz (ADR)(a)................. 743,257 0.7
------------ -----
1,561,893 1.5
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 493,800 +Bashinformsvyaz........................ 20,740 0.0
49,457 Nizhnovsvyazinform...................... 42,038 0.0
6,000 +Tyumentelecom.......................... 3,600 0.0
------------ -----
66,378 0.0
-----------------------------------------------------------------------------------------------------
UTILITIES-- 199,692 Bashkirenergo........................... 11,183 0.0
ELECTRICAL & GAS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN RUSSIA 1,663,759 1.5
- ---------------------------------------------------------------------------------------------------------------------------
SPAIN INTERNET CONTENT 1,100 +Terra Networks, SA..................... 60,093 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 60,093 0.0
- ---------------------------------------------------------------------------------------------------------------------------
TURKEY BANKING 47,708,275 +Turkiye Garanti Bankasi AS............. 721,652 0.7
44,939,829 Yapi ve Kredi Bankasi AS................ 1,388,567 1.3
------------ -----
2,110,219 2.0
-----------------------------------------------------------------------------------------------------
BEVERAGE 3,415,043 Ege Biracilik Ve Malt Sanayii AS........ 261,436 0.2
-----------------------------------------------------------------------------------------------------
ELECTRONICS 1,058,000 +Vestel Elektronik Sanayi ve Ticaret
AS.................................... 253,717 0.2
-----------------------------------------------------------------------------------------------------
RETAIL STORES 635,038 Migros Turk TAS ........................ 410,004 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TURKEY 3,035,376 2.8
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EUROPE
(COST--$9,243,774) 10,994,452 10.1
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN SHARES PERCENT OF
AMERICA INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARGENTINA OIL & RELATED 88,883 Perez Companc SA 'B'.................... $ 455,081 0.4%
-----------------------------------------------------------------------------------------------------
REAL ESTATE 8,111 IRSA Inversiones y Representaciones SA
(GDR)(b).............................. 261,582 0.3
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 3,881 Telecom Argentina Stet-France Telecom SA
(ADR)(a).............................. 132,924 0.1
3,490 Telefonica de Argentina SA (ADR)(a)..... 107,754 0.1
------------ -----
240,678 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ARGENTINA 957,341 0.9
- ---------------------------------------------------------------------------------------------------------------------------
BRAZIL BANKING 6,404,600 Banco Itau SA (Preferred)............... 550,284 0.5
16,833 Uniao de Bancos Brasileiros SA
(Unibanco) (GDR)(b)................... 507,094 0.5
------------ -----
1,057,378 1.0
-----------------------------------------------------------------------------------------------------
BEVERAGE 1,143,959 Companhia Cervejaria Brahma
(Preferred)........................... 837,043 0.8
2,553 Companhia Cervejaria Brahma (Preferred)
(ADR)(a).............................. 35,742 0.0
------------ -----
872,785 0.8
-----------------------------------------------------------------------------------------------------
METALS--STEEL 63,389 +Companhia Vale do Rio Doce 'A'
(Preferred)........................... 1,756,901 1.6
Brl 10,296 Companhia Vale do Rio Doce, 0% due
12/31/2049(d)......................... 0 0.0
------------ -----
1,756,901 1.6
-----------------------------------------------------------------------------------------------------
OIL & RELATED 4,118,308 Petroleo Brasileiro SA--
Petrobras (Preferred)................. 1,050,123 1.0
-----------------------------------------------------------------------------------------------------
RETAIL 16,679 Companhia Brasileira de Distribuicao
Grupo Pao de Acucar (ADR)(a).......... 538,940 0.5
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 81,369,000 +Embratel Participacoes SA.............. 1,362,164 1.3
25,881,000 +Tele Celular Sul Participacoes SA...... 56,382 0.1
8,100 +Tele Centro Oeste Celular Participacoes
SA (ADR)(a)........................... 52,650 0.1
2,800 Tele Leste Celular Participacoes SA
(ADR)(a).............................. 119,000 0.1
1,200 Tele Nordeste Celular Participacoes SA
(ADR)(a).............................. 60,600 0.1
84,725 Tele Norte Leste Participacoes SA
(ADR)(a).............................. 2,160,488 2.0
3,889 Tele Sudeste Celular Participacoes SA
(ADR)(a).............................. 150,942 0.1
14,523 +Telecomunicacoes Brasileiras SA-
Telebras (ADR)(a)..................... 227 0.0
10,528 +Telecomunicacoes Brasileiras
SA-Telebras (Preferred Block)
(ADR)(a).............................. 1,352,848 1.2
3,450 Telesp Celular Participacoes SA
(ADR)(a).............................. 146,194 0.1
32,144,015 +Telesp Participacoes SA................ 445,633 0.4
19,796 Telesp Participacoes SA (ADR)(a)........ 483,765 0.4
------------ -----
6,390,893 5.9
-----------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 51
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BRAZIL UTILITIES-- ELECTRICAL 17,768,000 Centrais Eletricas Basileiras SA--
(CONCLUDED) & GAS Eletrobras......................... $ 389,143 0.4%
54,751,608 Companhia Energetica de Minas Gerais
SA--CEMIG (Preferred).............. 1,229,180 1.1
90 Companhia Paranaense de Energia--
Copel (ADR)(a)..................... 838 0.0
------------ -----
1,619,161 1.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 13,286,181 12.3
- -----------------------------------------------------------------------------------------------------------------------------
MEXICO BEVERAGE 68,429 Panamerican Beverages, Inc. 'A'
(US Registered Shares)............. 1,407,071 1.3
-----------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 49,694 +Grupo Televisa SA (GDR)(b).......... 3,391,616 3.1
-----------------------------------------------------------------------------------------------------
BUILDING MATERIALS 39,469 Cemex, SA de CV...................... 221,010 0.2
28,358 +Cemex, SA de CV (ADR)(a)............ 790,479 0.7
1,772 Cemex, SA de CV (ADR)
(Warrants)(a)(e)................... 7,309 0.0
2,000 Cemex, SA de CV (Warrants)(e)........ 1,690 0.0
------------ -----
1,020,488 0.9
-----------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES 18,431 +Grupo Sanborns SA 'B1'.............. 39,919 0.0
-----------------------------------------------------------------------------------------------------
FINANCIAL 48,500 +Grupo Financiero Banamex Accival, SA
SERVICES--COMMERCIAL de CV (Banacci) 'O'................ 194,974 0.2
796,700 Grupo Financiero Bancomer, SA
de CV 'O'.......................... 333,326 0.3
------------ -----
528,300 0.5
-----------------------------------------------------------------------------------------------------
FOOD 196,830 +Grupo Industrial Bimbo, SA de CV
'A'................................ 436,707 0.4
-----------------------------------------------------------------------------------------------------
HEALTH/PERSONAL CARE 387,977 Kimberly-Clark de Mexico, SA de CV
'A'................................ 1,512,557 1.4
-----------------------------------------------------------------------------------------------------
LEISURE 118,333 +Grupo Carso, SA de CV 'A1'.......... 586,352 0.6
-----------------------------------------------------------------------------------------------------
MACHINERY 21,561 Tubos de Acero de Mexico SA
(ADR)(a)........................... 292,421 0.3
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 30,805 Telefonos de Mexico SA (ADR)(a)...... 3,465,563 3.2
-----------------------------------------------------------------------------------------------------
TELEVISION 215,240 TV Azteca, SA de CV (ADR)(a)(c)...... 1,937,160 1.8
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 14,618,154 13.5
- -----------------------------------------------------------------------------------------------------------------------------
PERU FINANCIAL SERVICES 25,800 Credicorp Limited.................... 309,600 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PERU 309,600 0.3
- -----------------------------------------------------------------------------------------------------------------------------
VENEZUELA TELECOMMUNICATIONS 6,540 Compania Anonima Nacional Telefonos
de Venezuela (CANTV) (ADR)(a)...... 161,048 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN VENEZUELA 161,048 0.1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN AMERICA
(COST--$19,720,537) 29,332,324 27.1
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MIDDLE
EAST
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EGYPT BANKING 15,209 Commercial International Bank
(GDR)(b)........................... 214,447 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EGYPT 214,447 0.2
- -----------------------------------------------------------------------------------------------------------------------------
ISRAEL BANKING 187,218 Bank Hapoalim........................ 583,759 0.5
248,093 Bank Leumi Le-Israel................. 522,490 0.5
------------ -----
1,106,249 1.0
-----------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 3,500 +Check Point Software Technologies
Ltd. .............................. 695,188 0.7
-----------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 52
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MIDDLE
EAST SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ISRAEL TELEPHONE 71,966 +Bezeq Israeli Telecommunication
(CONCLUDED) COMMUNICATIONS Corporation Ltd. .................. $ 358,963 0.3%
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ISRAEL 2,160,400 2.0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE MIDDLE EAST
(COST--$1,920,481) 2,374,847 2.2
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PACIFIC
BASIN/ASIA
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHINA AUTOMOBILES 1,247,000 Qingling Motor
Company 'H'........................ 152,406 0.1
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 273,000 Eastern Communication Co., Ltd.
'B'................................ 177,450 0.2
-----------------------------------------------------------------------------------------------------
UTILITIES-- 782,000 Beijing Datang Power
ELECTRICAL & GAS Generation Company Limited 'H'....... 129,780 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHINA 459,636 0.4
- -----------------------------------------------------------------------------------------------------------------------------
HONG KONG CEMENT 5,074,370 +Anhui Conch Cement Co. Ltd. 'H'..... 404,748 0.4
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 14,000 +i-CABLE Communications Limited
(ADR)(a)........................... 357,000 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG KONG 761,748 0.7
- -----------------------------------------------------------------------------------------------------------------------------
INDIA BANKING 59,779 State Bank of India.................. 308,929 0.3
-----------------------------------------------------------------------------------------------------
CHEMICALS 81,140 +Reliance Industries Ltd............. 436,018 0.4
2,333 +Reliance Industries Ltd.
(GDR)(b)(c)........................ 32,662 0.0
------------ -----
468,680 0.4
-----------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 2,874 +Infosys Technologies Limited........ 959,294 0.9
22,500 Pentafour Software & Exports Ltd.
(New Shares)....................... 691,193 0.6
13,754 +Satyam Computer Services Limited.... 695,448 0.6
------------ -----
2,345,935 2.1
-----------------------------------------------------------------------------------------------------
FINANCIAL 382,906 ICICI Ltd. .......................... 810,010 0.7
SERVICES 19,650 +ICICI Ltd. (ADR)(a)................. 289,838 0.3
------------ -----
1,099,848 1.0
-----------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 22,148 +Hindustan Lever Limited............. 1,145,850 1.1
PRODUCTS
-----------------------------------------------------------------------------------------------------
LEISURE & TOURISM 13,400 +EIH Limited......................... 61,623 0.1
-----------------------------------------------------------------------------------------------------
METALS-- 45,455 Hindalco Industries Ltd. ............ 841,372 0.8
NON-FERROUS 2,048 Hindalco Industries Ltd.
(GDR)(b)(c)........................ 47,411 0.0
------------ -----
888,783 0.8
-----------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 20,818 Bharat Petroleum Corporation Ltd. ... 187,932 0.2
-----------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 461 Ranbaxy Laboratories Limited
PRESCRIPTION (GDR)(b)........................... 9,958 0.0
-----------------------------------------------------------------------------------------------------
SOFTWARE--APPLICATION 21,000 Wipro Limited........................ 1,255,847 1.2
DEVELOPMENT
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 30,302 Videsh Sanchar Nigam Ltd. (GDR)(b)... 736,339 0.7
-----------------------------------------------------------------------------------------------------
TOBACCO 24,000 ITC Limited.......................... 366,981 0.3
-----------------------------------------------------------------------------------------------------
UTILITIES-- 10,119 +BSES Ltd. (GDR)(b).................. 126,488 0.1
ELECTRICAL & GAS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDIA 9,003,193 8.3
- -----------------------------------------------------------------------------------------------------------------------------
INDONESIA BANKING 17,428,000 +PT Bank Internasional Indonesia..... 374,796 0.3
-----------------------------------------------------------------------------------------------------
FOOD 323,000 +PT Indofood Sukses Makmur Tbk....... 405,197 0.4
-----------------------------------------------------------------------------------------------------
FOREST PRODUCTS 989,000 +PT Indah Kiat Pulp & Paper Corpora-
tion Tbk........................... 389,928 0.4
-----------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 53
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDONESIA TELECOMMUNICATIONS 12,120 PT Indosat (Persero) Tbk(ADR)(a)..... $ 262,095 0.3%
(CONCLUDED) 1,022,000
PT Telekomunikasi Indonesia.......... 582,430 0.5
------------ -----
844,525 0.8
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDONESIA 2,014,446 1.9
- -----------------------------------------------------------------------------------------------------------------------------
MALAYSIA BANKING 187,600 Malayan Banking Berhad............... 666,474 0.6
-----------------------------------------------------------------------------------------------------
LEISURE 281,000 Resorts World Berhad................. 806,026 0.8
-----------------------------------------------------------------------------------------------------
NATURAL GAS 136,000 Petronas Gas Berhad.................. 318,526 0.3
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 761,000 Telekom Malaysia Berhad.............. 2,943,868 2.7
-----------------------------------------------------------------------------------------------------
TOBACCO 57,800 British American Tobacco Berhad...... 441,105 0.4
-----------------------------------------------------------------------------------------------------
UTILITIES-- 212,000 Tenaga Nasional Berhad............... 546,737 0.5
ELECTRICAL & GAS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MALAYSIA 5,722,736 5.3
- -----------------------------------------------------------------------------------------------------------------------------
PHILIPPINES BANKING 47,516 Metropolitan Bank & Trust Company.... 342,777 0.3
-----------------------------------------------------------------------------------------------------
UTILITIES-- 196,920 Manila Electric Company 'B'.......... 563,328 0.5
ELECTRICAL & GAS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PHILIPPINES 906,105 0.8
- -----------------------------------------------------------------------------------------------------------------------------
SINGAPORE ELECTRONIC COMPONENTS 9,457 +Chartered Semiconductor Manufactur-
ing Limited (ADR)(a)............... 680,904 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SINGAPORE 680,904 0.6
- -----------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA AUTO & TRUCK 20,195 +Hyundai Motor Company Ltd. ......... 320,273 0.3
-----------------------------------------------------------------------------------------------------
BANKING & FINANCIAL 20,740 +Housing & Commercial Bank, Korea.... 657,833 0.6
-----------------------------------------------------------------------------------------------------
CHEMICALS 6,970 Honam Petrochemical Corporation...... 97,641 0.1
16,490 L.G. Chemical Limited................ 521,578 0.5
------------ -----
619,219 0.6
-----------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 8,170 Haansoft Inc. ....................... 378,627 0.3
-----------------------------------------------------------------------------------------------------
DISTRIBUTION 210,070 +Kolon International Corporation..... 1,036,469 1.0
-----------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 2,023 Samsung Display Devices Co., Ltd. ... 84,128 0.1
-----------------------------------------------------------------------------------------------------
ELECTRONIC INSTRUMENTS 27,419 Samsung Electronics Co............... 6,425,951 5.9
-----------------------------------------------------------------------------------------------------
FINANCE 16,330 Daewoo Securities.................... 184,882 0.2
3,120 Dongwon Securities................... 67,348 0.1
11,680 Hyundai Securities................... 228,455 0.2
4,990 LG Investment & Securities Company
Limited............................ 84,852 0.1
9,214 Samsung Securities Company Ltd. ..... 279,255 0.2
------------ -----
844,792 0.8
-----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- 35,375 Kookmin Bank......................... 554,780 0.5
COMMERCIAL
-----------------------------------------------------------------------------------------------------
FOOD 4,270 Cheil Jedang Corporation............. 492,837 0.5
2,860 Cheil Jedang Corporation
(Preferred)........................ 128,511 0.1
------------ -----
621,348 0.6
-----------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 11,320 SK Corporation....................... 343,091 0.3
-----------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 54
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOUTH KOREA STEEL 14,626 Pohang Iron & Steel Company Ltd.
(CONCLUDED) (ADR)(a)........................... $ 511,910 0.5%
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 37,234 Korea Telecom Corporation (ADR)(a)... 2,783,241 2.5
2,900 +Korea Thrunet Co., Ltd. (Class A)... 196,475 0.2
19,114 SK Telecom Co. Ltd. (ADR)(a)(c)...... 733,528 0.7
------------ -----
3,713,244 3.4
-----------------------------------------------------------------------------------------------------
UTILITIES-- ELECTRICAL 64,200 Korea Electric Power Corporation..... 1,991,048 1.8
& GAS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH KOREA 18,102,713 16.7
- -----------------------------------------------------------------------------------------------------------------------------
TAIWAN BANKING 1,683,706 +E. Sun Commercial Bank.............. 662,644 0.6
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 115,800 Asia Cement Corporation.............. 101,851 0.1
-----------------------------------------------------------------------------------------------------
CEMENT 119,300 Taiwan Cement Corporation............ 123,178 0.1
-----------------------------------------------------------------------------------------------------
COMPUTER EQUIPMENT 69,062 Compal Electronics Inc. ............. 232,187 0.2
-----------------------------------------------------------------------------------------------------
COMPUTERS 56,000 Quanta Computer Inc. ................ 439,006 0.4
-----------------------------------------------------------------------------------------------------
ELECTRONIC 194,600 +Mosel Vitelic, Inc. ................ 310,070 0.3
COMPONENTS 306,000 +United Microelectronics Corporation,
Ltd. .............................. 1,092,161 1.0
------------ -----
1,402,231 1.3
-----------------------------------------------------------------------------------------------------
ELECTRONIC INSTRUMENTS 72,000 +Chroma Ate Inc. .................... 211,090 0.2
-----------------------------------------------------------------------------------------------------
ELECTRONIC/ 451,112 +Vanguard International Semiconductor
SEMICONDUCTORS Corporation........................ 589,407 0.6
-----------------------------------------------------------------------------------------------------
HEALTH INSURANCE 237,000 Cathay Life Insurance Co., Ltd. ..... 570,220 0.5
-----------------------------------------------------------------------------------------------------
PLASTICS 548,113 Formosa Plastic. Corporation......... 1,091,685 1.0
-----------------------------------------------------------------------------------------------------
SECURITIES 323,100 Grand Cathay Securities Corporation.. 211,076 0.2
-----------------------------------------------------------------------------------------------------
SEMICONDUCTORS 878,240 +Taiwan Semiconductor Manufacturing
Company............................ 4,673,871 4.3
-----------------------------------------------------------------------------------------------------
VENTURE CAPITAL 230,600 +China Development Industrial Bank
Inc. .............................. 367,432 0.4
-----------------------------------------------------------------------------------------------------
WIRE & CABLE 362,000 +Pacific Electrical Wire & Cable Co.
Ltd. .............................. 256,099 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TAIWAN 10,931,977 10.1
- -----------------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 238,400 +Bangkok Bank Public Company Lim-
ited 'Foreign'..................... 603,303 0.6
457,000 Siam Commercial Bank Public Company
Limited (Warrants)(e).............. 213,039 0.2
387,900 +Thai Farmers Bank Public Company
Limited 'Foreign'.................. 650,978 0.6
------------ -----
1,467,320 1.4
-----------------------------------------------------------------------------------------------------
BUILDING MATERIALS 12,926 +The Siam Cement Public Company
Limited............................ 431,096 0.4
-----------------------------------------------------------------------------------------------------
COMPUTERS 4,900 +Shin Corporations Public Company
Limited............................ 41,247 0.0
-----------------------------------------------------------------------------------------------------
TELEVISION 69,540 BEC World Public Company Limited
'Foreign'.......................... 492,745 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THAILAND 2,432,408 2.3
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN/ASIA (COST --
$36,317,219) 51,015,866 47.1
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 55
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE PERCENT OF
SECURITIES AMOUNT ISSUE VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $ 1,357,000 General Motors Acceptance Corp., 5%
due 1/03/2000...................... $ 1,356,435 1.3%
-----------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 1,000,000 Federal Home Loan Banks, 5.75%
OBLIGATIONS* due 1/19/2000...................... 996,965 0.9
1,000,000 Federal Home Loan Mortgage
Corporation, 5.67% due 1/13/2000... 997,952 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES (COST -- $3,351,352) 3,351,352 3.1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST -- $78,875,527)................ 107,965,350 99.6
OTHER ASSETS LESS LIABILITIES........ 426,305 0.4
------------ -----
NET ASSETS........................... $108,391,655 100.0%
============ =====
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
December 31, 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.
* 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.
+ Non-income producing security.
See Notes to Financial Statements.
54
<PAGE> 56
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$78,875,527)........ $107,965,350
Cash........................................................ 550,024
Foreign cash................................................ 1,529,930
Receivables:
Securities sold........................................... $ 556,458
Dividends................................................. 147,552
Forward foreign exchange contracts........................ 65,789
Capital shares sold....................................... 30,405 800,204
----------
Prepaid expenses and other assets........................... 127,021
------------
Total assets................................................ 110,972,529
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,559,760
Capital shares redeemed................................... 635,773
Investment adviser........................................ 95,473
Distributor............................................... 147 2,291,153
----------
Accrued expenses and other liabilities...................... 289,721
------------
Total liabilities........................................... 2,580,874
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $108,391,655
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares Common Stock, $.10 par value, 100,000,000
shares authorized......................................... $ 1,035,440
Class B Shares Common Stock, $.10 par value, 100,000,000
shares authorized......................................... 12,706
Paid-in capital in excess of par............................ 126,004,136
Undistributed investment income--net........................ 3,340
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (47,755,119)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 29,091,152
------------
NET ASSETS.................................................. $108,391,655
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $107,078,893 and 10,354,395
shares outstanding........................................ $ 10.34
============
Class B--Based on net assets of $1,312,762 and 127,061
shares outstanding........................................ $ 10.33
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
55
<PAGE> 57
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $123,585 foreign withholding tax)......... $ 1,358,680
Interest and discount earned................................ 740,156
-----------
Total income................................................ 2,098,836
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 773,462
Custodian fees.............................................. 260,373
Foreign capital gains tax expense........................... 197,096
Accounting services......................................... 23,718
Professional fees........................................... 19,049
Printing and shareholder reports............................ 10,141
Transfer agent fees......................................... 5,004
Directors' fees and expenses................................ 1,488
Pricing services............................................ 748
Distribution fees--Class B.................................. 734
Other....................................................... 2,881
-----------
Total expenses before reimbursement......................... 1,294,694
Reimbursement of expenses................................... (327,133)
-----------
Total expenses after reimbursement.......................... 967,561
-----------
Investment income--net...................................... 1,131,275
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 216,748
Foreign currency transactions--net........................ (481,143) (264,395)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 39,821,364
Foreign currency transactions--net........................ 4,406 39,825,770
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 39,561,375
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $40,692,650
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
56
<PAGE> 58
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,131,275 $ 2,591,669
Realized loss on investments and foreign currency
transactions--net......................................... (264,395) (43,748,177)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 39,825,770 (1,681,821)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ 40,692,650 (42,838,329)
------------ ------------
- ------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (2,102,112) (1,752,375)
Class B................................................... (11,709) (388)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (2,113,821) (1,752,763)
------------ ------------
- ------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ 5,260,179 (32,339,010)
------------ ------------
- ------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 43,839,008 (76,930,102)
Beginning of year........................................... 64,552,647 141,482,749
------------ ------------
End of year*................................................ $108,391,655 $ 64,552,647
============ ============
- ------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 3,340 $ 1,416,656
============ ============
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
57
<PAGE> 59
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS.
CLASS A
------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999+ 1998+ 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................... $ 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.................. 4.01 (2.86) (.75) .76 (.30)
-------- -------- -------- ------- -------
Total from investment operations...................... 4.12 (2.68) (.64) .96 (.10)
-------- -------- -------- ------- -------
Less dividends from investment income--net............ (.21) (.11) (.19) (.23) (.09)
-------- -------- -------- ------- -------
Net asset value, end of year.......................... $ 10.34 $ 6.43 $ 9.22 $ 10.05 $ 9.32
======== ======== ======== ======= =======
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.................... 65.52% (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.............................................. 1.67% 1.42% 1.42% 1.31% 1.36%
======== ======== ======== ======= =======
Investment income--net................................ 1.47% 2.30% 1.15% 2.42% 2.73%
======== ======== ======== ======= =======
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................ $107,079 $ 64,312 $141,451 $95,599 $55,209
======== ======== ======== ======= =======
Portfolio turnover.................................... 97.79% 121.06% 93.62% 87.33% 62.53%
======== ======== ======== ======= =======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
58
<PAGE> 60
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS B
BEEN DERIVED FROM INFORMATION PROVIDED IN THE --------------------------------------------
FINANCIAL STATEMENTS. FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD
------------------------ NOV. 3, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: 1999++ 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...................................... .07 .17 .01
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ 4.04 (2.86) (.09)
-------- -------- -------
Total from investment operations............................ 4.11 (2.69) (.08)
-------- -------- -------
Less dividends from investment income--net.................. (.20) (.11) --
-------- -------- -------
Net asset value, end of period.............................. $ 10.33 $ 6.42 $ 9.22
======== ======== =======
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 65.38% (29.51%) (.86%)++
======== ======== =======
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............................. 1.40% 1.40% 1.39%*
======== ======== =======
Expenses.................................................... 1.87% 1.72% 1.58%*
======== ======== =======
Investment income--net...................................... .83% 2.37% 1.16%*
======== ======== =======
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $ 1,313 $ 241 $ 32
======== ======== =======
Portfolio turnover.......................................... 97.79% 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.
59
<PAGE> 61
- --------------------------------------------------------------------------------
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. 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 premiums 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
60
<PAGE> 62
- --------------------------------------------------------------------------------
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.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $430,770 have been reclassified between undistributed
net investment income and accumulated net realized capital losses. These
reclassifications have no effect on net assets or net asset values per share.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. 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 .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 year ended December 31, 1999, MLAM earned fees of $773,462, of which
$327,133 was voluntarily waived.
For the year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $90,838 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.
61
<PAGE> 63
- --------------------------------------------------------------------------------
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
year ended December 31, 1999 were $77,605,627 and $70,501,615, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Realized Gains Unrealized
(Losses) Gains
- ----------------------------------------------------------------------
<S> <C> <C>
Long-term Investments................ $ 437,666 $ 29,089,823
Short-term Investments............... (220,918) --
Foreign currency transactions........ (481,143) 1,329
------------ ------------
Total................................ $ (264,395) $ 29,091,152
============ ============
- ----------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $26,516,756, of which $30,238,542 related to appreciated
securities and $3,721,786 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$81,448,594.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
were $5,260,179 and $(32,339,010) for the years ended December 31, 1999 and
December 31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 3,543,624 $29,552,636
Shares issued to shareholders in
reinvestment of dividends............ 294,323 2,102,112
---------- -----------
Total issued.......................... 3,837,947 31,654,748
Shares redeemed....................... (3,491,789) (27,154,773)
---------- -----------
Net increase.......................... 346,158 $ 4,499,975
========== ===========
- -----------------------------------------------------------------
</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 Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 107,282 $ 915,190
Shares issued to shareholders in
reinvestment of dividends........... 1,475 11,709
---------- ------------
Total issued......................... 108,757 926,899
Shares redeemed...................... (19,255) (166,695)
---------- ------------
Net increase......................... 89,502 $ 760,204
========== ============
- -----------------------------------------------------------------
</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, 1999, the Fund had net capital loss carryforward of
approximately $45,454,000, of which $2,024,000 expires in 2003, $90,000 expires
in 2004, $39,365,000 expires in 2006 and $3,975,000 expires in 2007. This amount
will be available to offset like amounts of any future taxable gains.
6. COMMITMENTS:
At December 31, 1999, the Fund had entered into foreign exchange contracts,
under which it agreed to purchase various foreign currencies with a value of
approximately $101,000.
62
<PAGE> 64
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
DEVELOPING CAPITAL MARKETS FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Developing Capital Markets Focus Fund of Merrill
Lynch Variable Series Funds, Inc. as of December 31, 1999, the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Developing Capital
Markets Focus Fund of Merrill Lynch Variable Series Funds, Inc. as of December
31, 1999, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
63
<PAGE> 65
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the year ended December 31, 1999, the Domestic Money Market Fund's Class A
Shares had a net annualized yield of 4.84%. For the six-month period ended
December 31, 1999, the Fund's Class A Shares had a net annualized yield of
5.07%. The Fund's Class A Shares' 7-day yield as of December 31, 1999 was 5.50%.
The average portfolio maturity was 61 days at December 31, 1999, compared to 73
days at June 30, 1999.
THE ENVIRONMENT
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the
two-year Treasury note yield hit a two-year high over concerns of the continued
strength of the economy and potential future action by the Federal Reserve
Board. Against the background of still higher interest rates, we positioned the
Fund more conservatively. We expect to continue to concentrate new investments
in the one-month and three-month areas as we wait for a clearer economic picture
to develop.
The Fund's composition at the end of December and as of our last report to
shareholders is detailed below:
<TABLE>
<CAPTION>
- ------------------------------------------------------
12/31/99 6/30/99
- ------------------------------------------------------
<S> <C> <C>
Bank Notes....................... 13.2% 11.7%
Certificates of Deposit.......... 1.5 1.6
Commercial Paper................. 35.4 40.7
Corporate Notes.................. 35.8 31.0
Funding Agreements............... 4.6 3.7
Promissory Notes................. 1.7 --
Master Notes..................... -- 1.8
Repurchase Agreements............ 0.2 --
US Government Agency &
Instrumentality Obligations --
Discount....................... -- 2.5
US Government Agency &
Instrumentality Obligations --
Non-Discount................... 6.5 9.4
Other Assets Less Liabilities.... 1.1 --
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/ David Chesney
David J. Chesney
Vice President and Portfolio Manager
February 7, 2000
- --------------------------------------------------------
We are pleased to announce that David J. Chesney is responsible for the
day-to-day management of Domestic Money Market Fund. Mr. Chesney was Vice
President and analyst of Merrill Lynch Convertible Fund, Inc. from 1997 to 1999.
From 1994 to 1997, he was an analyst in the fixed-income department.
- --------------------------------------------------------
64
<PAGE> 66
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--13.2% $ 5,000,000 American Express Centurion Bank+... 5.73 % 6/19/2000 $ 4,996,687
5,000,000 American Express Centurion Bank+... 5.75 7/13/2000 5,000,000
4,750,000 First USA Bank, NA+............... 6.551 1/21/2000 4,750,925
1,000,000 First Union National Bank......... 5.30 3/01/2000 998,772
5,000,000 First Union National Bank+........ 5.87 8/28/2000 5,002,016
10,000,000 Harris Trust & Savings+........... 5.66 4/06/2000 9,998,988
5,000,000 Huntington National Bank+......... 5.375 2/11/2000 4,999,539
9,750,000 KeyBank NA+....................... 6.478 2/21/2000 9,749,062
5,000,000 KeyBank NA+....................... 6.235 3/20/2000 4,997,500
2,000,000 LaSalle National Bank............. 5.11 4/24/2000 1,995,104
4,000,000 NationsBank NA+................... 5.67 3/16/2000 3,999,765
5,000,000 NationsBank NA+................... 5.66 4/05/2000 4,999,499
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$61,495,946) 61,487,857
- -------------------------------------------------------------------------------------------------------------------------
CERTIFICATE OF 7,000,000 Fleet National Bank+.............. 5.65 4/17/2000 6,999,045
DEPOSIT+--1.5%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATE OF DEPOSIT (COST--$6,999,045) 6,999,045
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--35.4% 5,000,000 AT&T Corporation+................. 6.529 8/07/2000 5,000,000
1,000,000 Asset Securitization Cooperative
Corp. .......................... 6.00 1/18/2000 997,533
8,750,000 Asset Securitization Cooperative
Corp.+.......................... 6.571 3/13/2000 8,750,000
4,750,000 Bear Stearns Companies, Inc. ..... 5.88 3/22/2000 4,687,547
10,000,000 CXC Incorporated.................. 6.00 1/18/2000 9,975,334
7,000,000 CXC Incorporated+................. 6.573 3/15/2000 6,999,862
1,834,000 Centric Capital Corp. ............ 6.05 1/27/2000 1,826,860
2,700,000 Ciesco L.P. ...................... 5.65 2/10/2000 2,683,897
250,000 Ciesco L.P. ...................... 5.65 2/15/2000 248,313
2,500,000 Corporate Receivables Corp. ...... 5.80 2/23/2000 2,478,042
1,105,000 Edison Asset Securitization,
LLC............................. 5.88 2/10/2000 1,098,083
500,000 Edison Asset Securitization,
LLC............................. 6.35 2/11/2000 496,560
5,000,000 Edison Asset Securitization,
LLC............................. 5.82 2/22/2000 4,956,878
6,000,000 Edison Asset Securitization,
LLC............................. 5.80 2/29/2000 5,945,819
470,000 Edison Asset Securitization,
LLC............................. 5.95 2/29/2000 465,756
5,000,000 Edison Asset Securitization,
LLC............................. 5.97 2/29/2000 4,954,850
1,000,000 Eureka Securitization Inc. ....... 7.00 1/18/2000 997,083
4,392,000 Eureka Securitization Inc. ....... 6.07 1/26/2000 4,375,613
2,625,000 Finova Capital Corp. ............. 5.90 1/20/2000 2,617,663
1,000,000 Finova Capital Corp. ............. 5.85 2/22/2000 991,376
11,000,000 Finova Capital Corp.+............. 6.641 3/20/2000 10,999,690
403,000 Grand Funding Corp. .............. 6.25 1/10/2000 402,510
1,500,000 Grand Funding Corp. .............. 6.25 1/13/2000 1,497,396
6,790,000 Grand Funding Corp. .............. 6.11 1/20/2000 6,771,021
7,157,000 Grand Funding Corp. .............. 6.13 1/27/2000 7,129,139
3,000,000 Kitty Hawk Funding Corp. ......... 5.78 2/15/2000 2,978,113
1,000,000 Kitty Hawk Funding Corp. ......... 5.80 3/20/2000 987,187
1,000,000 Kitty Hawk Funding Corp. ......... 5.82 3/20/2000 987,187
200,000 Knight-Ridder, Inc. .............. 5.88 1/19/2000 199,477
9,000,000 Knight-Ridder, Inc. .............. 5.90 1/19/2000 8,976,321
5,000,000 Knight-Ridder, Inc. .............. 6.10 2/11/2000 4,967,879
6,231,000 Knight-Ridder, Inc. .............. 6.02 2/18/2000 6,182,461
6,700,000 Lehman Brothers Holdings Inc. .... 5.90 2/16/2000 6,649,977
10,000,000 Lehman Brothers Holdings Inc. .... 5.90 2/17/2000 9,923,750
7,000,000 Lehman Brothers Holdings Inc. .... 5.95 3/21/2000 6,909,140
2,654,000 Park Avenue Receivables Corp...... 7.00 1/10/2000 2,650,388
500,000 Park Avenue Receivables Corp.+.... 6.561 2/11/2000 499,989
7,685,000 Park Avenue Receivables Corp. .... 6.00 2/14/2000 7,630,237
3,906,000 Variable Funding Capital Corp. ... 6.45 1/10/2000 3,901,101
5,000,000 Variable Funding Capital Corp. ... 5.80 2/25/2000 4,957,306
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$165,754,230) 165,747,338
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE> 67
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE NOTES--35.8% $ 1,360,000 AT&T Capital Corporation.......... 7.50 % 11/15/2000 $ 1,366,649
4,000,000 Asset-Backed Securities Investment
Trust 1997-F+++................. 6.543 9/15/2000 4,000,000
1,400,000 Associates Corporation of North
America......................... 5.25 3/30/2000 1,396,812
1,150,000 Associates Corporation of North
America......................... 6.00 6/15/2000 1,148,232
850,000 Associates Corporation of North
America......................... 6.375 6/15/2000 850,213
2,000,000 Associates Corporation of North
America......................... 6.25 9/15/2000 1,997,414
3,850,000 Bear Stearns Companies, Inc.+ .... 6.561 1/20/2000 3,850,020
4,000,000 Bear Stearns Companies, Inc.+ .... 6.571 3/24/2000 3,999,765
9,000,000 The CIT Group Holdings, Inc. ..... 6.70 5/02/2000 9,019,053
2,000,000 The CIT Group Holdings, Inc.+ .... 5.655 5/30/2000 1,999,564
2,750,000 The CIT Group Holdings, Inc.+ .... 5.80 9/15/2000 2,748,123
1,020,000 The CIT Group Holdings, Inc. ..... 6.875 1/16/2001 1,018,815
5,500,000 Caterpillar Inc.+ ................ 6.228 1/20/2000 5,500,491
4,750,000 Countrywide Home Loans, Inc.+ .... 6.225 2/09/2000 4,749,991
2,000,000 E.I. du Pont de Nemours and
Company......................... 5.079 4/03/2000 1,995,276
4,500,000 Finova Capital Corp. ............. 8.13 4/26/2000 4,523,494
2,000,000 Finova Capital Corp. ............. 6.45 6/01/2000 1,998,254
1,500,000 Finova Capital Corp. ............. 8.55 6/15/2000 1,512,919
6,850,000 Ford Motor Credit Company......... 8.375 1/15/2000 6,854,311
3,500,000 Ford Motor Credit Company......... 7.60 3/29/2000 3,514,462
3,500,000 Ford Motor Credit Company......... 6.375 4/15/2000 3,501,452
1,000,000 Ford Motor Credit Company+........ 5.70 5/05/2000 1,000,000
1,000,000 Ford Motor Credit Company......... 6.65 8/01/2000 1,002,333
3,000,000 Ford Motor Credit Company+........ 5.499 10/02/2000 3,000,294
2,250,000 Ford Motor Credit Company......... 6.375 10/06/2000 2,246,020
500,000 Ford Motor Credit Company......... 6.25 11/08/2000 498,313
750,000 General Electric Capital
Corp.+ ......................... 6.111 5/03/2000 750,157
900,000 General Electric Capital
Corp.+ ......................... 5.39 5/12/2000 900,071
1,000,000 General Motors Acceptance
Corp. .......................... 5.75 1/05/2000 1,000,021
2,000,000 General Motors Acceptance
Corp.+ ......................... 6.141 2/03/2000 1,999,972
2,000,000 General Motors Acceptance
Corp. .......................... 8.125 2/23/2000 2,005,432
3,000,000 General Motors Acceptance
Corp. .......................... 7.00 3/01/2000 3,003,300
1,000,000 General Motors Acceptance
Corp. .......................... 7.625 3/17/2000 1,003,595
750,000 General Motors Acceptance
Corp. .......................... 9.375 4/01/2000 755,470
1,000,000 General Motors Acceptance
Corp. .......................... 6.65 5/24/2000 1,002,643
1,460,000 General Motors Acceptance
Corp. .......................... 6.875 6/07/2000 1,465,266
2,000,000 General Motors Acceptance
Corp. .......................... 6.875 7/17/2000 2,007,542
3,850,000 General Motors Acceptance
Corp.+ ......................... 6.158 7/20/2000 3,848,221
2,000,000 General Motors Acceptance
Corp.+ ......................... 6.10 9/01/2000 1,999,406
1,400,000 General Motors Acceptance
Corp.+ ......................... 6.26 12/01/2000 1,400,864
900,000 General Motors Acceptance
Corp.+ ......................... 6.136 2/27/2001 899,253
5,000,000 Goldman Sachs Group, Inc.+........ 6.281 6/27/2000 5,003,850
2,000,000 Goldman Sachs Group, Inc. ........ 6.00 8/07/2000 1,993,824
5,750,000 Goldman Sachs Group, Inc. ........ 6.55 12/22/2000 5,750,000
700,000 Goldman Sachs Group, Inc.+ ....... 5.39 1/12/2001 700,000
7,500,000 Household Finance Corp.+ ......... 6.095 5/15/2000 7,499,393
7,000,000 Household Finance Corp. .......... 6.75 6/01/2000 7,008,211
2,000,000 Household Finance Corp. .......... 6.96 6/07/2000 2,005,566
1,225,000 Household Finance Corp. .......... 7.15 6/15/2000 1,229,435
1,500,000 Household Finance Corp. .......... 5.678 7/07/2000 1,493,084
1,900,000 IBM Credit Corp.+ ................ 5.79 3/20/2000 1,898,649
5,000,000 Morgan Stanley, Dean Witter
& Co.+ ......................... 6.201 1/22/2001 5,000,000
5,800,000 New Court Credit Group Inc.+ ..... 6.83 12/01/2000 5,836,640
3,500,000 Norwest Corporation............... 7.125 4/01/2000 3,510,182
5,000,000 Norwest Financial Inc.+ .......... 6.499 9/07/2000 4,998,000
800,000 PepsiCo, Inc. .................... 5.875 6/01/2000 799,236
</TABLE>
66
<PAGE> 68
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE NOTES $ 2,000,000 SMM Trust+........................ 6.255% 9/25/2000 $ 2,000,000
(CONCLUDED)
1,500,000 Salomon, Smith Barney
Holdings, Inc. ................... 6.625 11/30/2000 1,499,537
3,000,000 Wells Fargo & Co. ................ 5.31 3/31/2000 2,996,451
2,000,000 Wells Fargo & Co. ................ 5.225 4/10/2000 1,996,774
2,500,000 Xerox Corp. ...................... 5.70 7/26/2000 2,488,363
2,500,000 Xerox Credit Corp.+ .............. 5.62 4/06/2000 2,499,497
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$167,675,596) 167,540,175
- -------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--4.6% 5,000,000 Allstate Life Insurance Co.+...... 5.602 7/03/2000 5,000,000
5,000,000 Allstate Life Insurance Co.+...... 6.576 11/01/2000 5,000,000
5,000,000 Jackson National Life Insurance
Co.+............................ 6.496 5/01/2000 5,000,000
5,000,000 Metropolitan Life Insurance
Company+........................ 6.526 5/01/2000 5,000,000
1,500,000 Security Life of Denver Insurance
Co.+............................ 6.57 3/23/2000 1,500,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$21,500,000) 21,500,000
- -------------------------------------------------------------------------------------------------------------------------
PROMISSORY NOTES--1.7% 8,000,000 Goldman Sachs Group, L.P.+ ....... 6.546 7/07/2000 8,000,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL PROMISSORY NOTES (COST--$8,000,000) 8,000,000
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY & 3,000,000 Federal Home Loan Bank............ 4.95 2/22/2000 2,995,390
INSTRUMENTALITY 1,300,000 Federal Home Loan Mortgage
OBLIGATIONS-- Corporation..................... 5.18 11/24/2000 1,286,457
NON-DISCOUNT--6.5%
2,000,000 Federal Home Loan Mortgage
Corporation..................... 5.25 1/19/2001 1,976,106
2,000,000 Federal National Mortgage
Association+.................... 5.993 7/21/2000 1,999,454
1,000,000 Federal National Mortgage
Association..................... 5.07 12/14/2000 988,030
1,425,000 Federal National Mortgage
Association..................... 5.21 1/26/2001 1,407,672
4,000,000 Student Loan Marketing
Association+.................... 5.908 2/04/2000 3,999,916
10,750,000 Student Loan Marketing
Association+.................... 6.216 9/29/2000 10,748,504
600,000 US Treasury Notes................. 4.50 9/30/2000 593,437
600,000 US Treasury Notes................. 4.625 11/30/2000 592,500
2,000,000 US Treasury Notes................. 4.625 12/31/2000 1,971,250
1,900,000 US Treasury Notes................. 4.50 1/31/2001 1,868,530
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$30,574,670) 30,427,246
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE 860,000 Nomura Securities International,
AGREEMENTS**--0.2% Inc., purchased on 12/31/1999 to
yield 5% to 1/03/2000........... 860,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (COST--$860,000) 860,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$462,859,487)--98.9%....... 462,561,661
OTHER ASSETS LESS
LIABILITIES--1.1%............... 5,219,412
------------
NET ASSETS--100.0%................ $467,781,073
============
- -------------------------------------------------------------------------------------------------------------------------
</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 December 31, 1999.
** Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
+ Variable Rate Notes.
++ Subject to principal paydowns.
See Notes to Financial Statements.
67
<PAGE> 69
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$462,859,487*)...... $462,561,661
Cash........................................................ 48,840
Receivables:
Interest.................................................. $3,218,812
Capital shares sold....................................... 2,247,383 5,466,195
----------
Prepaid expenses............................................ 34,613
------------
Total assets................................................ 468,111,309
------------
- --------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser........................................ 219,975
Capital shares redeemed................................... 38,071
Dividends to shareholders................................. 1,018 259,064
----------
Accrued expenses and other liabilities...................... 71,172
------------
Total liabilities........................................... 330,236
------------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $467,781,073
============
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value,
1,300,000,000 shares authorized+.......................... $ 46,807,890
Paid-in capital in excess of par............................ 421,271,009
Unrealized depreciation on investments--net................. (297,826)
------------
NET ASSETS.................................................. $467,781,073
============
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $467,781,073 and 468,078,899
shares outstanding........................................ $ 1.00
============
- --------------------------------------------------------------------------------------
</TABLE>
* As of December 31, 1999, net unrealized depreciation for Federal income tax
purposes amounted to $297,872, of which $12,723 related to appreciated
securities and $310,595 related to depreciated securities. The aggregate cost at
December 31, 1999 for Federal income tax purposes was $462,859,533.
+ The Fund is also authorized to issue 1,300,000,000 Class B Shares.
See Notes to Financial Statements.
68
<PAGE> 70
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $23,534,441
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $2,215,648
Accounting services......................................... 92,468
Professional fees........................................... 45,257
Printing and shareholder reports............................ 31,534
Custodian fees.............................................. 31,050
Directors' fees and expenses................................ 9,301
Registration fees........................................... 6,252
Transfer agent fees......................................... 5,010
Pricing services............................................ 315
Other....................................................... 3,487
----------
Total expenses.............................................. 2,440,322
-----------
Investment income--net...................................... 21,094,119
-----------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized gain on investments--net........................... 17,656
Change in unrealized depreciation on investments--net....... (287,952)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $20,823,823
===========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
69
<PAGE> 71
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 21,094,119 $ 17,729,772
Realized gain on investments--net........................... 17,656 47,278
Change in unrealized appreciation/depreciation on
investments--net.......................................... (287,952) (19,258)
------------- -------------
Net increase in net assets resulting from operations........ 20,823,823 17,757,792
------------- -------------
- -------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net: Class A............................. (21,094,119) (17,729,772)
Realized gain on investments--net: Class A.................. (17,656) (47,278)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (21,111,775) (17,777,050)
------------- -------------
- -------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares............................ 279,226,568 289,645,200
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions............... 21,108,016 17,785,712
------------- -------------
300,334,584 307,430,912
Cost of shares redeemed..................................... (240,782,799) (216,946,151)
------------- -------------
Net increase in net assets derived from Class A capital
share transactions........................................ 59,551,785 90,484,761
------------- -------------
- -------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 59,263,833 90,465,503
Beginning of year........................................... 408,517,240 318,051,737
------------- -------------
End of year................................................. $467,781,073 $ 408,517,240
============= =============
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
70
<PAGE> 72
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. --------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net................................... .0473 .0506 .0511 .0504 .0547
Realized and unrealized gain (loss) on
investments--net....................................... (.0006) --+ .0001 (.0005) .0012
-------- -------- -------- -------- --------
Total from investment operations......................... .0467 .0506 .0512 .0499 .0559
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net................................. (.0473) (.0508) (.0511) (.0504) (.0547)
Realized gain on investments--net...................... --+ --+ --+ (.0001) (.0002)
-------- -------- -------- -------- --------
Total dividends and distributions........................ (.0473) (.0508) (.0511) (.0505) (.0549)
-------- -------- -------- -------- --------
Net asset value, end of year............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....................... 4.84% 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....................................... 4.76% 5.03% 5.12% 4.97% 5.50%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................... $467,781 $408,517 $318,052 $274,756 $303,912
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.0001 per share.
See Notes to Financial Statements.
71
<PAGE> 73
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
NOTES TO FINANCIALS 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. 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, for which market quotations are readily available,
are valued at market value. 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 additional securities daily to ensure
that the contract is fully collateralized. If the counterparty defaults and the
fair value of the collateral declines, liquidation of the collateral by the Fund
may be delayed or limited.
(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 .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.
72
<PAGE> 74
- --------------------------------------------------------------------------------
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 Fund are officers and/or directors of
MLAM, PSI, FDS, PFD, and/or ML & Co.
3. CAPITAL SHARE TRANSACTIONS:
The number of shares sold, reinvested 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, value of shares reinvested and cost of
shares redeemed, respectively, since shares are recorded at $1.00 per share.
73
<PAGE> 75
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
DOMESTIC MONEY MARKET FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Domestic Money Market Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Domestic Money
Market Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31,
1999, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
74
<PAGE> 76
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
During the fiscal year ended December 31, 1999, the total return for Global
Bond Focus Fund's Class A Shares was -8.18%, as compared to -5.08% for the
unmanaged benchmark J.P. Morgan Global Government Bond Index for the same
period.
During the 12-month period ended December 31, 1999, much of our strategy
centered around adjusting the Fund's duration in response to interest rate
volatility. We shortened our duration in the dollar bloc countries relative to
the Fund's benchmark. We also reduced our exposure to European Monetary Union
("EMU") countries and increased investments in non-EMU countries (the United
Kingdom, Greece, Norway, Denmark and Sweden). At the same time, we reduced the
duration of our EMU investments and extended duration of our non-EMU
investments. We expected interest rates in non-EMU countries to come down to
meet the lower interest rate structure in EMU countries. However, late in the
fiscal year interest rates began to rise in non-EMU countries as well, which
negatively impacted Fund performance. Although our short duration in dollar-bloc
countries helped performance, it was not enough to offset the negative effect of
our European investments.
In Japan, our underweight position in the yen also hindered Fund performance.
We believed that we were still in a bullish trend for the US dollar relative to
the yen and that this was a correction in the cycle that would soon end. We also
kept a short duration in Japan, anticipating that there would be a rise in
Japanese interest rates as the economy reflated. In fact, the yen got much
stronger and interest rates in Japan declined.
INVESTMENT ENVIRONMENT
During the fiscal year ended December 31, 1999, there were three major
predominant forces at work in the global bond markets. The first was the Federal
Reserve Board's attempt to preemptively contain inflationary pressures before
they materialized. At the end of June, August and November, the Federal Reserve
Board raised interest rates 25 basis points (0.25%) to ensure a low level of
inflation, which in turn prompted the central banks of several countries to
raise their official interest rates in November. In addition to the United
States, Canada, Australia, New Zealand, Germany, United Kingdom, Denmark and
Sweden raised interest rates between 25 basis points and 50 basis points.
The second factor influencing market activity was the rebound in the Japanese
economy and the resulting rise in the Japanese yen. Gross domestic product (GDP)
growth was surprisingly strong in the first quarter and positive in the second
quarter when a decline was expected. With this economic rebound there came a
robust stock market.
The third important market influence was the pervasive weakness of the euro
throughout the period. The euro's weakness was attributed to a poor, but slowly
rising economy. Relative to the United States and Japan, the EMU's economy was
not moving along and inflationary pressures were beginning to emerge. In
addition, eurobond sales by the Japanese, who had been large holders of
eurobonds, hurt the euro even further during the period. As a result, the euro
relative to the yen went from E123.625 on July 1, 1999 to E102.65 on December
30, 1999, a decline of 16.97%. Relative to the US dollar, the euro declined
approximately 3% during the period.
INVESTMENT OUTLOOK
Federal Reserve Board Chairman Alan Greenspan continues to voice the central
bank's desire to prevent any potential rise in inflation. Even though at present
there are no significant signs of inflation, we believe the Federal Reserve
Board will strive to temper economic growth through a gradual rise in interest
rates. If the US central bank can orchestrate a soft landing and get economic
growth lower, it may preclude significant future monetary policy tightenings in
2000. At the same time, growth is also present in Japan and the country
currently appears to be rebounding out of its deep recession. However, despite
intervention by the Bank of Japan, continued strengthening of the yen could have
an adverse effect on the economic rebound.
75
<PAGE> 77
- --------------------------------------------------------------------------------
IN CONCLUSION
We thank you for your investment in Global Bond Focus Fund, 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/ Harry Escobar
Harry Escobar
Senior Vice President and Portfolio Manager
February 7, 2000
76
<PAGE> 78
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the JP Morgan Global Government Bond
Index and the Merrill Lynch US Treasury/Agency 1-10 Year Index. Beginning and
ending values are:
<TABLE>
<CAPTION>
7/01/93** 12/99
<S> <C> <C>
Global Bond Focus Fund+--Class A
Shares* $10,000 $13,480
JP Morgan Global Government
Bond Index++ $10,000 $14,625
Merrill Lynch US Treasury/Agency
1-10 Years Index+++ $10,000 $14,101
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+Global Bond Focus Fund invests in US and foreign government and corporate bonds
denominated in various currencies.
++This unmanaged Index is comprised of government bonds in the 13 largest bond
markets, including the United States.
+++This unmanaged Index is comprised of intermediate-term US Government bonds
maturing in one year--ten years.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 -8.18%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +5.85
- --------------------------------------------------------------------------------
Inception (7/01/93) through 12/31/99 +4.70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -1.04% -8.18%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Insurance-related fees and
expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
77
<PAGE> 79
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH FACE PERCENT OF
AMERICA INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CANADA FOREIGN GOVERNMENT NZ$ 4,200,000 Canada Government Bond, 6.625% due
OBLIGATIONS 10/03/2007....................... $ 2,036,349 4.4%
------------------------------------------------------------------------------------------------------
SUPRANATIONAL C$ 2,030,000 Inter-American Development Bank,
7.25% due 11/03/2003............. 1,438,720 3.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
CANADA 3,475,069 7.5
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES FINANCIAL SERVICES DM 2,425,000 Ford Motor Credit Co., 5.25% due
6/16/2008........................ 1,187,452 2.6
------------------------------------------------------------------------------------------------------
GAMING Jazz Casino Co. LLC:
US$ 228,937 5.987% due 11/15/2009++............ 136,218 0.3
21,000 Contigent Notes due
11/15/2009+++.................... 0 0.0
----------- -----
136,218 0.3
------------------------------------------------------------------------------------------------------
US GOVERNMENT & 1,200,000 Federal National Mortgage
AGENCY OBLIGATIONS Association, 6.625% due
9/15/2009........................ 1,165,500 2.5
US Treasury Bonds:
1,475,000 5.25% due 11/15/2028............... 1,215,031 2.6
1,990,000 6.125% due 8/15/2029............... 1,897,027 4.1
----------- -----
4,277,558 9.2
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
THE UNITED STATES 5,601,228 12.1
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
HELD COMMON STOCKS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES GAMING 6,089 +JCC Holding Company (Class A)..... 17,125 0.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE UNITED
STATES 17,125 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH AMERICA
(COST--$9,955,962) 9,093,422 19.6
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PACIFIC FACE
BASIN AMOUNT FIXED-INCOME INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA FOREIGN GOVERNMENT A$ 500,000 Australian Government Bond, 5.75%
OBLIGATIONS due 6/15/2011.................... 294,394 0.6
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
AUSTRALIA 294,394 0.6
- ------------------------------------------------------------------------------------------------------------------------
JAPAN FOREIGN GOVERNMENT Japan Government Bond:
OBLIGATIONS Y 323,000,000 #145, 5.50% due 3/20/2002.......... 3,519,796 7.6
404,000,000 #161, 4.70% due 9/22/2003.......... 4,534,707 9.8
----------- -----
8,054,503 17.4
------------------------------------------------------------------------------------------------------
SUPRANATIONAL 65,000,000 Asian Development Bank, 5.625% due
2/18/2002........................ 707,106 1.5
20,000,000 International Bank for
Reconstruction & Development,
4.50% due 6/20/2000.............. 199,431 0.4
----------- -----
906,537 1.9
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
JAPAN 8,961,040 19.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC
BASIN (COST--$9,127,115) 9,255,434 19.9
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 80
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN FACE PERCENT OF
EUROPE INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINLAND FOREIGN E 1,177,315 Finnish Government Bond, 7.25% due
GOVERNMENT 4/18/2006........................ $ 1,310,656 2.8%
OBLIGATIONS Y 246,000,000 Republic of Finland, 6% due
1/29/2002........................ 2,687,093 5.8
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
FINLAND 3,997,749 8.6
- ------------------------------------------------------------------------------------------------------------------------
FRANCE TELECOMMUNI- E 1,295,816 France Telecom, 5.75% due
CATIONS 4/25/2007........................ 1,321,642 2.8
------------------------------------------------------------------------------------------------------
TRANSPORTATION-- 1,750,000 Societe Nationale des Chemins de
ROAD & RAIL Fer, 4.625% due 10/25/2009....... 1,612,459 3.5
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
FRANCE 2,934,101 6.3
- ------------------------------------------------------------------------------------------------------------------------
GERMANY FOREIGN Bundesrepublic Deutschland:
GOVERNMENT 2,040,000 4.125% due 7/04/2008............... 1,887,012 4.1
OBLIGATIONS 1,300,000 4.75% due 7/04/2028................ 1,090,829 2.3
765,000 Bundesschatzanweisungen, 4% due
3/17/2000........................ 771,545 1.7
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
GERMANY 3,749,386 8.1
- ------------------------------------------------------------------------------------------------------------------------
GREECE FOREIGN GRD 592,000,000 Hellenic Republic, 8.60% due
GOVERNMENT 3/26/2008........................ 2,045,671 4.4
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
GREECE 2,045,671 4.4
- ------------------------------------------------------------------------------------------------------------------------
ITALY FOREIGN E 1,641,977 Buoni Poliennali Del Tesoro, 10%
GOVERNMENT due 8/01/2003.................... 1,928,859 4.2
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
ITALY 1,928,859 4.2
- ------------------------------------------------------------------------------------------------------------------------
NETHERLANDS FOREIGN 1,230,000 Netherlands Government Bond, 5.25%
GOVERNMENT due 7/15/2008.................... 1,220,142 2.6
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
THE NETHERLANDS 1,220,142 2.6
- ------------------------------------------------------------------------------------------------------------------------
SPAIN FOREIGN 1,000,000 Bonos y Obligation Del Estado,
GOVERNMENT 5.25% due 1/31/2003.............. 1,021,694 2.2
OBLIGATIONS
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
SPAIN 1,021,694 2.2
- ------------------------------------------------------------------------------------------------------------------------
UNITED FOREIGN United Kingdom Gilt:
KINGDOM GOVERNMENT L 400,000 7% due 11/06/2001.................. 652,116 1.4
OBLIGATIONS 1,000,000 6.75% due 11/26/2004............... 1,659,051 3.6
1,250,000 7.50% due 12/07/2006............... 2,192,001 4.7
----------- -----
4,503,168 9.7
------------------------------------------------------------------------------------------------------
INDUSTRIAL 320,000 BOC Group PLC, 7.25% due
6/07/2002........................ 515,583 1.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
THE UNITED KINGDOM 5,018,751 10.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN EUROPE
(COST--$23,080,796) 21,916,353 47.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE> 81
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE PERCENT OF
SECURITIES AMOUNT ISSUE VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL US$ 1,613,000 General Motors Acceptance Corp., 5%
PAPER++++ due 1/03/2000.................... $ 1,612,552 3.5%
------------------------------------------------------------------------------------------------------
COMMERCIAL E 1,835,000 General Electric Capital Corp,
PAPER--FOREIGN++++ 3.41% due 3/29/2000.............. 1,833,108 4.0
------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT C$ 1,800,000 Ontario Treasury Bill, 4.80% due
OBLIGATIONS++++ 1/17/2000........................ 1,238,145 2.7
------------------------------------------------------------------------------------------------------
US GOVERNMENT US$ 162,000 US Treasury Bills, 4.66% due
OBLIGATIONS++++ 1/20/2000........................ 161,621 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES (COST--$4,872,218) 4,845,426 10.5
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NOMINAL VALUE
OPTIONS COVERED BY
PURCHASED OPTIONS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENCY PUT 4,300,000 Japanese Yen, expiring January 2000
OPTIONS PURCHASED at Y 105......................... 8,643 0.0
------------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED
(COST--$33,024) 8,643 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$47,069,115)................ 45,119,278 97.2
UNREALIZED DEPRECIATION ON FORWARD
FOREIGN EXCHANGE
CONTRACTS--NET+++++.............. (232,241) (0.5)
OTHER ASSETS LESS LIABILITIES...... 1,511,551 3.3
----------- -----
NET ASSETS......................... $46,398,588 100.0%
=========== =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Represents a pay-in-kind security which may pay interest/dividends in
additional face amount/shares.
+++ Represents an obligation by Jazz Casino Co. LLC to pay a semi-annual amount
to the Fund through 11/15/2009. The payments are based upon varying interest
rates and the amounts, which may be paid-in-kind, are contingent upon the
earnings before income taxes, depreciation and amortization of Jazz Casino Co.
LLC on a fiscal year basis.
++++ Commercial Paper, Commercial Paper--Foreign and certain Foreign and US
Government Obligations are traded on a discount basis; the interest rates shown
reflect the discount rates paid at the time of purchase by the Fund.
+++++ Forward foreign exchange contracts as of December 31, 1999 were as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
FOREIGN CURRENCY SOLD EXPIRATION DATE DEPRECIATION
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A$ 473,495 January 2000 $ (8,073)
C$ 903,732 January 2000 (14,258)
L 1,023,446 January 2000 (5,066)
NZ$ 2,363,498 February 2000 (54,290)
Y 658,597,810 January 2000 (150,554)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET
(US$ COMMITMENT--$10,046,850) $(232,241)
=========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
80
<PAGE> 82
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$47,036,091)........ $45,110,635
Options purchased, at value (cost--$33,024)................. 8,643
Foreign cash................................................ 618,515
Cash........................................................ 358
Interest receivable......................................... 967,730
Prepaid expenses............................................ 3,366
-----------
Total assets................................................ 46,709,247
-----------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts................................................. 232,241
Payables:
Capital shares redeemed................................... $36,867
Investment adviser........................................ 27,061 63,928
-------
Accrued expenses............................................ 14,490
-----------
Total liabilities........................................... 310,659
-----------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $46,398,588
===========
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 200,000,000
shares authorized+........................................ $ 540,703
Paid-in capital in excess of par............................ 52,056,818
Accumulated distributions in excess of investment
income--net............................................... (727,371)
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (3,291,742)
Unrealized depreciation on investments and foreign currency
transactions--net......................................... (2,179,820)
-----------
NET ASSETS.................................................. $46,398,588
===========
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $46,398,588 and 5,407,025
shares outstanding........................................ $ 8.58
===========
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
81
<PAGE> 83
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned (net of $31,199 foreign
withholding tax).......................................... $ 3,360,238
- -------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 336,742
Registration fees........................................... 32,825
Custodian fees.............................................. 28,002
Professional fees........................................... 13,484
Accounting services......................................... 8,697
Printing and shareholder reports............................ 6,376
Transfer agent fees......................................... 5,009
Directors' fees and expenses................................ 1,501
Pricing services............................................ 301
Other....................................................... 696
-----------
Total expenses.............................................. 433,633
-----------
Investment income--net...................................... 2,926,605
-----------
- -------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized loss from:
Investments--net.......................................... (1,222,274)
Foreign currency transactions--net........................ (2,006,891) (3,229,165)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (4,945,963)
Foreign currency transactions--net........................ 180,905 (4,765,058)
----------- -----------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (7,994,223)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(5,067,618)
===========
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
82
<PAGE> 84
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 2,926,605 $ 4,099,794
Realized gain (loss) on investments and foreign currency
transactions--net......................................... (3,229,165) 1,442,112
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (4,765,058) 2,964,166
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (5,067,618) 8,506,072
------------ ------------
- -----------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (1,506,947) (3,660,200)
In excess of investment income--net:
Class A................................................... (221,514) (540,914)
Return of capital:
Class A................................................... (1,501,179) --
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (3,229,640) (4,201,114)
------------ ------------
- -----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (14,720,434) (10,995,882)
------------ ------------
- -----------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (23,017,692) (6,690,924)
Beginning of year........................................... 69,416,280 76,107,204
------------ ------------
End of year*................................................ $ 46,398,588 $ 69,416,280
============ ============
- -----------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ (727,371) $ 81,521
============ ============
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
83
<PAGE> 85
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED CLASS A+
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ---------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......................... $ 9.90 $ 9.32 $ 9.76 $ 9.79 $ 9.17
------- ------- ------- ------- -------
Investment income--net..................................... .48 .55 .56 .78 .85
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net....................... (1.27) .58 (.40) (.03) .61
------- ------- ------- ------- -------
Total from investment operations........................... (.79) 1.13 .16 .75 1.46
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................... (.25) (.47) (.29) (.78) (.84)
In excess of investment income--net...................... (.04) (.08) (.03) -- --
Return of capital........................................ (.24) -- (.28) -- --
------- ------- ------- ------- -------
Total dividends and distributions.......................... (.53) (.55) (.60) (.78) (.84)
------- ------- ------- ------- -------
Net asset value, end of year............................... $ 8.58 $ 9.90 $ 9.32 $ 9.76 $ 9.79
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share......................... (8.18%) 12.62% 1.95% 8.02% 16.69%
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................... .77% .75% .73% .69% .68%
======= ======= ======= ======= =======
Investment income--net..................................... 5.21% 5.72% 6.11% 7.95% 8.99%
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)..................... $46,399 $69,416 $76,107 $93,790 $81,845
======= ======= ======= ======= =======
Portfolio turnover......................................... 136.25% 127.93% 568.76% 267.13% 132.57%
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
84
<PAGE> 86
- --------------------------------------------------------------------------------
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. 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.
85
<PAGE> 87
- --------------------------------------------------------------------------------
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 and
post-October losses.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences have been reclassified as follows: $2,006,891 between
accumulated distributions in excess of net investment income and accumulated net
realized capital losses; $1,501,034 between paid-in capital in excess of par and
accumulated distributions in excess of net investment income; and $175 between
paid-in capital in excess of par and accumulated net realized capital losses.
These reclassifications have no effect on net assets or net asset value per
share.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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 .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 year ended December 31, 1999, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, $130 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.
86
<PAGE> 88
- --------------------------------------------------------------------------------
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
year ended December 31, 1999 were $72,409,847 and $90,861,549, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains (losses) as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ----------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $(1,226,455) $(1,898,664)
Short-term investments............... (1,389) (26,792)
Financial futures contracts.......... 5,570 --
Foreign currency options purchased... (84,560) (24,381)
Foreign currency options written..... 15,370 --
Forward foreign exchange contracts... (788,082) (232,241)
Foreign currency transactions........ (1,149,619) 2,258
----------- -----------
Total................................ $(3,229,165) $(2,179,820)
=========== ===========
- ----------------------------------------------------------------------
</TABLE>
Transactions in options written for the year ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Nominal Value Covered by Premiums
Call Options Written Written Options Received
- ---------------------------------------------------------------------
<S> <C> <C>
Outstanding call options
written, beginning of year..... -- --
Options written................. 1,450,000 $ 15,370
Options expired................. (1,450,000) (15,370)
---------- --------
Outstanding call options
written, end of year........... -- $ --
========== ========
- ---------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $2,045,828, of which $505,965 related to appreciated
securities and $2,551,793 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$47,156,463.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 133,201 $ 1,253,560
Shares issued to shareholders in
reinvestment of dividends........... 353,252 3,229,640
---------- ------------
Total issued......................... 486,453 4,483,200
Shares redeemed...................... (2,089,518) (19,203,634)
---------- ------------
Net decrease......................... (1,603,065) $(14,720,434)
========== ============
- -----------------------------------------------------------------
</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, 1999, the Fund had a net capital loss carryforward of
approximately $2,553,000, of which $1,603,000 expires in 2005 and $950,000
expires in 2007. This amount will be available to offset like amounts of any
future taxable gains.
87
<PAGE> 89
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
GLOBAL BOND FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Global Bond Focus Fund of Merrill Lynch Variable
Series Funds, Inc. as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Global Bond Focus
Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
88
<PAGE> 90
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the 30-year
Treasury bond yield hit a two-year high over concerns of the continued strength
of the economy and potential future action by the Federal Reserve Board.
FISCAL YEAR IN REVIEW
During the year, Global Growth Focus Fund increased substantially in terms of
total net assets, from $19.7 million at year-end 1998 to $180.4 million at
December 31, 1999. This increase in net assets represented a significant
increase in net subscriptions to this world stock Fund. For the year ended
December 31, 1999, the total investment return for the Fund's Class A Shares was
+38.69%. This compares to a total return of +24.93% for the unmanaged Morgan
Stanley Capital International (MSCI) World Stock Index for the same period. The
actively managed portfolios in the Lipper Analytical Services Global Funds
Average had a total return of +36.15% during 1999.
The Fund's equity investments in the top five industry categories as of
December 31, 1999--wireline communications, communications equipment,
electronics, computers and wireless communications--were responsible for the
majority of the Fund's positive absolute and comparative investment returns for
1999. Starting in early July 1999, we started to shift the Fund's focus from a
relatively large investment weighting in the stocks of companies in the banking
and financial, financial services, household products, insurance and
pharmaceuticals sectors to companies in the communications equipment,
electronics and computers industries.
We also increased the Fund's weighting in companies in Japan where the Fund
has had a relatively modest investment weighting since its commencement of
operations on June 5, 1998. After the second-quarter 1999 business conditions
report for Japan in July 1999, we started to increase the Fund's weighting in
large-capitalization Japanese companies. This report showed that the consumer
sector of the Japanese economy was continuing to increase real spending on a
consecutive quarterly comparison after a significant rebound in the first
quarter of 1999. Also, several global luxury goods retailers reported
stronger-than-expected revenue growth from sales growth in Japan. We anticipate
the possibility of a continued upturn in the consumer spending sector of Japan.
Consequently, during the second half of 1999 we substantially increased the
percentage of the Fund's net assets invested in Japanese stocks. At year-end
1999, the second-largest equity investment in the Fund was the holding of shares
in NTT Mobile Communications Network, Inc. of Japan. In our opinion, real growth
rates of business activity and consumer spending could rise in Continental
Europe and Japan during 2000 if there is an export-led increase in manufacturing
employment in Europe and continued fiscal stimulus from the Japanese government.
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
February 7, 2000
89
<PAGE> 91
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Morgan Stanley Capital International
World Index. Beginning and ending values are:
<TABLE>
<CAPTION>
6/30/98** 12/99
<S> <C> <C>
Global Growth
Focus Fund+--Class A Shares* $10,000 $14,770
Morgan Stanley Capital
International World Index++ $10,000 $13,318
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**The Fund commenced operations on 6/05/98. For purposes of fair comparison of
the Fund's performance relative to the Index, the graph begins on 6/30/98.
+The Fund invests in a diversified portfolio of equity securities of issuers
located in various foreign countries and the United States, placing particular
emphasis on companies that have exhibited above-average growth rates in
earnings.
++This unmanaged market capitalization-weighted Index is comprised of a
representative sampling of large-, medium-, and small-capitalization companies
in 22 countries, including the United States.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +38.69%
- --------------------------------------------------------------------------------
Inception (6/05/98) to 12/31/99 +29.45
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +31.21% +38.69%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset value 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.
90
<PAGE> 92
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH SHARES PERCENT OF
AMERICA INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CANADA BROADCASTING 74,000 +Rogers Communications, Inc. 'B'.............. $ 1,803,134 1.0%
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 12,298 Nortel Networks Corporation................... 1,238,119 0.7
EQUIPMENT
------------------------------------------------------------------------------------------------------
WIRELINE 28,328 +AT&T Canada Inc. (Class B)................... 1,136,661 0.6
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 4,177,914 2.3
- -------------------------------------------------------------------------------------------------------------------------
UNITED STATES ADVERTISING 11,863 The Interpublic Group of Companies, Inc. ..... 684,347 0.4
------------------------------------------------------------------------------------------------------
BROADCASTING 10,056 +AMFM Inc. ................................... 786,882 0.4
7,987 +CBS Corporation.............................. 510,669 0.3
1,978 +Clear Channel Communications, Inc. .......... 176,536 0.1
13,150 +Infinity Broadcasting Corporation (Class
A).......................................... 475,866 0.3
------------ -----
1,949,953 1.1
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 41,643 +3Com Corporation............................. 1,954,618 1.1
EQUIPMENT 82,000 +Cisco Systems, Inc. ......................... 8,779,125 4.9
23,000 +JDS Uniphase Corporation..................... 3,708,750 2.0
42,147 Lucent Technologies Inc. ..................... 3,153,122 1.7
------------ -----
17,595,615 9.7
------------------------------------------------------------------------------------------------------
COMPUTERS 42,000 +EMC Corporation.............................. 4,588,500 2.6
73,000 +Sun Microsystems, Inc. ...................... 5,648,375 3.1
------------ -----
10,236,875 5.7
------------------------------------------------------------------------------------------------------
ELECTRICAL 746 Emerson Electric Co. ......................... 42,802 0.0
EQUIPMENT 11,423 General Electric Company...................... 1,767,709 1.0
------------ -----
1,810,511 1.0
------------------------------------------------------------------------------------------------------
ELECTRONICS 4,000 +Broadcom Corporation (Class A)............... 1,089,250 0.6
12,000 +LSI Logic Corporation........................ 810,000 0.4
48,132 Texas Instruments Incorporated................ 4,662,787 2.6
10,000 +Xilinx, Inc. ................................ 454,375 0.3
------------ -----
7,016,412 3.9
------------------------------------------------------------------------------------------------------
ENERGY 3,515 Duke Energy Corporation....................... 176,189 0.1
21,968 El Paso Energy Corporation.................... 852,633 0.5
68,685 Enron Corp. .................................. 3,047,897 1.7
3,505 UtiliCorp United Inc. ........................ 68,128 0.0
------------ -----
4,144,847 2.3
------------------------------------------------------------------------------------------------------
ENTERTAINMENT 19,816 The Walt Disney Company....................... 579,618 0.3
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 7,016 T. Rowe Price Associates, Inc. ............... 258,276 0.1
------------------------------------------------------------------------------------------------------
INFORMATION 45,000 +America Online, Inc. ........................ 3,394,687 1.9
PROCESSING 8,000 +At Home Corporation (Class A)................ 343,500 0.2
------------ -----
3,738,187 2.1
------------------------------------------------------------------------------------------------------
OIL SERVICES 19,497 Baker Hughes Incorporated..................... 410,656 0.2
2,725 Diamond Offshore Drilling, Inc. .............. 83,283 0.1
8,496 Schlumberger Limited.......................... 477,900 0.3
1,645 Transocean Sedco Forex Inc. .................. 55,410 0.0
------------ -----
1,027,249 0.6
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 12,000 +Amgen Inc. .................................. 720,000 0.4
15,000 Merck & Co., Inc. ............................ 1,005,937 0.6
29,486 Pfizer Inc. .................................. 956,452 0.5
------------ -----
2,682,389 1.5
------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 571 Eastman Kodak Company......................... 37,829 0.0
------------------------------------------------------------------------------------------------------
RESTAURANTS 14,273 McDonald's Corporation........................ 575,380 0.3
------------------------------------------------------------------------------------------------------
RETAIL 14,000 +Amazon.com, Inc. ............................ 1,065,750 0.6
------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE> 93
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICA SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES SEMICONDUCTORS 25,683 +Applied Materials, Inc. ..................... $ 3,252,110 1.8%
(CONCLUDED)
------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 8,279 Carnival Corporation.......................... 395,840 0.2
------------------------------------------------------------------------------------------------------
WIRELESS 1,099 +Sprint Corp. (PCS Group)..................... 112,647 0.1
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
WIRELINE 27,312 AT&T Corp. ................................... 1,386,084 0.8
COMMUNICATIONS 19,000 +Covad Communications Group, Inc. ............ 1,056,875 0.6
3,100 +Infonet Services Corporation (Class B)....... 81,375 0.0
13,420 +MCI WorldCom Inc. ........................... 711,287 0.4
14,000 +NorthPoint Communications Group, Inc. ....... 333,375 0.2
10,000 +Qwest Communications International Inc. ..... 429,375 0.2
------------ -----
3,998,371 2.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED STATES 61,162,206 33.9
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH AMERICA
(COST--$49,225,269) 65,340,120 36.2
- -------------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN
- -------------------------------------------------------------------------------------------------------------------------
AUSTRALIA WIRELESS 275,000 +Cable & Wireless Optus Limited............... 915,017 0.5
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRALIA 915,017 0.5
- -------------------------------------------------------------------------------------------------------------------------
JAPAN AUTOMOBILES 2,000 Honda Motor Co., Ltd. ........................ 74,371 0.0
60,000 Toyota Motor Corporation...................... 2,906,351 1.6
------------ -----
2,980,722 1.6
------------------------------------------------------------------------------------------------------
COMPUTERS 75,000 Fujitsu Limited............................... 3,420,100 1.9
------------------------------------------------------------------------------------------------------
LEISURE 11,300 Sony Corporation.............................. 3,350,524 1.9
------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 1,000 Fuji Photo Film............................... 36,501 0.0
------------------------------------------------------------------------------------------------------
RETAIL STORES 37,000 +Ito-Yokado Co., Ltd. ........................ 4,018,984 2.2
------------------------------------------------------------------------------------------------------
WIRELESS 195 NTT Mobile Communications Network, Inc. ...... 7,499,266 4.1
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
WIRELINE 280 Nippon Telegraph & Telephone Corporation
COMMUNICATIONS (NTT)....................................... 4,794,990 2.7
------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 500 East Japan Railway Company.................... 2,695,959 1.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 28,797,046 15.9
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC BASIN
(COST--$20,512,171) 29,712,063 16.4
- -------------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- -------------------------------------------------------------------------------------------------------------------------
DENMARK WIRELINE 20,880 Tele Danmark A/S.............................. 1,551,817 0.9
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 1,551,817 0.9
- -------------------------------------------------------------------------------------------------------------------------
FINLAND COMMUNICATIONS 35,290 Nokia Oyj..................................... 6,396,665 3.5
EQUIPMENT
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 6,396,665 3.5
- -------------------------------------------------------------------------------------------------------------------------
FRANCE BANKING & 8,900 +Credit Lyonnais.............................. 406,888 0.2
FINANCIAL
------------------------------------------------------------------------------------------------------
BROADCASTING & 2,574 Societe Television Francaise 1................ 1,347,849 0.7
PUBLISHING
------------------------------------------------------------------------------------------------------
COSMETICS 130 L'Oreal SA.................................... 104,270 0.1
------------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE> 94
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FRANCE ELECTRICAL 20,000 Alstom........................................ $ 666,634 0.4%
(CONCLUDED) EQUIPMENT
------------------------------------------------------------------------------------------------------
ELECTRONICS 27,000 STMicroelectronics............................ 4,154,479 2.3
------------------------------------------------------------------------------------------------------
FOODS 1,148 Groupe Danone................................. 270,512 0.2
------------------------------------------------------------------------------------------------------
INFORMATION 825 Cap Gemini SA................................. 209,355 0.1
PROCESSING
------------------------------------------------------------------------------------------------------
INSURANCE 2,946 Axa........................................... 410,580 0.2
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 21,718 +Aventis SA................................... 1,259,709 0.7
3,060 +Aventis SA................................... 177,798 0.1
------------ -----
1,437,507 0.8
------------------------------------------------------------------------------------------------------
RETAIL STORES 3,324 Carrefour SA.................................. 612,885 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 9,620,959 5.3
- -------------------------------------------------------------------------------------------------------------------------
GERMANY AUTOMOBILES 17,529 +DaimlerChrysler AG........................... 1,362,711 0.8
------------------------------------------------------------------------------------------------------
BANKING & 3,757 Commerzbank AG................................ 137,901 0.1
FINANCIAL 4,373 Deutsche Bank AG (Registered Shares).......... 369,243 0.2
3,570 Dresdner Bank AG (Registered Shares).......... 194,129 0.1
------------ -----
701,273 0.4
------------------------------------------------------------------------------------------------------
CHEMICALS 7,187 BASF AG....................................... 369,103 0.2
7,155 Bayer AG...................................... 338,639 0.2
1,588 +Celanese AG.................................. 29,104 0.0
------------ -----
736,846 0.4
------------------------------------------------------------------------------------------------------
DIVERSIFIED 16,000 Mannesmann AG................................. 3,858,824 2.1
------------------------------------------------------------------------------------------------------
ELECTRONICS 38,800 Siemens AG.................................... 4,934,743 2.8
------------------------------------------------------------------------------------------------------
INFORMATION 25,000 +Freenet.de AG................................ 2,764,215 1.5
PROCESSING
------------------------------------------------------------------------------------------------------
INSURANCE 1,646 Allianz AG (Registered Shares)................ 552,784 0.3
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 4,942 Veba AG....................................... 240,121 0.1
------------------------------------------------------------------------------------------------------
RETAIL STORES 41,000 Metro AG...................................... 2,204,726 1.2
------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 600 SAP AG (Systeme, Anwendungen, Produkte in der
Datenverarbeitung) (Preferred).............. 361,312 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 17,717,555 9.8
- -------------------------------------------------------------------------------------------------------------------------
IRELAND BANKING & 10,000 Allied Irish Banks PLC........................ 113,791 0.1
FINANCIAL
------------------------------------------------------------------------------------------------------
WIRELINE 4,303 +Esat Telecom Group PLC (ADR)(a).............. 393,725 0.2
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN IRELAND 507,516 0.3
- -------------------------------------------------------------------------------------------------------------------------
ITALY BANKING & 120,000 Banca di Roma................................. 154,192 0.1
FINANCIAL 54,750 Unicredito Italiano SpA....................... 269,050 0.2
------------ -----
423,242 0.3
------------------------------------------------------------------------------------------------------
INSURANCE 7,500 Assicurazioni Generali........................ 247,722 0.1
228,725 Istituto Nazionale delle Assicurazioni (INA)
SpA......................................... 605,758 0.3
------------ -----
853,480 0.4
------------------------------------------------------------------------------------------------------
REAL ESTATE 215,725 +Unione Immobiliare SpA....................... 99,928 0.1
INVESTMENT TRUST
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 1,376,650 0.8
- -------------------------------------------------------------------------------------------------------------------------
NETHERLANDS CHEMICALS 18,000 Akzo Nobel NV................................. 902,675 0.5
18,000 DSM NV........................................ 721,415 0.4
------------ -----
1,624,090 0.9
------------------------------------------------------------------------------------------------------
ENERGY 50,000 Royal Dutch Petroleum Company................. 3,063,798 1.7
------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE> 95
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NETHERLANDS INSURANCE 4,392 Aegon NV...................................... $ 424,141 0.2%
(CONCLUDED)
16,282 ING Groep NV.................................. 982,775 0.6
------------ -----
1,406,916 0.8
------------------------------------------------------------------------------------------------------
LEISURE 7,896 Koninklijke (Royal) Philips Electronics NV.... 1,073,422 0.6
------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 10,000 +ASM Lithography Holding NV................... 1,110,721 0.6
------------------------------------------------------------------------------------------------------
WIRELINE 11,195 +Equant....................................... 1,270,508 0.7
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE NETHERLANDS 9,549,455 5.3
- -------------------------------------------------------------------------------------------------------------------------
PORTUGAL WIRELINE 93,500 Portugal Telecom SA (Registered Shares)....... 1,025,343 0.6
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PORTUGAL 1,025,343 0.6
- -------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING & 16,929 Banco Bilbao Vizcaya, SA...................... 241,052 0.1
FINANCIAL
55,530 Banco Santander Central Hispano, SA........... 628,526 0.4
------------ -----
869,578 0.5
------------------------------------------------------------------------------------------------------
INFORMATION 44,000 +Telefonica Publicidad e Informacion, SA...... 2,137,861 1.2
PROCESSING
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 3,007,439 1.7
- -------------------------------------------------------------------------------------------------------------------------
SWEDEN COMMUNICATIONS 20,765 Telefonaktiebolaget LM Ericsson 'B'........... 1,337,233 0.7
EQUIPMENT
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 1,337,233 0.7
- -------------------------------------------------------------------------------------------------------------------------
SWITZERLAND FOODS 300 Nestle SA (Registered Shares)................. 549,790 0.3
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 520 Novartis AG (Registered Shares)............... 763,812 0.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWITZERLAND 1,313,602 0.7
- -------------------------------------------------------------------------------------------------------------------------
UNITED BANKING & 11,000 Barclays PLC.................................. 316,415 0.2
KINGDOM FINANCIAL
20,655 HSBC Holdings PLC............................. 287,735 0.1
44,000 Lloyds TSB Group PLC.......................... 550,087 0.3
------------ -----
1,154,237 0.6
------------------------------------------------------------------------------------------------------
CHEMICALS 2,295 Imperial Chemical Industries PLC.............. 24,284 0.0
------------------------------------------------------------------------------------------------------
ENERGY 285,000 BP Amoco PLC.................................. 2,863,793 1.6
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 18,892 Unilever PLC.................................. 138,907 0.1
------------------------------------------------------------------------------------------------------
INSURANCE 265 CGU PLC....................................... 4,267 0.0
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 8,500 AstraZeneca Group PLC......................... 352,348 0.2
23,550 Glaxo Wellcome PLC............................ 665,252 0.4
43,776 SmithKline Beecham PLC........................ 558,239 0.3
------------ -----
1,575,839 0.9
------------------------------------------------------------------------------------------------------
PUBLISHING 20,000 EMAP PLC...................................... 413,235 0.2
11,160 Pearson PLC................................... 361,010 0.2
------------ -----
774,245 0.4
------------------------------------------------------------------------------------------------------
WIRELESS 729,750 Vodafone AirTouch PLC......................... 3,613,400 2.0
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
WIRELINE 141,071 +COLT Telecom Group PLC....................... 7,216,346 4.0
COMMUNICATIONS
81,000 +Energis PLC.................................. 3,888,511 2.2
------------ -----
11,104,857 6.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED KINGDOM 21,253,829 11.8
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN EUROPE
(COST--$53,153,230) 74,658,063 41.4
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
94
<PAGE> 96
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE PERCENT OF
SECURITIES AMOUNT ISSUE VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL $5,841,000 General Motors Acceptance Corp., 5% due
PAPER* 1/03/2000................................... $ 5,838,566 3.2%
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT Federal Home Loan Bank:
AGENCY OBLIGATIONS*
3,000,000 5.67% due 1/12/2000........................... 2,994,330 1.7
2,500,000 5.75% due 1/14/2000........................... 2,494,410 1.4
------------ -----
5,488,740 3.1
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST--$11,327,306)........................... 11,327,306 6.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$134,217,976)........ 181,037,552 100.3
LIABILITIES IN EXCESS OF OTHER ASSETS......... (629,778) (0.3)
------------ -----
NET ASSETS.................................... $180,407,774 100.0%
============ =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at
the time of purchase by the Fund.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
95
<PAGE> 97
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$134,217,976)....... $181,037,552
Cash........................................................ 9,077
Receivables:
Dividends................................................. $108,784
Capital shares sold....................................... 102,987 211,771
--------
Prepaid expenses............................................ 9,716
------------
Total assets................................................ 181,268,116
------------
- -------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 672,572
Investment adviser........................................ 120,012 792,584
--------
Accrued expenses and other liabilities...................... 67,758
------------
Total liabilities........................................... 860,342
------------
- -------------------------------------------------------------------------------------
NET ASSETS.................................................. $180,407,774
============
- -------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 1,220,765
Paid-in capital in excess of par............................ 131,253,214
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 1,117,726
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 46,816,069
------------
NET ASSETS.................................................. $180,407,774
============
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $180,407,774 and 12,207,645
shares outstanding........................................ $ 14.78
============
- -------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
96
<PAGE> 98
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $168,310 foreign withholding tax)......... $ 1,774,358
Interest and discount earned................................ 634,275
-----------
Total income................................................ 2,408,633
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 983,016
Custodian fees.............................................. 75,004
Accounting services......................................... 34,799
Registration fees........................................... 28,809
Transfer agent fees......................................... 4,563
Professional fees........................................... 4,276
Printing and shareholder reports............................ 8,336
Directors' fees and expenses................................ 1,232
-----------
Total expenses.............................................. 1,140,035
-----------
Investment income--net...................................... 1,268,598
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 2,239,464
Foreign currency transactions--net........................ (149,311) 2,090,153
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 45,182,126
Foreign currency transactions--net........................ (3,546) 45,178,580
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 47,268,733
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $48,537,331
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
97
<PAGE> 99
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
YEAR ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSETS: DECEMBER 31, 1999 DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,268,598 $ 42,106
Realized gain (loss) on investments and foreign currency
transactions--net......................................... 2,090,153 (5,750)
Change in unrealized appreciation on investments and foreign
currency transactions--net................................ 45,178,580 1,637,489
------------ -----------
Net increase in net assets resulting from operations........ 48,537,331 1,673,845
------------ -----------
- ------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (1,171,390) --
Realized gain on investments--net:
Class A................................................... (1,105,991) --
------------ -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (2,277,381) --
------------ -----------
- ------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 114,490,492 14,983,487
------------ -----------
- ------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 160,750,442 16,657,332
Beginning of period......................................... 19,657,332 3,000,000
------------ -----------
End of period*.............................................. $180,407,774 $19,657,332
============ ===========
- ------------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ -- $ 43,956
============ ===========
- ------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
98
<PAGE> 100
- --------------------------------------------------------------------------------
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 FOR THE YEAR FOR THE PERIOD
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1999 DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.82 $ 10.00
-------- -------
Investment income--net....................................... .11 .03
Realized and unrealized gain on investments and foreign
currency transactions--net................................. 4.06 .79
-------- -------
Total from investment operations............................. 4.17 .82
-------- -------
Less dividends and distributions:
Investment income--net..................................... (.12) --
Realized gain on investments--net.......................... (.09) --
-------- -------
Total dividends and distributions............................ (.21) --
-------- -------
Net asset value, end of period............................... $ 14.78 $ 10.82
======== =======
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................... 38.69% 8.20%++
======== =======
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................................... .87% 1.03%*
======== =======
Investment income--net....................................... .97% .63%*
======== =======
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $180,408 $19,657
======== =======
Portfolio turnover........................................... 99.09% 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.
See Notes to Financial Statements.
99
<PAGE> 101
- --------------------------------------------------------------------------------
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. 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.
When the contract is closed, the Fund records a
100
<PAGE> 102
- --------------------------------------------------------------------------------
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) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $141,164 have been reclassified between undistributed
net investment income and undistributed net realized capital gains. These
reclassifications have no effect on net assets or net asset value per share.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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 .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 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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $17,933 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
year ended
101
<PAGE> 103
- --------------------------------------------------------------------------------
December 31, 1999 were $222,725,762 and $117,358,434, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains (losses) as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $2,240,253 $46,819,576
Short-term investments.............. (789) --
Foreign currency transactions....... (149,311) (3,507)
---------- -----------
Total............................... $2,090,153 $46,816,069
========== ===========
- ---------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $46,792,019, of which $49,938,757 related to appreciated
securities and $3,146,738 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$134,245,533.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 15,332,216 $170,032,328
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 159,398 2,277,381
---------- ------------
Total issued......................... 15,491,614 172,309,709
Shares redeemed...................... (5,100,726) (57,819,217)
---------- ------------
Net increase......................... 10,390,888 $114,490,492
========== ============
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Period June 5, 1998+ Dollar
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.
102
<PAGE> 104
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
GLOBAL GROWTH FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Global Growth Focus Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended, and changes in net assets and the financial
highlights for the year then ended and for the period June 5, 1998 (commencement
of operations) to December 31, 1998. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Global Growth Focus
Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
103
<PAGE> 105
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the 30-year
Treasury bond yield hit a two-year high over concerns of the continued strength
of the economy and potential future action by the Federal Reserve Board.
FISCAL YEAR IN REVIEW
For the year ended December 31, 1999, Global Strategy Focus Fund's Class A
Shares had a total return of +21.37%. Foreign equities provided the highest
return among asset classes during 1999. The Fund's return was enhanced by our
decision to expand foreign equity representation beginning early in the year,
with our focus on enlarging the commitment to Japan and expanding representation
in emerging markets. This increase included the establishment of positions in
Brazil, South Korea and Singapore. The allocation of significant assets to "new
economy" sectors in all markets--including technology, business services,
telecommunications services and telecommunications equipment--also had a
positive effect on the Fund's performance. Within the United States, technology
was the largest sector represented throughout the year, and this allocation
proved rewarding. In contrast to 1998, the return on fixed-income securities
lagged that of equities by a substantial margin, but the negative impact was
limited by a significant reduction in our US bond representation during 1999.
PORTFOLIO MATTERS
As of December 31, 1999, the asset allocation for Global Strategy Portfolio
was: US stocks, 25% of net assets; foreign stocks, 54%; US bonds, 3%; foreign
bonds, 16%; and cash reserves, 2%.
Equity representation remained at 79%
of net assets during the six months ended December 31, 1999, but we shifted the
asset mix in favor of foreign equities. We increased the allocation to this
sector from 43% of net assets to 54% during the second half of 1999. We enlarged
the Fund's representation in European technology and business services through
new positions such as Epcos AG, Equant, Getronics NV, Telefonaktiebolaget LM
Ericsson and Tandberg Television ASA. Overall, Europe remains the largest
regional commitment, while Japan continues to be overweighted relative to the
benchmark unmanaged Morgan Stanley Capital International Europe, Australasia,
Far East Index. We increased the Fund's commitment to Asia (excluding Japan)
through positions in City Developments Limited and Singapore Airlines Limited in
Singapore. In Latin America, we continued to focus on Brazil because it offered
the most favorable reward/risk potential, in our view.
During the six months ended December 31, 1999, we reduced our US equity
position from 36% of net assets to 25%. Our technology holdings accounted for
nearly one-third of the Fund's US equity assets. This commitment reflects our
continuing emphasis on the shares of companies where we believe a consistent and
above-average rate of earnings growth could be extended over the next several
years and where valuations appear to us to be reasonable relative to earnings
growth potential. Consistent with this focus are the Fund's significant
commitments to the consumer staples, communication services, financial and
healthcare sectors.
In the fixed-income sector, we reduced our position in US bonds from 6% of net
assets to 3% during the six months ended December 31, 1999. Late in 1999, we
took advantage of an interest rate rise to extend the Fund's average duration to
6.8 years, after reducing the duration earlier in the second half of 1999. In
our opinion, the Federal Reserve Board will continue to tighten monetary policy
in 2000 until the US economy slows down. Such a slowdown could
104
<PAGE> 106
- --------------------------------------------------------------------------------
ease fears of a resurgence of inflation and enable intermediate-term--long-term
US interest rates to decline. At this time, risk in US fixed-income securities
appears limited, in our view. In the foreign bond sector, we increased the
Fund's representation from 13% of net assets to 16% during the second half of
1999. We maintained positions in German and UK bonds throughout the second half
of the year. We reestablished a position in New Zealand bonds during the latter
part of 1999, taking advantage of a widening yield differential between New
Zealand and US bonds of similar maturities.
IN CONCLUSION
We appreciate your investment in Global Strategy Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook 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
February 7, 2000
105
<PAGE> 107
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
[GLOBAL STRATEGY FOCUS FUND GRAPH]
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Morgan Stanley Capital International
World Index and a Weighted Index. Beginning and ending values are:
<TABLE>
<CAPTION>
2/28/92** 12/99
<S> <C> <C>
Global Strategy
Focus Fund+--Class A Shares* $10,000 $22,660
Morgan Stanley Capital
International World Index++ $10,000 $31,177
Weighted Index+++ $10,000 $26,208
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+Global Strategy Focus Fund invests primarily in a portfolio of equity and
fixed-income securities of US and foreign issuers.
++This unmanaged market capitalization-weighted Index is comprised of a
representative sampling of stocks of large-, medium-, and small-capitalization
companies in 22 countries, including the United States.
+++This unmanaged Index, which is an equally weighted blend of the Morgan
Stanley Capital International World Index, the Salomon Brothers World Government
Bond Index and the Salomon Brothers World Money Market Index, is comprised of a
representative sampling of stocks of large-, medium-, and small-capitalization
companies in 22 countries, government bonds and money market securities in the
major markets, including the United States.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +21.37%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +13.11
- --------------------------------------------------------------------------------
Inception (2/28/92) to 12/31/99 +11.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +15.99% +21.37%
</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.
106
<PAGE> 108
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD US STOCKS VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE & DEFENSE 34,302 United Technologies Corporation.......... $ 2,229,630 0.3%
- -------------------------------------------------------------------------------------------------------------------------
APPLICATION DEVELOPMENT 28,480 +Siebel Systems, Inc. ................... 2,399,440 0.3
SOFTWARE
- -------------------------------------------------------------------------------------------------------------------------
BANKING 38,128 Bank of America Corporation.............. 1,913,549 0.3
78,330 The Bank of New York Company, Inc. ...... 3,133,200 0.4
12,400 The Chase Manhattan Corporation.......... 963,325 0.1
49,100 Citigroup Inc. .......................... 2,728,119 0.4
54,660 Wells Fargo Company...................... 2,210,314 0.3
------------ -----
10,948,507 1.5
- -------------------------------------------------------------------------------------------------------------------------
BEVERAGES 13,000 The Coca-Cola Company.................... 757,250 0.1
23,600 PepsiCo, Inc. ........................... 831,900 0.1
------------ -----
1,589,150 0.2
- -------------------------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 47,290 AT&T Corp. .............................. 2,399,968 0.3
108,000 +AT&T Corp.-Liberty Media Group (Class
A)..................................... 6,129,000 0.9
14,440 +Clear Channel Communications, Inc. ..... 1,288,770 0.2
14,600 +UnitedGlobalCom Inc. (Class A).......... 1,025,650 0.1
------------ -----
10,843,388 1.5
- -------------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 27,400 +American Tower Corporation (Class A).... 837,413 0.1
- -------------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 6,700 +Oracle Corporation...................... 750,400 0.1
- -------------------------------------------------------------------------------------------------------------------------
CABLE 130,500 +Charter Communications, Inc. (Class
A)..................................... 2,854,688 0.4
- -------------------------------------------------------------------------------------------------------------------------
CHEMICALS 21,713 E.I. du Pont de Nemours and Company...... 1,430,344 0.2
29,446 Rohm and Haas Company.................... 1,198,084 0.2
------------ -----
2,628,428 0.4
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 22,000 +Convergys Corporation................... 676,500 0.1
- -------------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 73,485 +MCI WorldCom Inc. ...................... 3,894,705 0.5
- -------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 8,000 +America Online, Inc. ................... 603,500 0.1
86,130 +Cisco Systems, Inc. .................... 9,221,293 1.3
24,300 International Business Machines
Corporation............................ 2,624,400 0.3
------------ -----
12,449,193 1.7
- -------------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 3,500 +i2 Technologies, Inc. .................. 681,188 0.1
11,600 +Symantec Corporation.................... 680,050 0.1
2,100 +Yahoo! Inc. ............................ 908,644 0.1
------------ -----
2,269,882 0.3
- -------------------------------------------------------------------------------------------------------------------------
COMPUTERS 25,300 Compaq Computer Corporation.............. 684,681 0.1
32,030 +EMC Corporation......................... 3,499,278 0.5
6,400 +Gateway Inc. ........................... 461,200 0.1
39,300 +Sun Microsystems, Inc. ................. 3,040,838 0.4
50,500 Tandy Corporation........................ 2,483,969 0.3
------------ -----
10,169,966 1.4
- -------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 49,970 The Dial Corporation..................... 1,214,896 0.2
13,500 Honeywell International Inc. ............ 778,781 0.1
------------ -----
1,993,677 0.3
- -------------------------------------------------------------------------------------------------------------------------
COSMETICS 12,000 The Gillette Company..................... 494,250 0.1
- -------------------------------------------------------------------------------------------------------------------------
ELECTRIC & GAS 31,200 +Calpine Corporation..................... 1,996,800 0.3
- -------------------------------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS 8,000 +The AES Corporation..................... 598,000 0.1
- -------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 53,600 General Electric Company................. 8,294,600 1.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
107
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD US STOCKS VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ELECTRONICS 2,700 +Broadcom Corporation (Class A).......... $ 735,244 0.1%
28,200 Intel Corporation........................ 2,319,450 0.3
9,600 Texas Instruments Incorporated........... 930,000 0.1
------------ -----
3,984,694 0.5
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 39,550 Associates First Capital Corporation
(Class A).............................. 1,085,153 0.2
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- 33,300 Household International, Inc. ........... 1,240,425 0.2
CONSUMER
- -------------------------------------------------------------------------------------------------------------------------
FOODS 98,060 +Keebler Foods Company................... 2,757,938 0.4
- -------------------------------------------------------------------------------------------------------------------------
HEALTHCARE--PRODUCTS & 31,500 Columbia/HCA Healthcare Corporation...... 923,344 0.1
SERVICES
- -------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 22,900 Colgate-Palmolive Company................ 1,488,500 0.2
16,800 The Procter & Gamble Company............. 1,840,650 0.3
------------ -----
3,329,150 0.5
- -------------------------------------------------------------------------------------------------------------------------
INFORMATION PROCESSING 31,000 +Unisys Corporation...................... 990,063 0.1
- -------------------------------------------------------------------------------------------------------------------------
INSURANCE 30,840 AXA Financial, Inc. ..................... 1,044,705 0.2
15,187 American International Group, Inc. ...... 1,642,094 0.2
------------ -----
2,686,799 0.4
- -------------------------------------------------------------------------------------------------------------------------
INTERNETWORKING 2,500 +InfoSpace.com, Inc. .................... 534,844 0.0
7,000 +Inktomi Corporation..................... 620,375 0.1
3,900 +Internet Capital Group, Inc. ........... 661,294 0.1
------------ -----
1,816,513 0.2
- -------------------------------------------------------------------------------------------------------------------------
LASER SYSTEMS & COMPONENTS 42,760 +JDS Uniphase Corporation................ 6,895,050 0.9
- -------------------------------------------------------------------------------------------------------------------------
MACHINERY & EQUIPMENT 11,331 Caterpillar Inc. ........................ 533,265 0.1
- -------------------------------------------------------------------------------------------------------------------------
MANUFACTURING 16,520 Millipore Corporation.................... 638,085 0.1
- -------------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 20,830 Johnson & Johnson........................ 1,939,794 0.3
- -------------------------------------------------------------------------------------------------------------------------
METALS 37,515 Alcoa Inc. .............................. 3,113,745 0.4
- -------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 66,600 Enron Corp. ............................. 2,955,375 0.4
- -------------------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES 38,800 Burlington Resources Inc. ............... 1,282,825 0.2
- -------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 46,337 Exxon Mobil Corporation.................. 3,733,025 0.5
- -------------------------------------------------------------------------------------------------------------------------
OIL SERVICES 50,000 Schlumberger Limited..................... 2,812,500 0.4
9,680 Transocean Sedco Forex Inc. ............. 326,095 0.0
------------ -----
3,138,595 0.4
- -------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 26,800 International Paper Company.............. 1,512,525 0.2
- -------------------------------------------------------------------------------------------------------------------------
PETROLEUM 41,700 Unocal Corporation....................... 1,399,556 0.2
- -------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICAL--DIVERSIFIED 20,810 American Home Products Corporation....... 820,694 0.1
41,900 Bristol-Myers Squibb Company............. 2,689,456 0.4
------------ -----
3,510,150 0.5
- -------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 19,380 Pharmacia & Upjohn, Inc. ................ 872,100 0.1
PRESCRIPTION
- -------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 36,640 Cardinal Health, Inc. ................... 1,754,140 0.2
5,800 Eli Lilly and Company.................... 385,700 0.1
47,270 Merck & Co., Inc. ....................... 3,170,044 0.4
55,560 Pfizer Inc. ............................. 1,802,228 0.3
------------ -----
7,112,112 1.0
- -------------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 48,000 +AMFM Inc. .............................. 3,756,000 0.5
- -------------------------------------------------------------------------------------------------------------------------
RESTAURANTS 61,600 McDonald's Corporation................... 2,483,250 0.3
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
108
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD US STOCKS VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RETAIL 23,000 +Federated Department Stores, Inc. ...... $ 1,162,938 0.2%
45,840 Lowe's Companies, Inc. .................. 2,738,940 0.4
66,450 +Safeway Inc. ........................... 2,363,128 0.3
53,950 Wal-Mart Stores, Inc. ................... 3,729,294 0.5
------------ -----
9,994,300 1.4
- -------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 13,410 Motorola, Inc. .......................... 1,974,623 0.3
- -------------------------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 74,950 +Microsoft Corporation................... 8,745,728 1.2
20,000 +Network Associates, Inc. ............... 532,500 0.1
------------ -----
9,278,228 1.3
- -------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 21,000 +3Com Corporation........................ 985,688 0.1
14,800 +Adelphia Business Solutions, Inc. ...... 700,225 0.1
25,700 +Amdocs Limited.......................... 886,650 0.1
58,970 GTE Corporation.......................... 4,161,071 0.6
13,000 +Global TeleSystems Group, Inc. ......... 450,125 0.1
22,040 Lucent Technologies Inc. ................ 1,648,868 0.2
------------ -----
8,832,627 1.2
- -------------------------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 9,500 United Parcel Service, Inc. (Class B).... 655,500 0.1
- -------------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 72,853 SBC Communications Inc. ................. 3,551,584 0.5
- -------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATION-- 8,800 +Nextel Communications, Inc. (Class A)... 906,950 0.1
DOMESTIC PAGING 13,800 +Sprint Corp. (PCS Group)................ 1,414,500 0.2
& CELLULAR
------------ -----
2,321,450 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS (COST--$124,549,868) 178,216,460 24.5
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COUNTRY FOREIGN STOCKS++
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUSTRALIA 227,500 Broken Hill Proprietary Company Limited
(19)................................... 2,974,484 0.4
38,700 The News Corporation Limited (Preferred)
(ADR)* (46)............................ 1,294,031 0.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRALIA 4,268,515 0.6
- -------------------------------------------------------------------------------------------------------------------------
AUSTRIA 41,100 Mayr-Melnhof Karton AG (43).............. 1,903,834 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRIA 1,903,834 0.3
- -------------------------------------------------------------------------------------------------------------------------
BERMUDA 16,500 +Global Crossing Ltd. (51)............... 823,969 0.1
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BERMUDA 823,969 0.1
- -------------------------------------------------------------------------------------------------------------------------
BRAZIL 92,600 Aracruz Celulose SA (ADR)* (43).......... 2,430,750 0.3
84,800 Companhia Vale do Rio Doce 'A'
(Preferred) (39)....................... 2,350,333 0.3
71,400 Embratel Participacoes SA (ADR)* (51).... 1,945,650 0.3
5,160,000 Petroleo Brasileiro SA (42).............. 1,144,038 0.1
15,600 Telecomunicacoes Brasileiras SA-Telebras
Preferred (Block) (ADR)* (51).......... 2,004,600 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 9,875,371 1.3
- -------------------------------------------------------------------------------------------------------------------------
CANADA 46,000 Alberta Energy Company Ltd. (41)......... 1,428,867 0.2
40,900 BCE Inc.(51)............................. 3,688,669 0.5
199,900 Domtar, Inc. (43)........................ 2,359,557 0.3
44,200 Nortel Networks Corporation (13)......... 4,464,200 0.6
77,200 Teleglobe Inc. (51)...................... 1,751,475 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 13,692,768 1.9
- -------------------------------------------------------------------------------------------------------------------------
DENMARK 12,900 +ISS International Service System A/S 'B'
(30)................................... 867,928 0.1
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 867,928 0.1
- -------------------------------------------------------------------------------------------------------------------------
FINLAND 116,900 Amer Group Ltd. (19)..................... 2,372,024 0.3
29,700 Nokia Oyj (13)........................... 5,383,422 0.8
</TABLE>
109
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINLAND 80,000 Sampo Insurance Company Ltd. 'A' (32).... $ 2,795,432 0.4%
(CONCLUDED) 57,400 UPM-Kymmene Oyj (43)..................... 2,312,072 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 12,862,950 1.8
- -------------------------------------------------------------------------------------------------------------------------
FRANCE 5,800 +Atos SA (32)............................ 961,363 0.1
56,400 Aventis SA (12).......................... 3,277,060 0.5
27,800 Axa (32)................................. 3,874,453 0.5
18,600 Banque Nationale de Paris (BNP) (6)...... 1,715,686 0.3
6,250 Cap Gemini SA (31)....................... 1,586,025 0.2
12,510 Carrefour SA (38)........................ 2,306,615 0.3
37,000 France Telecom SA (51)................... 4,892,107 0.7
9,000 Groupe Danone (25)....................... 2,120,742 0.3
63,100 Pechiney SA 'A' (39)..................... 4,508,284 0.6
42,500 STMicroelectronics NV (NY Registered
Shares) (49)........................... 6,436,094 0.9
65,500 Scor (32)................................ 2,888,982 0.4
7,165 Societe Generale 'A' (6)................. 1,666,701 0.2
63,800 Thomson CSF (21)......................... 2,106,646 0.3
29,300 +Thomson Multimedia (23)................. 1,578,523 0.2
37,600 Total Fina SA 'B' (41)................... 5,016,874 0.7
49,200 Vivendi (55)............................. 4,441,655 0.6
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 49,377,810 6.8
- -------------------------------------------------------------------------------------------------------------------------
GERMANY 15,300 BASF AG (12)............................. 785,762 0.1
22,300 Deutsche Bank AG (Registered Shares)
(6).................................... 1,882,944 0.3
30,000 Dresdner Bank AG (Registered Shares)
(6).................................... 1,631,340 0.2
42,389 +Epcos AG (22)........................... 3,180,086 0.4
36,700 Henkel KGaA (Preferred) (12)............. 2,420,677 0.3
20,000 Mannesmann AG (36)....................... 4,823,530 0.7
18,200 RWE AG (19).............................. 712,936 0.1
24,200 Siemens AG (23).......................... 3,077,855 0.4
43,800 Veba AG (40)............................. 2,128,143 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 20,643,273 2.8
- -------------------------------------------------------------------------------------------------------------------------
HONG KONG 145,800 Hutchison Whampoa Limited (40)........... 2,119,568 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG KONG 2,119,568 0.3
- -------------------------------------------------------------------------------------------------------------------------
IRELAND 360,000 Bank of Ireland (6)...................... 2,863,908 0.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN IRELAND 2,863,908 0.4
- -------------------------------------------------------------------------------------------------------------------------
ITALY 462,000 ENI SpA (41)............................. 2,540,178 0.4
94,250 Mondadori (Arnoldo) Editore SpA (46)..... 2,989,657 0.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 5,529,835 0.8
- -------------------------------------------------------------------------------------------------------------------------
JAPAN 240,000 The Bank of Tokyo-Mitsubishi, Ltd. (7)... 3,344,358 0.5
92,000 Bridgestone Corp. (52)................... 2,025,639 0.3
137,000 The Daimaru, Inc. (48)................... 463,861 0.1
507 East Japan Railway Company (53).......... 2,733,702 0.4
94,000 Fujitsu Limited (23)..................... 4,286,525 0.6
123,000 Hitachi Ltd. (23)........................ 1,973,970 0.3
60,000 Honda Motor Co., Ltd. (3)................ 2,231,138 0.3
12,600 +Internet Initiative Japan Inc.
(ADR)* (23)............................ 1,222,200 0.2
37,000 +Ito-Yokado Co., Ltd. (48)............... 4,018,984 0.6
108,000 Kao Corporation (17)..................... 3,080,732 0.4
6,500 Keyence Corporation (23)................. 2,639,691 0.4
32,000 Kyocera Corporation (23)................. 8,298,268 1.1
168,000 Marui Co., Ltd. (38)..................... 2,508,739 0.3
154,000 Matsushita Electric Industrial Company,
Ltd. (23).............................. 4,264,801 0.6
127,000 Minebea Company Ltd. (35)................ 2,178,599 0.3
175,000 +Mitsukoshi, Ltd. (48)................... 616,499 0.1
192,000 NEC Corporation (15)..................... 4,575,007 0.6
</TABLE>
110
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JAPAN 256 +NTT Mobile Communications Network, Inc.
(CONCLUDED) (51)................................... $ 9,845,190 1.3%
847,000 Nippon Sheet Glass Company, Ltd. (26).... 4,392,895 0.6
750,000 Nippon Steel Corporation (50)............ 1,754,085 0.2
311 Nippon Telegraph & Telephone Corporation
(NTT) (23)............................. 5,325,863 0.7
121,000 Olympus Optical Co., Ltd. (19)........... 1,710,979 0.2
24,000 Orix Corporation (24).................... 5,406,400 0.7
17,000 Rohm Company Ltd. (23)................... 6,986,985 1.0
309,000 The Sanwa Bank, Ltd. (7)................. 3,758,557 0.5
52,000 Shin-Etsu Chemical Co., Ltd. (12)........ 2,238,967 0.3
7,500 Softbank Corporation (18)................ 7,177,806 1.0
23,000 Sony Corporation (ADR)* (2).............. 6,549,250 0.9
249,000 The Sumitomo Bank, Ltd. (6).............. 3,408,856 0.5
30,000 TDK Corporation (23)..................... 4,142,284 0.6
64,000 Takeda Chemical Industries, Ltd. (45).... 3,162,736 0.4
212,000 The Tokio Marine & Fire Insurance Co.
Ltd. (32).............................. 2,479,108 0.3
370,000 Toshiba Corporation (23)................. 2,824,151 0.4
86,000 Toyota Motor Corporation (3)............. 4,165,770 0.6
22,000 Toyota Motor Corporation (ADR)* (3)...... 2,142,250 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 127,934,845 17.6
- -------------------------------------------------------------------------------------------------------------------------
NETHERLANDS 48,500 ABN AMRO Holding NV (6).................. 1,211,220 0.2
14,400 +ASM Lithography Holding NV (22)......... 1,599,438 0.2
15,400 Akzo Nobel NV (12)....................... 772,288 0.1
51,100 +Baan Company, NV (14)................... 721,951 0.1
108,000 CSM NV (25).............................. 2,305,627 0.3
8,700 +Equant (15)............................. 987,353 0.1
13,700 Getronics NV (14)........................ 1,092,635 0.2
42,126 Koninklijke Ahold NV (25)................ 1,246,750 0.2
13,608 Koninklijke (Royal) Philips Electronics
NV (NY Registered Shares) (23)......... 1,837,080 0.3
28,928 Unilever NV 'A' (37)..................... 1,597,516 0.2
93,700 VNU NV (46).............................. 4,923,491 0.7
39,200 Vedior NV 'A' (29)....................... 402,639 0.0
47,800 Vendex KBB NV (48)....................... 1,270,753 0.2
75,600 Wolters Kluwer NV 'A' (9)................ 2,557,941 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE NETHERLANDS 22,526,682 3.1
- -------------------------------------------------------------------------------------------------------------------------
NORWAY 82,900 Bergesen d.y. ASA 'B' (53)............... 1,418,953 0.2
197,800 Merkantildata ASA (14)................... 2,397,126 0.3
133,300 +Tandberg Television ASA (51)............ 1,848,613 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORWAY 5,664,692 0.8
- -------------------------------------------------------------------------------------------------------------------------
SINGAPORE 298,000 City Developments Limited (16)........... 1,745,045 0.3
82,573 DBS Group Holdings Limited (7)........... 1,353,900 0.2
78,600 +Flextronics International Ltd. (22)..... 3,615,600 0.5
153,700 Singapore Airlines Limited (1)........... 1,744,703 0.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SINGAPORE 8,459,248 1.2
- -------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA 46,700 Pohang Iron & Steel Company Ltd.
(ADR)* (50)............................ 1,634,500 0.2
5,300 Samsung Electronics (23)................. 1,242,114 0.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH KOREA 2,876,614 0.4
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
111
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SPAIN 172,000 Dinamia Capital Privado. Sociedad de
Capital Riesgo, SA (56)................ $ 1,498,215 0.2%
133,000 Endesa SA (54)........................... 2,639,780 0.4
27,390 +Grupo Ferrovial, SA (16)................ 397,177 0.0
89,100 Metrovacesa, SA (47)..................... 1,543,248 0.2
134,400 Repsol-YPF, SA (44)...................... 3,115,545 0.4
175,500 +Telefonica SA (51)...................... 4,382,867 0.6
273,600 Uralita, SA (10)......................... 1,931,361 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 15,508,193 2.1
- -------------------------------------------------------------------------------------------------------------------------
SWEDEN 58,100 Autoliv, Inc. (5)........................ 1,703,190 0.2
163,200 Castellum AB (47)........................ 1,594,726 0.2
16,400 Custos AB 'A' (19)....................... 398,705 0.1
65,500 Custos AB 'B' (19)....................... 1,573,110 0.2
202,200 Fastighets AB Tornet (47)................ 2,808,994 0.4
102,750 ForeningsSparbanken AB (6)............... 1,512,097 0.2
161,500 Haldex AB (5)............................ 1,882,329 0.3
254,182 Investment AB Bure (33).................. 1,735,643 0.2
325,700 Nordbanken Holding AB (6)................ 1,917,236 0.3
175,800 +Stora Enso Oyj 'R' (43)................. 3,021,756 0.4
58,200 Telefonaktiebolaget LM Ericsson
'B' (51)............................... 3,747,987 0.5
56,000 Volvo AB 'B' (4)......................... 1,450,436 0.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 23,346,209 3.2
- -------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 1,302 Adecco SA (Registered Shares) (29)....... 1,014,312 0.1
6,223 Credit Suisse Group (Registered
Shares) (6)............................ 1,237,406 0.2
1,000 Novartis AG (Registered Shares) (20)..... 1,468,870 0.2
275 Roche Holding AG (45).................... 3,265,377 0.5
3,320 UBS AG (Registered Shares) (7)........... 896,903 0.1
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWITZERLAND 7,882,868 1.1
- -------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 75,100 AstraZeneca Group PLC (20)............... 3,113,094 0.4
295,600 BP Amoco PLC (41)........................ 2,970,305 0.4
531,000 Billiton PLC (19)........................ 3,130,705 0.4
143,200 British Telecommunications PLC (51)...... 3,497,351 0.5
161,400 +Cable & Wireless PLC (51)............... 2,732,979 0.4
768,600 Devro PLC (25)........................... 1,249,979 0.2
258,186 Diageo PLC (8)........................... 2,075,484 0.3
127,700 Dixons Group PLC (48).................... 3,069,325 0.4
69,500 +Energis PLC (51)........................ 3,336,438 0.5
107,000 Glaxo Wellcome PLC (45).................. 3,022,589 0.4
215,300 HSBC Holdings PLC (6).................... 2,999,246 0.4
551,500 Hilton Group PLC (34).................... 1,764,883 0.2
395,700 Lloyds TSB Group PLC (6)................. 4,947,033 0.7
139,300 The Peninsular and Oriental Steam
Navigation Company (53)................ 2,322,784 0.3
217,900 Reckitt Benckiser PLC (28)............... 2,041,817 0.3
84,250 Shell Transport & Trading Company (ADR)*
(42)................................... 4,149,313 0.6
243,800 SmithKline Beecham PLC (45).............. 3,108,981 0.4
296,300 +Telewest Communications PLC (11)........ 1,579,544 0.2
621,000 Vodafone AirTouch PLC (51)............... 3,074,918 0.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED KINGDOM 54,186,768 7.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS (COST--$296,323,044) 393,215,848 54.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
112
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE PERCENT OF
COUNTRY AMOUNT FOREIGN BONDS++ VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GERMANY E 74,410,000 Bundes Obligation, 4.75% due 11/20/2001
(27)................................... $ 75,651,330 10.4%
29,770,000 Bundesrepublic Deutschland, 4.75% due
7/04/2028 (27)......................... 24,979,973 3.5
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 100,631,303 13.9
- -------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND NZ$ 13,900,000 New Zealand Government Bond, 8% due
4/15/2004 (27)......................... 7,502,591 1.0
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NEW ZEALAND 7,502,591 1.0
- -------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM L 5,720,000 United Kingdom Treasury Gilt, 7.25% due
2/07/2007(27).......................... 10,064,528 1.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED KINGDOM 10,064,528 1.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (COST--$132,105,080) 118,198,422 16.3
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
US GOVERNMENT & AGENCY OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association:
US$ 1,000,000 5.625% due 3/15/2001..................... 990,780 0.1
1,340,000 5.75% due 2/15/2008...................... 1,236,780 0.2
8,300,000 5.25% due 1/15/2009...................... 7,320,849 1.0
750,000 6.375% due 6/15/2009..................... 716,130 0.1
5,300,000 US Treasury Bonds, 6.125% due
8/15/2029.............................. 5,052,384 0.7
US Treasury Notes:
2,100,000 5% due 4/30/2001......................... 2,069,151 0.3
1,800,000 5.75% due 6/30/2001...................... 1,788,750 0.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY OBLIGA-
TIONS (COST--$19,455,211) 19,174,824 2.6
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER** 16,523,000 General Motors Acceptance Corp., 5% due
1/03/2000.............................. 16,518,410 2.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$16,518,410) 16,518,410 2.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$588,951,613)... 725,323,964 99.8
OTHER ASSETS LESS LIABILITIES............ 1,716,353 0.2
------------ -----
NET ASSETS............................... $727,040,317 100.0%
============ =====
- -------------------------------------------------------------------------------------------------------------------------
</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.
++ Corresponding industry groups for foreign stocks and bonds:
<TABLE>
<S> <C> <C>
(1) Airlines (20) Drugs (39) Metals & Mining
(2) Appliances (21) Electrical Equipment (40) Multi-Industry
(3) Automobile (22) Electronic Components (41) Oil & Related
(4) Automobile & Equipment (23) Electronics (42) Oil--Integrated
(5) Auto--Parts (24) Finance (43) Paper & Forest Products
(6) Banking (25) Foods (44) Petroleum
(7) Banking & Financial (26) Glass (45) Pharmaceutical
(8) Beverages (27) Government (Bonds) (46) Printing & Publishing
(9) Broadcasting & Publishing (28) Hardware Products (47) Real Estate
(10) Building Materials (29) Human Resources (48) Retail Stores
(11) Cable Television Services (30) Industrial--Services (49) Semiconductor Capital Equipment
(12) Chemicals (31) Information Processing (50) Steel
(13) Communication Equipment (32) Insurance (51) Telecommunications
(14) Computer Software (33) Investment Management (52) Tires & Rubber
(15) Computers (34) Leisure (53) Transport Services
(16) Construction (35) Machine Tools & Machinery (54) Utilities--Electric
(17) Cosmetics (36) Machinery & Equipment (55) Utilities--Water
(18) Distribution (37) Manufacturing (56) Venture Capital
(19) Diversified (38) Merchandising
</TABLE>
See Notes to Financial Statements.
113
<PAGE> 115
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$588,951,613)....... $725,323,964
Cash........................................................ 1,493
Receivables:
Securities sold........................................... $2,757,819
Interest.................................................. 1,672,398
Dividends................................................. 626,987
Capital shares sold....................................... 2,918 5,060,122
----------
Prepaid expenses and other assets........................... 49,909
------------
Total assets................................................ 730,435,488
------------
- -----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 2,547,064
Investment adviser........................................ 429,772
Capital shares redeemed................................... 245,731 3,222,567
----------
Accrued expenses and other liabilities...................... 172,604
------------
Total liabilities........................................... 3,395,171
------------
- -----------------------------------------------------------------------------------------
NET ASSETS.................................................. $727,040,317
============
- -----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 200,000,000
shares authorized+........................................ $ 5,145,299
Paid-in capital in excess of par............................ 584,428,699
Accumulated distributions in excess of investment
income--net............................................... (2,487,324)
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 3,618,782
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 136,334,861
------------
NET ASSETS.................................................. $727,040,317
============
- -----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $727,040,317 and 51,452,988
shares outstanding........................................ $ 14.13
============
- -----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
114
<PAGE> 116
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 9,205,827
Dividends (net of $615,760 foreign withholding tax)......... 6,270,596
Other income................................................ 25,110
------------
Total income................................................ 15,501,533
------------
- -----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 4,535,540
Custodian fees.............................................. 238,503
Accounting services......................................... 134,566
Professional fees........................................... 80,661
Printing and shareholder reports............................ 79,563
Directors' fees and expenses................................ 16,090
Transfer agent fees......................................... 5,010
Pricing services............................................ 4,781
Other....................................................... 10,813
-----------
Total expenses.............................................. 5,105,527
------------
Investment income--net...................................... 10,396,006
------------
- -----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain from:
Investments--net.......................................... 78,265,077
Foreign currency transactions--net........................ 124,348 78,389,425
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 46,034,563
Foreign currency transactions--net........................ (267,392) 45,767,171
----------- ------------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 124,156,596
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $134,552,602
============
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
115
<PAGE> 117
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 10,396,006 $ 19,776,143
Realized gain on investments and foreign currency
transactions--net......................................... 78,389,425 1,127,496
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 45,767,171 47,215,144
------------ -------------
Net increase in net assets resulting from operations........ 134,552,602 68,118,783
------------ -------------
- -------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (14,746,772) (32,818,349)
In excess of investment income--net:
Class A................................................... (2,747,792) --
Realized gain on investments--net:
Class A................................................... (78,043,311) (100,559,993)
In excess of realized gain on investments--net:
Class A................................................... -- (8,809,833)
------------ -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (95,537,875) (142,188,175)
------------ -------------
- -------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (78,000,222) (29,551,610)
------------ -------------
- -------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (38,985,495) (103,621,002)
Beginning of year........................................... 766,025,812 869,646,814
------------ -------------
End of year*................................................ $727,040,317 $ 766,025,812
============ =============
- -------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ (2,487,324) $ 4,350,766
============ =============
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
116
<PAGE> 118
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED DECEMBER 31,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ----------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999++ 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................... $ 13.41 $ 14.71 $ 13.87 $ 12.55 $ 11.73
-------- -------- -------- -------- --------
Investment income--net...................................... .20 .34 .35 .28 .39
Realized and unrealized gain on investments and foreign
currency transactions--net................................ 2.58 .76 1.21 1.33 .82
-------- -------- -------- -------- --------
Total from investment operations............................ 2.78 1.10 1.56 1.61 1.21
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.................................... (.30) (.55) (.30) (.29) (.39)
In excess of investment income--net....................... (.05) -- -- -- --
Realized gain on investments--net......................... (1.71) (1.70) (.42) -- --+
In excess of realized gain on investments--net............ -- (.15) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions........................... (2.06) (2.40) (.72) (.29) (.39)
-------- -------- -------- -------- --------
Net asset value, end of year................................ $ 14.13 $ 13.41 $ 14.71 $ 13.87 $ 12.55
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.......................... 21.37% 8.87% 11.94% 13.17% 10.60%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .73% .72% .73% .71% .72%
======== ======== ======== ======== ========
Investment income--net...................................... 1.49% 2.40% 2.33% 2.68% 3.33%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)...................... $727,040 $766,026 $869,647 $870,203 $540,242
======== ======== ======== ======== ========
Portfolio turnover.......................................... 103.76% 120.59% 108.66% 173.44% 27.23%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
See Notes to Financial Statements.
117
<PAGE> 119
- --------------------------------------------------------------------------------
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. 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.
When the contract is closed, the Fund records a
118
<PAGE> 120
- --------------------------------------------------------------------------------
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. Distributions in excess of net investment
income and net realized capital gains are due primarily to differing tax
treatments for foreign currency transactions.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $260,468 have been reclassified between accumulated
distributions in excess of net investment income and undistributed net realized
capital gains. These reclassifications have no effect on net assets or net asset
value per share.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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 .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 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 expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by MLAM which, in turn, will be reimbursed by MLLA.
For the year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $129,797 in
commissions on the execution of portfolio security transactions.
For the year ended December 31, 1999, Merrill Lynch Security Pricing Service,
an affiliate of MLPF&S, earned $285 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.
119
<PAGE> 121
- --------------------------------------------------------------------------------
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
year ended December 31, 1999 were $714,322,348 and $887,241,758, respectively.
Net realized gains for the year ended December 31, 1999 and net unrealized
gains (losses) as of December 31, 1999 were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Realized Gains
Gains (Losses)
- -----------------------------------------------------------------------------
<S> <C> <C>
Long-term investments............................ $78,265,077 $136,372,351
Foreign currency transactions.................... 124,348 (37,490)
----------- ------------
Total............................................ $78,389,425 $136,334,861
=========== ============
- -----------------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $132,460,467, of which $175,471,777 related to appreciated
securities and $43,011,310 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$592,863,497.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Class A for the Year Ended Dollar
December 31, 1999 Shares Amount
- ----------------------------------------------------------------------------
<S> <C> <C>
Shares sold................................... 122,464 $ 1,702,788
Shares issued to shareholders in reinvestment
of dividends and distributions............... 6,938,455 95,537,875
----------- -------------
Total issued.................................. 7,060,919 97,240,663
Shares redeemed............................... (12,752,079) (175,240,885)
----------- -------------
Net decrease.................................. (5,691,160) $ (78,000,222)
=========== =============
- ----------------------------------------------------------------------------
</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. LOANED SECURITIES:
At December 31, 1999, the Fund held US Treasury Notes having an aggregate
value of approximately $6,711,000 as collateral for portfolio securities loaned
having a market value of approximately $6,982,000.
120
<PAGE> 122
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
GLOBAL STRATEGY FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Global Strategy Focus Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Global Strategy
Focus Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999,
the results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
121
<PAGE> 123
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the 30-year
Treasury bond yield hit a two-year high over concerns of the continued strength
of the economy and potential future action by the Federal Reserve Board.
FISCAL YEAR IN REVIEW
During the fiscal year ended December 31, 1999, we adhered to the Fund's
stated investment objective of seeking both capital appreciation and current
income. Moreover, we focused our attention on the Year 2000 issue given the
critical importance of the utility sector. As a result, we remained very
underweighted in emerging markets for the year. For the 12 months ended December
31, 1999, the Fund's Class A Shares had a total return of +12.63 %.
At December 31, 1999, approximately 39.5% of the Fund's net assets was
invested in US-based utilities and 58.1% was invested in non-US based utility
stocks. The majority of the Fund's overseas utility investments were in Europe,
more specifically southern Europe. In terms of sector allocation,
telecommunications was dominant on an overall portfolio basis, particularly in
Europe. This sector is a clear beneficiary of changes in technology. New
technology is not only lowering the cost of doing business but is impacting
overall demand for services through increased Internet usage as well as wireless
telephony. These trends have clearly been positive for the sector and have been
evident in terms of company results.
For the 12 months ended December 31, 1999, the Fund's performance was
negatively impacted by its holdings in the domestic electric utility sector and
to a lesser extent by its holdings in the domestic natural gas sector. The
defensive characteristics of the domestic electric utility sector worked against
performance as investors sought higher risk growth sectors such as technology.
In general, high-yielding US stocks underperformed the broad market by a wide
margin and the only stocks to show relative outperformance were those with
yields well below the yield of the Standard & Poor's (S&P) 500 Index. Rising
long-term interest rates also contributed negatively because the sector is still
considered to be sensitive to movements in interest rates.
European utilities had relatively weak performance during most of the fiscal
year ended December 31, 1999, as measured by the Financial Times/S&P Actuaries
World Utilities Index. This was partly in response to the weakness of the euro
relative to the US dollar, which started at E1.1585 on January 8, 1999, dropped
to E1.0684 on September 30, and finished the fiscal year at E1.0062 as of
December 31, 1999. However, in the fourth quarter of the Fund's fiscal year, the
European utility sector started to rebound as investors once again focused on
fundamentals and attractive asset bases. Moreover, companies are beginning to
unlock value by disposing of non-core assets and by listing faster-growing
businesses in the market. As of December 31, 1999, the value of the euro
compared to the US dollar appeared to be of a lesser concern.
During the Fund's fiscal year, there was a rebound in Pacific Basin-based
utility stocks, particularly in Japan. The Japanese utility sector primarily
benefited from the strength in the local market. The Fund's exposure to the
Japanese market is in the major telephone company, Nippon Telegraph & Telephone
Corporation (NTT).
IN CONCLUSION
We appreciate your investment in Global Utility Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to
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<PAGE> 124
- --------------------------------------------------------------------------------
sharing our investment outlook and strategies with you in our next report
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
February 7, 2000
123
<PAGE> 125
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Financial Times/Standard &
Poor's-Actuaries World Utilities Index. Beginning and ending values are:
<TABLE>
<CAPTION>
7/01/93** 12/99
<S> <C> <C>
Global Utility
Focus Fund+--Class A Shares* $10,000 $24,153
Financial Times/Standard & Poor's-
Actuaries World Utilities Index+++ $10,000 $21,162
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+Global Utility Focus Fund invests at least 65% of total assets in equity and
debt securities of domestic and foreign firms that, in the opinion of the
Investment Adviser, are involved in electricity, telecommunications, gas or
water.
++This unmanaged market capitalization-weighted Index is comprised of 2,307
equities from 29 countries in 17 regions, including the United States. The
starting date for the Index in the graph is from June 30, 1993.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +12.63%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +19.83
- --------------------------------------------------------------------------------
Inception (7/01/93) through 12/31/99 +14.53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +11.69% +12.63%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
124
<PAGE> 126
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA TELECOMMUNICATIONS 257,600 +Cable & Wireless Optus Limited............. $ 857,121 0.6%
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 455,029 Australian Gas Light Company Limited........ 2,659,225 2.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN AUSTRALIA 3,516,346 2.6
- ------------------------------------------------------------------------------------------------------------------------
BERMUDA TELECOMMUNICATIONS 86,100 +Global Crossing Ltd. ...................... 4,299,619 3.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN BERMUDA 4,299,619 3.2
- ------------------------------------------------------------------------------------------------------------------------
BRAZIL TELECOMMUNICATIONS 10,300 Embratel Participacoes SA (ADR)*............ 280,675 0.2
1,030 Tele Celular Sul Participacoes SA (ADR)*.... 32,702 0.1
3,433 Tele Centro Oeste Celular Participacoes SA
(ADR)*.................................... 22,314 0.0
2,060 Tele Centro Sul Participacoes SA (ADR)*..... 186,945 0.1
206 Tele Leste Celular Participacoes SA (ADR)*.. 8,755 0.0
515 Tele Nordeste Celular Participacoes SA
(ADR)*.................................... 26,007 0.0
206 Tele Norte Celular Participacoes SA (ADR)*.. 8,845 0.0
10,300 Tele Norte Leste Participacoes SA (ADR)*.... 262,650 0.2
2,060 Tele Sudeste Celular Participacoes SA
(ADR)*.................................... 79,954 0.1
10,300 +Telecomunicacoes Brasileiras SA--Telebras
(ADR)*.................................... 161 0.0
515 Telemig Celular Participacoes SA (ADR)*..... 23,787 0.0
4,120 Telesp Celular Participacoes SA (ADR)*...... 174,585 0.1
10,300 Telesp Participacoes SA (ADR)*.............. 251,706 0.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN BRAZIL 1,359,086 1.0
- ------------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 56,300 Tele Danmark A/S (ADR)*..................... 2,125,325 1.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN DENMARK 2,125,325 1.6
- ------------------------------------------------------------------------------------------------------------------------
FINLAND TELECOMMUNICATIONS 56,236 Sonera Oyj.................................. 3,853,648 2.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN FINLAND 3,853,648 2.9
- ------------------------------------------------------------------------------------------------------------------------
FRANCE UTILITIES--WATER 50,952 Vivendi..................................... 4,599,822 3.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN FRANCE 4,599,822 3.5
- ------------------------------------------------------------------------------------------------------------------------
GERMANY TELECOMMUNICATIONS 8,926 Deutsche Telekom AG......................... 635,486 0.5
9,210 Mannesmann AG............................... 2,221,236 1.7
------------ -----
2,856,722 2.2
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 15,000 RWE AG...................................... 587,585 0.4
20,000 Veba AG..................................... 971,755 0.7
39,000 Viag AG..................................... 714,769 0.5
------------ -----
2,274,109 1.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN GERMANY 5,130,831 3.8
- ------------------------------------------------------------------------------------------------------------------------
HONG KONG TELECOMMUNICATIONS 7,300 +China Telecom (Hong Kong) Limited (ADR)*... 938,506 0.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN HONG KONG 938,506 0.7
- ------------------------------------------------------------------------------------------------------------------------
IRELAND TELECOMMUNICATIONS 4,850 eircom PLC (ADR)*........................... 77,600 0.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN IRELAND 77,600 0.1
- ------------------------------------------------------------------------------------------------------------------------
ITALY TELECOMMUNICATIONS 651,600 Telecom Italia Mobile (TIM) SpA............. 7,276,828 5.5
405,333 Telecom Italia SpA.......................... 5,714,385 4.3
761,900 Telecom Italia SpA (Registered Non-
Convertible).............................. 4,641,761 3.5
------------ -----
17,632,974 13.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 138,000 AEM SpA..................................... 553,085 0.4
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 513,400 Italgas SpA................................. 1,943,897 1.4
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN ITALY 20,129,956 15.1
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
125
<PAGE> 127
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAPAN TELECOMMUNICATIONS 110 Nippon Telegraph & Telephone Corporation
(NTT)..................................... $ 1,883,746 1.4%
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN JAPAN 1,883,746 1.4
- ------------------------------------------------------------------------------------------------------------------------
MEXICO TELECOMMUNICATIONS 14,500 Telefonos de Mexico SA (ADR)*............... 1,631,250 1.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN MEXICO 1,631,250 1.2
- ------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND TELECOMMUNICATIONS 20,100 Telecom Corporation of New Zealand Limited
(ADR)*.................................... 773,850 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN NEW ZEALAND 773,850 0.6
- ------------------------------------------------------------------------------------------------------------------------
PHILIPPINES TELECOMMUNICATIONS 43,600 Philippine Long Distance Telephone Company
(ADR)*.................................... 1,128,150 0.8
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE PHILIPPINES 1,128,150 0.8
- ------------------------------------------------------------------------------------------------------------------------
PORTUGAL TELECOMMUNICATIONS 160,600 Portugal Telecom SA (ADR)*.................. 1,746,525 1.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 29,940 EDP-Electricidade de Portugal, SA (ADR)*.... 1,044,157 0.8
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN PORTUGAL 2,790,682 2.1
- ------------------------------------------------------------------------------------------------------------------------
SPAIN TELECOMMUNICATIONS 91,313 +Telefonica SA (ADR)*....................... 7,196,598 5.4
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 91,600 Endesa SA (ADR)*............................ 1,849,175 1.4
22,500 Hidroelectrica del Cantabrico, SA........... 316,752 0.2
131,000 Iberdrola SA................................ 1,815,178 1.4
------------ -----
3,981,105 3.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN SPAIN 11,177,703 8.4
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM TELECOMMUNICATIONS 57,715 British Telecommunications PLC.............. 1,409,565 1.1
10,000 British Telecommunications PLC (ADR)*....... 2,380,000 1.8
109,600 Vodafone AirTouch PLC (ADR)*................ 5,425,200 4.1
------------ -----
9,214,765 7.0
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 167,500 National Power PLC.......................... 969,307 0.7
95,139 PowerGen PLC................................ 683,402 0.5
42,224 ScottishPower PLC (ADR)*.................... 1,182,272 0.9
------------ -----
2,834,981 2.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE UNITED KINGDOM 12,049,746 9.1
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES TELECOMMUNICATIONS 25,500 AT&T Corp. ................................. 1,294,125 1.0
47,616 Bell Atlantic Corporation................... 2,931,360 2.2
58,000 BellSouth Corporation....................... 2,715,125 2.1
33,500 GTE Corporation............................. 2,363,844 1.8
60,000 +MCI WorldCom Inc. ......................... 3,180,000 2.4
107,662 SBC Communications Inc. .................... 5,248,522 3.9
42,000 Sprint Corp. (FON Group).................... 2,827,125 2.1
10,500 Sprint Corp. (PCS Group).................... 1,076,250 0.8
------------ -----
21,636,351 16.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 65,600 Allegheny Energy, Inc. ..................... 1,767,100 1.3
38,192 Cinergy Corp. .............................. 921,382 0.7
49,300 Consolidated Edison, Inc. .................. 1,700,850 1.3
31,500 DTE Energy Company.......................... 988,312 0.7
31,000 Duke Energy Corporation..................... 1,553,875 1.2
31,000 Edison International........................ 811,812 0.6
67,600 Energy East Corporation..................... 1,406,925 1.1
54,300 Entergy Corporation......................... 1,398,225 1.1
21,500 FPL Group, Inc. ............................ 920,469 0.7
47,200 GPU, Inc. .................................. 1,413,050 1.1
55,500 NSTAR....................................... 2,247,750 1.7
44,000 New Century Energies, Inc. ................. 1,336,500 1.0
89,100 NiSource Inc. .............................. 1,592,662 1.2
49,200 Reliant Energy, Inc. ....................... 1,125,450 0.8
</TABLE>
126
<PAGE> 128
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES UTILITIES--ELECTRIC 25,100 The Southern Company........................ $ 589,850 0.4%
(CONCLUDED) (CONCLUDED) 31,500 Texas Utilities Company..................... 1,120,219 0.8
------------ -----
20,894,431 15.7
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 28,800 The Coastal Corporation..................... 1,020,600 0.7
53,400 El Paso Energy Corporation.................. 2,072,587 1.6
30,000 Enron Corp. ................................ 1,331,250 1.0
33,000 KeySpan Corporation......................... 765,187 0.6
26,100 National Fuel Gas Company................... 1,213,650 0.9
25,000 New Jersey Resources Corporation............ 976,562 0.7
42,000 Washington Gas Light Company................ 1,155,000 0.9
24,000 The Williams Companies, Inc. ............... 733,500 0.6
------------ -----
9,268,336 7.0
------------------------------------------------------------------------------------------------------
UTILITIES--WATER 33,300 Philadelphia Suburban Corporation........... 688,894 0.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE UNITED STATES 52,488,012 39.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST--$64,431,514) 129,953,878 97.6
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER** $3,185,000 General Motors Acceptance Corp.,
5% due 1/03/2000............................ 3,183,673 2.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST--$3,183,673) 3,183,673 2.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$67,615,187)....... 133,137,551 100.0
LIABILITIES IN EXCESS OF OTHER ASSETS....... (50,187) 0.0
------------ -----
NET ASSETS.................................. $133,087,364 100.0%
============ =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* 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.
See Notes to Financial Statements.
127
<PAGE> 129
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$67,615,187)........ $133,137,551
Cash........................................................ 1,533
Receivables:
Dividends................................................. $195,784
Capital shares sold....................................... 5,954 201,738
--------
Prepaid expenses and other assets........................... 9,254
------------
Total assets................................................ 133,350,076
------------
- -------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 152,856
Investment adviser........................................ 74,288 227,144
--------
Accrued expenses and other liabilities...................... 35,568
------------
Total liabilities........................................... 262,712
------------
- -------------------------------------------------------------------------------------
NET ASSETS.................................................. $133,087,364
============
- -------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 789,866
Paid-in capital in excess of par............................ 65,356,479
Undistributed investment income--net........................ 3,245
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 1,417,235
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 65,520,539
------------
NET ASSETS.................................................. $133,087,364
============
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $133,087,364 and 7,898,655
shares outstanding........................................ $ 16.85
============
- -------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
128
<PAGE> 130
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $163,243 foreign withholding tax)......... $ 3,215,159
Interest and discount earned................................ 108,919
-----------
Total income................................................ 3,324,078
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 793,754
Custodian fees.............................................. 39,601
Accounting services......................................... 25,845
Professional fees........................................... 21,450
Printing and shareholder reports............................ 14,144
Transfer agent fees......................................... 5,010
Directors' fees and expenses................................ 3,079
Pricing services............................................ 1,569
Amortization of organization expenses....................... 684
Other....................................................... 2,430
-----------
Total expenses.............................................. 907,566
-----------
Investment income--net...................................... 2,416,512
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 11,334,541
Foreign currency transactions--net........................ (839) 11,333,702
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 1,218,462
Foreign currency transactions--net........................ (4,082) 1,214,380
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 12,548,082
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $14,964,594
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
129
<PAGE> 131
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 2,416,512 $ 3,302,910
Realized gain on investments and foreign currency
transactions--net......................................... 11,333,702 4,738,767
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 1,214,380 21,827,828
------------ ------------
Net increase in net assets resulting from operations........ 14,964,594 29,869,505
------------ ------------
- ------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (2,956,986) (3,589,798)
Realized gain on investments--net:
Class A................................................... (14,676,812) (6,606,938)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (17,633,798) (10,196,736)
------------ ------------
- ------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (9,221,584) (12,900,783)
------------ ------------
- ------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (11,890,788) 6,771,986
Beginning of year........................................... 144,978,152 138,206,166
------------ ------------
End of year*................................................ $133,087,364 $144,978,152
============ ============
- ------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 3,245 $ 544,558
============ ============
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
130
<PAGE> 132
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. --------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999+ 1998+ 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................... $ 17.08 $ 14.84 $ 12.19 $ 11.30 $ 9.45
-------- -------- -------- -------- --------
Investment income--net................................... .30 .36 .43 .46 .45
Realized and unrealized gain on investments and foreign
currency transactions--net............................. 1.75 2.99 2.66 .95 1.79
-------- -------- -------- -------- --------
Total from investment operations......................... 2.05 3.35 3.09 1.41 2.24
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net................................. (.37) (.40) (.44) (.52) (.39)
Realized gain on investments--net...................... (1.91) (.71) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions........................ (2.28) (1.11) (.44) (.52) (.39)
-------- -------- -------- -------- --------
Net asset value, end of year............................. $ 16.85 $ 17.08 $ 14.84 $ 12.19 $ 11.30
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....................... 12.63% 24.06% 25.90% 12.96% 24.33%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. .69% .68% .67% .66% .66%
======== ======== ======== ======== ========
Investment income--net................................... 1.83% 2.39% 3.21% 3.90% 4.44%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................... $133,087 $144,978 $138,206 $142,438 $148,225
======== ======== ======== ======== ========
Portfolio turnover....................................... 4.20% 5.20% 7.70% 11.39% 11.05%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
131
<PAGE> 133
- --------------------------------------------------------------------------------
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. 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.
When the contract is closed, the Fund records a
132
<PAGE> 134
- --------------------------------------------------------------------------------
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.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $839 have been reclassified between undistributed net
investment income and undistributed net realized capital gains. These
reclassifications have no effect on net assets or net asset value per share.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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 .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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $6,962 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.
133
<PAGE> 135
- --------------------------------------------------------------------------------
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
year ended December 31, 1999 were $5,433,926 and $30,081,342, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains (losses) as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $11,334,541 $65,522,364
Foreign currency transactions....... (839) (1,825)
----------- -----------
Total............................... $11,333,702 $65,520,539
=========== ===========
- ---------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $65,522,364, of which $67,388,023 related to appreciated
securities and $1,865,659 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$67,615,187.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 339,237 $ 5,557,571
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 1,054,101 17,633,798
---------- ------------
Total issued......................... 1,393,338 23,191,369
Shares redeemed...................... (1,982,708) (32,412,953)
---------- ------------
Net decrease......................... (589,370) $ (9,221,584)
========== ============
- -----------------------------------------------------------------
</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>
134
<PAGE> 136
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
GLOBAL UTILITY FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Global Utility Focus Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Global Utility Focus
Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
135
<PAGE> 137
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
For the 12-month period ended December 31, 1999, the Fund's Class A Shares had
a -1.80% total return as compared to a total return of -0.59% for the unmanaged
Salomon Smith Barney Government/Mortgage Index and an average total return of
- -2.15% for the Lipper Annuity U.S. Government Group. The Fund began using as its
benchmark the Salomon Smith Barney Government/Mortgage Index on July 1, 1999,
following the inclusion of mortgage-backed securities into the Fund's expanded
prospectus language. Prior to that, the Fund had used as a benchmark the
unmanaged Merrill Lynch US Treasury/Agency Master Index. Since adopting the new
Index on July 1, 1999, the Fund outperformed the benchmark, on a gross basis, by
0.17%. With respect to the Fund's performance relative to the Lipper Annuity
U.S. Government Group, the Fund's excess performance is directly attributable to
its overweighted position in mortgage-backed securities. The Fund also benefited
from its emphasis on higher coupon issues that tend to outperform during periods
of rising interest rates.
PORTFOLIO MATTERS
During the six-month period ended December 31, 1999, we initially went to a
market-weighted position in mortgage-backed securities, relative to the Salomon
Government/ Mortgage Index. During the final quarter of 1999, our
mortgage-backed position shifted to a 10% overweighting compared to the Index.
We overweighted positions in agency debentures at the expense of Treasury
securities. Although the timing of this bias initially hurt relative performance
as yield spreads widened, the breakeven attributes (the total return given the
level of yield differences) were extremely favorable. In fact, during late
August and early September, yield spreads began to contract, a situation that
accelerated during the latter half of the six-month period. Fortunately, the
spread overweighting was taken in the shorter maturity agencies, which tend to
perform better than longer-term agency issues in a spread-widening environment.
With respect to mortgage-backed securities, we remained committed to highly
liquid collateralized mortgage obligations. Also, we concentrated on keeping
coupon levels high. As a result, the Fund's Class A Shares returned +0.48% for
the six months ended December 31, 1999, as compared to its Lipper Annuity U.S.
Government peer group average of +0.06%.
Going forward, we believe that the current high-yield levels available on
agency debentures and mortgage-backed securities are attractive. Over long
periods of time, we believe agency debentures are likely to perform better than
Treasury debt given their yield advantage and very similar credit quality.
Therefore, we expect to continue to overweight the portfolio in agency
debentures, preferably in maturities in the five-year-ten-year area. With
respect to mortgage-backed securities, we plan to maintain our 10% overweighted
position relative to the Index, given our belief that a low prepayment
environment should translate into outperformance for this sector. From an
interest rate perspective, we believe that the Federal Reserve Board is likely
to continue to tighten monetary policy in an attempt to keep inflation under
control.
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
February 7, 2000
136
<PAGE> 138
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
[GOVERNMENT BOND FUND GRAPH]
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Salomon Smith Barney
Government/Mortgage Index and Merrill Lynch US Treasury/Agency Master Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
5/02/94** 12/99
<S> <C> <C>
Government Bond
Fund+--Class A Shares* $10,000 $13,982
Salomon Smith Barney Government/
Mortgage Index++ $10,000 $14,571
Merrill Lynch US Treasury/Agency
Master Index+++ $10,000 $14,417
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+Government Bond Fund invests in debt securities issued or guaranteed by the US
Government, its agencies or instrumentalities.
++This unmanaged Index is comprised of all 30-year and 15-year GNMA, FNMA and
FHLMC securities, and FNMA and FHLMC balloon mortgages. The starting date for
the Index in the line graph is from 4/30/94.
+++This unmanaged Index is comprised of all US Government agency notes and bonds
and US Treasury securities maturing in more than one year.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 -1.80%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +6.55
- --------------------------------------------------------------------------------
Inception (5/02/94) through 12/31/99 +6.09
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +0.48% -1.80%
</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.
137
<PAGE> 139
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT ISSUE VALUE
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL FARM CREDIT Federal Farm Credit Bank:
BANK--5.3% $ 4,200,000 5% due 1/14/2002....................................... $ 4,068,750
7,500,000 5.25% due 5/01/2002.................................... 7,272,675
2,000,000 6.27% due 7/10/2002.................................... 1,981,880
7,000,000 5.75% due 12/07/2028................................... 5,721,380
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL FARM CREDIT BANK (COST--$20,515,301) 19,044,685
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Federal Home Loan Bank:
BANK--4.5% 2,500,000 5.50% due 8/13/2001.................................... 2,462,900
4,800,000 6.625% due 8/27/2007................................... 4,678,512
4,635,000 6.175% due 4/17/2008................................... 4,293,169
5,000,000 6.50% due 8/14/2009.................................... 4,782,050
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN BANK (COST--$16,802,965) 16,216,631
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Federal Home Loan Mortgage Corporation+:
MORTGAGE CORPORATION--18.1% 4,500,000 6.56% due 3/25/2016.................................... 4,404,375
4,962,014 7% due 12/15/2020...................................... 4,870,018
5,762,591 6.30% due 5/15/2026.................................... 5,469,144
Federal Home Loan Mortgage Corporation Participation
Certificates:
5,500,000 6% due 4/14/2004....................................... 5,273,125
5,000,000 5.50% due 2/15/2028.................................... 4,464,050
Federal Home Loan Mortgage Corporation Participation
Certificates--Gold Program+:
10,000,000 6% due 8/15/2007....................................... 9,626,077
394,810 7.50% due 2/01/2023.................................... 392,384
90,263 7.50% due 5/01/2024.................................... 89,591
2,127,635 7.50% due 6/01/2024.................................... 2,111,781
1,363,704 7.50% due 7/01/2024.................................... 1,353,544
2,000,984 7.50% due 8/01/2024.................................... 1,986,073
555,726 7.50% due 9/01/2024.................................... 551,584
352,250 7.50% due 12/01/2024................................... 350,001
675,883 7.50% due 4/01/2025.................................... 671,568
1,067,905 7.50% due 8/01/2025.................................... 1,059,017
336,466 7.50% due 11/01/2025................................... 333,665
547,955 7.50% due 2/01/2026.................................... 544,457
32,024 7.50% due 4/01/2026.................................... 31,748
29,639 7.50% due 5/01/2026.................................... 29,392
167,502 7.50% due 7/01/2026.................................... 166,058
774,575 7.50% due 8/01/2026.................................... 767,898
1,201,099 7.50% due 2/01/2027.................................... 1,191,103
615,581 7.50% due 4/01/2027.................................... 610,274
51,920 7.50% due 6/01/2027.................................... 51,461
238,760 7.50% due 10/01/2027................................... 236,646
26,234 7.50% due 11/01/2027................................... 26,002
30,441 7.50% due 12/01/2027................................... 30,171
169,885 7.50% due 1/01/2028.................................... 168,381
11,047 7.50% due 2/01/2028.................................... 10,947
56,203 7.50% due 4/01/2028.................................... 55,696
259,627 7.50% due 5/01/2028.................................... 257,284
41,596 7.50% due 1/01/2029.................................... 41,215
875,778 7.50% due 3/01/2029.................................... 867,750
1,028,218 7.50% due 4/01/2029.................................... 1,018,733
16,823,393 7% due 7/01/2029....................................... 16,288,901
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(COST--$67,492,564) 65,400,114
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Federal National Mortgage Association+:
MORTGAGE 11,000,000 6.85% due 5/08/2002.................................... 10,926,080
ASSOCIATION--21.0% 7,500,000 5.94% due 3/29/2004.................................... 7,200,000
5,500,000 6.376% due 3/25/2007................................... 5,235,560
</TABLE>
138
<PAGE> 140
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT ISSUE VALUE
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL NATIONAL
MORTGAGE
ASSOCIATION (CONCLUDED)
Federal National Mortgage Association+(concluded):
$ 5,182,890 8% due 4/01/2008....................................... $ 5,268,481
7,165,000 5.83% due 12/10/2008................................... 6,495,553
596,525 7% due 6/01/2028....................................... 577,345
893,891 7% due 10/01/2028...................................... 865,150
1,095,495 7% due 12/01/2028...................................... 1,060,272
2,587,976 7% due 2/01/2029....................................... 2,503,327
4,747,539 7% due 3/01/2029....................................... 4,592,255
8,321,540 7% due 5/01/2029....................................... 8,051,252
6,751,862 6.50% due 6/01/2029.................................... 6,365,740
14,725,859 7% due 6/01/2029....................................... 14,245,682
2,982,160 7% due 7/01/2029....................................... 2,884,619
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(COST--$79,674,506) 76,271,316
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT Government National Mortgage Association+:
NATIONAL MORTGAGE 27,658,943 6.50% due 2/15/2028.................................... 25,995,457
ASSOCIATION--10.5% 479,790 7% due 2/15/2028....................................... 463,850
1,472,734 7% due 3/15/2028....................................... 1,423,803
234,858 7% due 4/15/2028....................................... 227,315
1,718,352 6.50% due 5/15/2028.................................... 1,615,005
772,741 7% due 5/15/2028....................................... 747,067
1,430,663 7% due 6/15/2028....................................... 1,383,130
352,095 7% due 7/15/2028....................................... 340,396
2,534,381 7% due 8/15/2028....................................... 2,450,177
776,933 7% due 11/15/2028...................................... 751,119
45,574 7% due 12/15/2028...................................... 44,060
2,562,254 7% due 5/15/2029....................................... 2,476,045
- ---------------------------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(COST--$40,164,528) 37,917,424
- ---------------------------------------------------------------------------------------------------------------------
PRIVATE EXPORT Private Export Funding Corporation:
FUNDING CORPORATION--2.5% 3,895,000 5.50% due 3/15/2001.................................... 3,849,701
3,335,000 7.01% due 4/30/2004.................................... 3,355,977
2,000,000 7.11% due 4/15/2007.................................... 2,002,180
- ---------------------------------------------------------------------------------------------------------------------
TOTAL PRIVATE EXPORT FUNDING CORPORATION
(COST--$9,636,334) 9,207,858
- ---------------------------------------------------------------------------------------------------------------------
STUDENT LOAN 8,000,000 Student Loan Marketing Association, 7.50% due 3/08/2000.. 8,010,000
MARKETING
ASSOCIATION--2.2%
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STUDENT LOAN MARKETING ASSOCIATION
(COST--$8,266,160) 8,010,000
- ---------------------------------------------------------------------------------------------------------------------
TENNESSEE VALLEY 5,000,000 Tennessee Valley Authority, Series E, 6.25% due
AUTHORITY--1.2% 12/15/2017............................................. 4,487,500
- ---------------------------------------------------------------------------------------------------------------------
TOTAL TENNESSEE VALLEY AUTHORITY (COST--$5,270,200) 4,487,500
- ---------------------------------------------------------------------------------------------------------------------
US TREASURY BONDS & US Treasury Bonds:
NOTES--29.3% 4,000,000 11.875% due 11/15/2003................................. 4,721,240
2,000,000 10.625% due 8/15/2015.................................. 2,723,440
1,500,000 9.25% due 2/15/2016.................................... 1,851,795
2,500,000 7.50% due 11/15/2016................................... 2,674,600
7,500,000 8.875% due 8/15/2017................................... 9,064,425
1,000,000 8.75% due 5/15/2020.................................... 1,210,310
1,500,000 8.125% due 5/15/2021................................... 1,719,375
9,500,000 8.125% due 8/15/2021................................... 10,895,265
6,000,000 7.50% due 11/15/2024................................... 6,550,320
2,000,000 6.125% due 11/15/2027.................................. 1,861,240
3,000,000 5.50% due 8/15/2028.................................... 2,558,430
US Treasury Notes:
10,000,000 8.50% due 11/15/2000................................... 10,196,900
3,000,000 7.875% due 8/15/2001................................... 3,075,000
</TABLE>
139
<PAGE> 141
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT ISSUE VALUE
- ---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US TREASURY BONDS &
NOTES (CONCLUDED)
US Treasury Notes (concluded):
$ 5,000,000 7.50% due 11/15/2001................................... $ 5,108,600
5,000,000 5.875% due 11/30/2001.................................. 4,967,950
3,000,000 7.50% due 5/15/2002.................................... 3,079,680
1,500,000 6.375% due 8/15/2002................................... 1,503,285
8,000,000 6.25% due 8/31/2002.................................... 7,987,520
7,500,000 5.75% due 8/15/2003.................................... 7,346,475
10,000,000 7% due 7/15/2006....................................... 10,242,200
1,500,000 5.50% due 2/15/2008.................................... 1,404,840
1,250,000 5.625% due 5/15/2008................................... 1,175,775
4,500,000 6% due 8/15/2009....................................... 4,359,375
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US TREASURY BONDS & NOTES (COST--$111,883,166) 106,278,040
- ---------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT &
AGENCY OBLIGATIONS (COST--$359,705,724)--94.6% 342,833,568
- ---------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS*--4.3% 15,635,000 Warburg Dillon Read LLC, purchased on 12/31/1999 to yield
2.70% to 1/03/2000..................................... 15,635,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES (COST--$15,635,000) 15,635,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$375,340,724)--98.9%............ 358,468,568
OTHER ASSETS LESS LIABILITIES--1.1%...................... 3,925,303
------------
NET ASSETS--100.0%....................................... $362,393,871
============
</TABLE>
- --------------------------------------------------------------------------------
* Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
+ 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.
See Notes to Financial Statements.
140
<PAGE> 142
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$375,340,724)....... $358,468,568
Cash........................................................ 8,629
Receivables:
Interest.................................................. $4,186,814
Paydowns.................................................. 53,502
Loaned securities......................................... 972 4,241,288
----------
Prepaid expenses and other assets........................... 25,310
------------
Total assets................................................ 362,743,795
------------
- --------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser........................................ 175,224
Capital shares redeemed................................... 105,788 281,012
----------
Accrued expenses and other liabilities...................... 68,912
------------
Total liabilities........................................... 349,924
------------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $362,393,871
============
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 3,613,582
Paid-in capital in excess of par............................ 376,921,690
Undistributed investment income--net........................ 386,790
Accumulated realized capital losses on investments--net..... (1,656,035)
Unrealized depreciation on investments--net................. (16,872,156)
------------
NET ASSETS.................................................. $362,393,871
============
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $362,393,871 and 36,135,816
shares outstanding........................................ $ 10.03
============
- --------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
141
<PAGE> 143
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 23,327,855
Other income................................................ 11,708
------------
Total income................................................ 23,339,563
------------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $1,819,811
Accounting services......................................... 81,729
Custodian fees.............................................. 44,648
Professional fees........................................... 38,577
Printing and shareholder reports............................ 10,688
Pricing services............................................ 8,913
Directors' fees and expenses................................ 7,677
Transfer agent fees......................................... 5,010
----------
Total expenses.............................................. 2,017,053
------------
Investment income--net...................................... 21,322,510
------------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET:
Realized loss on investments--net........................... (1,609,613)
Change in unrealized appreciation/depreciation on
investments--net.......................................... (26,034,501)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (6,321,604)
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
142
<PAGE> 144
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 21,322,510 $ 13,545,855
Realized gain (loss) on investments--net.................... (1,609,613) 1,052,590
Change in unrealized appreciation/depreciation on
investments--net.......................................... (26,034,501) 4,754,422
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (6,321,604) 19,352,867
------------ ------------
- -----------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (22,902,351) (12,902,841)
In excess of investment income--net:
Class A................................................... (68) --
Realized gain on investments--net:
Class A................................................... -- (687,846)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (22,902,419) (13,590,687)
------------ ------------
- -----------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 41,202,248 164,833,095
------------ ------------
- -----------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 11,978,225 170,595,275
Beginning of year........................................... 350,415,646 179,820,371
------------ ------------
End of year*................................................ $362,393,871 $350,415,646
============ ============
- -----------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 386,790 $ 1,579,841
============ ============
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
143
<PAGE> 145
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. -----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................ $ 10.88 $ 10.60 $ 10.40 $ 10.79 $ 9.97
-------- -------- -------- ------- -------
Investment income--net............................ .61 .59 .63 .65 .62
Realized and unrealized gain (loss) on
investments--net................................ (.80) .31 .25 (.36) .81
-------- -------- -------- ------- -------
Total from investment operations.................. (.19) .90 .88 .29 1.43
-------- -------- -------- ------- -------
Less dividends and distributions:
Investment income--net.......................... (.66) (.60) (.63) (.64) (.61)
In excess of investment income--net............. --+ -- -- -- --
Realized gain on investments--net............... -- (.02) (.05) (.04) --
In excess of realized gain on
investments--net.............................. -- -- --+ -- --
-------- -------- -------- ------- -------
Total dividends and distributions................. (.66) (.62) (.68) (.68) (.61)
-------- -------- -------- ------- -------
Net asset value, end of year...................... $ 10.03 $ 10.88 $ 10.60 $ 10.40 $ 10.79
======== ======== ======== ======= =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share................ (1.80%) 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............................ 5.86% 5.66% 6.26% 6.39% 6.28%
======== ======== ======== ======= =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)............ $362,394 $350,416 $179,820 $89,581 $40,996
======== ======== ======== ======= =======
Portfolio turnover................................ 116.59% 43.10% 117.65% 21.23% 45.39%
======== ======== ======== ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
144
<PAGE> 146
- --------------------------------------------------------------------------------
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. 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. If the counterparty defaults and the
fair value of the collateral declines, liquidation of the collateral by the Fund
may be delayed or limited.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates. Distributions in excess of net investment income are due
primarily to differing tax treatments for post-October losses.
(f) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $386,858 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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
145
<PAGE> 147
- --------------------------------------------------------------------------------
.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 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 year ended December 31, 1999, Merrill Lynch Security Pricing Service,
an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a subsidiary
of ML & Co., earned $3,194 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
year ended December 31, 1999 were $467,439,848 and $403,322,122, respectively.
Net realized losses for the year ended December 31, 1999 and net unrealized
losses as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Realized Unrealized
Losses Losses
- -----------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $(1,609,606) $(16,872,156)
Short-term investments.............. (7) --
----------- ------------
Total............................... $(1,609,613) $(16,872,156)
=========== ============
- -----------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $16,879,187, of which $187,789 related to appreciated
securities and $17,066,976 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$375,347,755.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 4,662,244 $ 48,874,138
Shares issued to shareholders in
reinvestment of dividends........... 2,216,991 22,902,419
---------- ------------
Total issued......................... 6,879,235 71,776,557
Shares redeemed...................... (2,962,902) (30,574,309)
---------- ------------
Net increase......................... 3,916,333 $ 41,202,248
========== ============
- -----------------------------------------------------------------
</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. CAPITAL LOSS CARRYFORWARD:
At December 31, 1999, the Fund had a net capital loss carryforward of
approximately $1,424,000, all of which expires in 2007. This amount will be
available to offset like amounts of any future taxable gains.
6. LOANED SECURITIES:
At December 31, 1999, the Fund held US Treasury Bonds having an aggregate value
of approximately $5,058,000 as collateral for portfolio securities loaned having
a market value of approximately $4,968,000.
146
<PAGE> 148
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
GOVERNMENT BOND FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Government Bond Fund of Merrill Lynch Variable
Series Funds, Inc. as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and broker. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Government Bond Fund
of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
147
<PAGE> 149
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
MARKET REVIEW
In the aftermath of the Asian crisis and Russian default, high-yield investors
began 1999 in a cautious mode. Nevertheless, with a healthy economy as a
backdrop, mutual funds flows were positive in 14 of the first 21 weeks of the
year. Newly created collateralized bond obligations (CBOs) were another source
of buying power. As a result, new issues were generally well received. Two large
transactions in excess of $1 billion--Charter Communications Holdings and
Lyondell Chemical--were readily absorbed by the market.
Unfortunately, the tide began to turn in mid-May as the Federal Open Market
Committee (FOMC) moved to a tightening bias and in June effected the first of
three interest rate hikes. Predictably, new issuance fell off, and from mid-May
through June, the market suffered through six straight weeks of mutual fund
outflows. Secondary market making by dealers dried up.
In July, the market regained momentum as the FOMC's adoption of a neutral bias
brought investors back. Fund flows turned positive, and the market again was
able to absorb two huge transactions--United Pan-European Communications and
Allied Waste North America. Investor sentiment quickly turned, perhaps as a
result of two large satellite credit defaults in August. The August through
October period was brutal, as the high-yield market registered negative total
returns each month, while funds flows were negative in 13 out of 14 weeks.
The month of November brought a strong rebound, spurred by a rally in the
equity markets and reduced inflationary fears as the FOMC effected its third
rate increase. The second-largest weekly inflow into high-yield mutual funds
emboldened issuers. Three seasoned telecommunications credits--VoiceStream
Wireless Corporation/Voicestream Wireless Holding Corporation, Nextel
Communications, Inc. and Global Crossing Holding Ltd.--each priced more the $1
billion in new bonds during the month. The positive trend continued into
December, as the market registered another positive return, while new-issue
volume wound down.
For the year, new-issue volume totaled $94.7 billion, down 32% from 1998, but
still the third largest in the market's history. Media/ telecommunications
continued the trend of recent years as the dominant sector, accounting for over
40% of new-issue volume. Fund flows for the year were negative $836 million,
which was the worst year since 1994. Clearly, pension funds, insurance
companies, equity funds, crossover buyers and CBOs took up the slack.
As a result, the high-yield market ended up posting its second consecutive low
single-digit return for the year, which is unprecedented in a nonrecessionary
climate.
FISCAL YEAR IN REVIEW
Besides being buffeted by the unfortunate combination of mutual fund outflows
and rising US Treasury yields, which increased by almost 180 basis points
(1.80%) during the year, the high-yield market suffered its worst year in terms
of defaults since the recession year of 1991. In contrast to the defaults of
that era, 1999's defaults were dominated by business plan failures or driven by
changes in Government policies, as witnessed in the healthcare sector. (The
collapse in oil prices also contributed to the demise of several credits.)
According to data compiled by Donaldson, Lufkin & Jenrette Securities Corp., a
leading underwriter of high-yield bonds, the high-yield market recorded a
default rate of 4.02% for 1999, up from 1.28% in 1998. In the peak year of 1991,
the tally was 8.80%. Data compiled by Edward Altman of New York University's
Stern School showed a similar trend. While a recent survey by the Federal
Reserve Board showed that more senior bank lending officers were tightening
rather than easing lending standards (thus making life more difficult for
marginal credits), we believe that the default rate may have peaked. Our belief
stems from two factors. First, the new-issue mix in 1999 showed an improvement
in the credit quality of new transactions. Second, the recovery in commodity
prices--oil, paper and pulp, and metals--may bode well for credits in those
sectors. We would also remind investors that the default rate often is a lagging
indicator.
Against this backdrop, the Fund's Class A Shares recorded a total return of
+5.95% for the fiscal year ended December 31, 1999, which compared favorably to
the unmanaged Credit Suisse First Boston Global High Yield Bond Index's total
return of +3.28%. While lackluster by historical standards, the 1999 return
looked quite good relative to the ten-year US Treasury return of -8.43%. For the
six months ended December 31, 1999, the Fund's Class A Shares recorded a total
return of +2.16%, as compared to +0.45% for the Index. The Fund's superior
148
<PAGE> 150
- --------------------------------------------------------------------------------
performance relative to the Index stemmed from several factors. First, the Fund
was overweighted in emerging markets bonds (12.9% as compared to 7.6% for the
Index), which rebounded smartly from last year's selloff. Second, the Fund
benefited from its overweightings in the paper/packaging, cable and
utility/independent power producer sectors, all of which posted strong returns
overall for the year and in particular during the second half. Finally,
benefiting Fund performance were its underweightings in the supermarket/drug,
entertainment and consumer/manufacturing sectors, all of which posted negative
returns for both the 12-month and six-month periods ended December 31, 1999. Our
very modest exposure to the textile sector was also helpful, as many bonds in
this ailing industry were pummeled.
Individual credit selection was also very important. Thanks to our staff of
research professionals, we managed to avoid the majority of the year's credit
disasters, including the two large satellite credits that filed for Chapter XI
in August. On the plus side, positive event risk also enhanced the Fund's
return. Among the events helping Fund performance were Sprint's takeover of
American Telecasting, which caused its bonds to soar from distressed levels to
about 105% of par; investment-grade Mannesmann AG's takeover bid for Orange PLC,
a major Fund holding; Tekni-Plex, Inc.'s announcement that it planned a
recapitalization, which would likely result in a tender for its two bond issues,
one of which is among the Fund's top ten holdings; and Lyondell Chemical
Company's announcement of a huge asset sale.
During the latter half of the year, we focused most of our new-issue activity
on large credits, since we believed this was the approach to take given the
limited liquidity provided by dealers. We were also quite selective since the
Fund was somewhat cash constrained. Our major new-issue purchases were the bonds
of ASAT Finance (an affiliate of a semiconductor manufacturer), Blount Inc. (a
diversified manufacturing concern that essentially went private), ICN
Pharmaceutical Inc. (a manufacturer of a broad variety of prescription and
non-prescription pharmaceuticals) and Tapco International Corporation (a small
manufacturer of building trim with strong cash flow margins). In the secondary
market, we established a new position in Corning Consumer Products at a large
discount to par, and added to existing positions in Amkor Technologies Inc. and
Autopistas del Sol SA. The latter is an Argentine toll road operator with
positive momentum, yet its bonds still trade at a substantial discount.
Our major sales were two media concerns--Hollinger International Publishing,
Inc. and Garden State Newspapers--where fundamentals had started to deteriorate,
in our view. We also exited ASAT Finance since we believed the bond had become
fully valued.
At year-end, communications and media remained our largest broad industry
category, equaling 26.7% of the Fund's total market value. Of the more narrowly
classified sectors, the largest industries were: communications, 12.2% of the
market value; utilities/independent power producers, 10.9%; cable (domestic &
international), 10.1%; and packaging/paper & forest products, 9.4%. Foreign
bonds comprised 25.5% of the Fund, with emerging market issues (mostly Latin
American corporate bonds) accounting for 12.9% of market value. At December 31,
1999, the average portfolio maturity was 6 years, 11 months, and cash and cash
equivalents amounted to 8.4% of market value.
INVESTMENT OUTLOOK
Looking ahead, we are optimistic on the outlook for the high yield market in
2000. There are currently several fundamental and technical factors that are
encouraging. Given that almost 70% of the universe is trading at a discount to
par, and with an increasing percentage of bonds callable in the next three
years, we would expect bond retirements to rise this year. While we would not
expect to see much in the way of retail mutual funds flows, we could see new
money from institutional and CBO buyers in 2000. The continued lure of the
equity markets may make it difficult for the high-yield market to attract retail
money back until at least a few months of positive returns have been posted. In
addition, at present the general economy is expected to remain healthy. On the
supply side, many capital hungry high-yield credits are gaining access to
private and public equity, vendor financing, and convertible and bank debt.
IN CONCLUSION
We thank you for your continued interest in High Current Income Fund of
Merrill Lynch
149
<PAGE> 151
- --------------------------------------------------------------------------------
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/ Robert F. Murray
Robert F. Murray
Vice President and Portfolio Manager
February 7, 2000
150
<PAGE> 152
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
[HIGH CURRENT INCOME FUND GRAPH]
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Credit Suisse First Boston High Yield
Index. Beginning and ending values are:
<TABLE>
<CAPTION>
12/89 12/99
<S> <C> <C>
High Current Income Fund+
- --Class A Shares* $10,000 $26,778
Credit Suisse First Boston Global
High Yield Index++ $10,000 $28,542
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
+High Current Income Fund invests principally in fixed-income securities, which
are rated in the lower rating categories of the established rating services or
in unrated securities of comparable quality.
++This unmanaged market-weighted Index of high-yield debt securities is
comprised of 1,625 securities rated BBB or lower.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD COVERED % RETURN
- ----------------------------------------------------------------------
<S> <C>
Year Ended 12/31/99 + 5.95%
- ----------------------------------------------------------------------
Five Years Ended 12/31/99 + 8.25
- ----------------------------------------------------------------------
Ten Years Ended 12/31/99 +10.35
- ----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +2.16% +5.95%
- ------------------------------------------------------------------------------------------
</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.
151
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE--0.6% B B2 $ 3,000,000 L-3 Communications Corp., 10.375% due
5/01/2007.................................. $ 3,097,500
- ---------------------------------------------------------------------------------------------------------------------------
AIRLINES--0.8% BB Ba3 4,000,000 USAir Inc., 10.375% due 3/01/2013............ 3,840,000
- ---------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE--0.7% NR* NR* 5,000,000 Breed Technologies Inc., 9.25% due
4/15/2008(c)............................... 56,250
B B2 750,000 Dura Operating Corporation, 9% due
5/01/2009.................................. 706,875
B B2 3,000,000 Venture Holdings Trust, 11% due 6/01/2007.... 2,880,000
------------
3,643,125
- ---------------------------------------------------------------------------------------------------------------------------
BROADCASTING-- BB- Ba3 3,000,000 Antenna TV SA, 9% due 8/01/2007.............. 2,700,000
RADIO & TV--2.8% B B1 3,000,000 Chancellor Media Corp., 9% due 10/01/2008.... 3,120,000
B- B3 2,000,000 Cumulus Media, Inc., 10.375%
due 7/01/2008.............................. 2,080,000
BB Ba2 4,000,000 Grupo Televisa SA, 11.875% due 5/15/2006..... 4,280,000
B B2 2,000,000 Sinclair Broadcasting Group Inc., 10% due
9/30/2005.................................. 1,990,000
------------
14,170,000
- ---------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS--1.0% B B2 2,000,000 NCI Building Systems Inc., 9.25% due
5/01/2009.................................. 1,900,000
B- B3 3,000,000 Tapco International Corporation, 12.50% due
8/01/2009(e)............................... 2,917,500
------------
4,817,500
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--1.9% Century Communications Corporation:
BB- B1 3,000,000 9.50% due 3/01/2005........................ 3,000,000
BB- B1 2,500,000 8.375% due 12/15/2007...................... 2,343,750
B+ B1 4,000,000 Olympus Communications LP/Capital Corp.,
10.625% due 11/15/2006..................... 4,220,000
------------
9,563,750
- ---------------------------------------------------------------------------------------------------------------------------
CABLE-- Australis Media Ltd.(c)(g):
INTERNATIONAL--4.6% D NR* 8,000,000 1.75%/15.75% due 5/15/2003(k).............. 80,000
D NR* 136,859 1.75%/15.75% due 5/15/2003................. 1,369
BB B1 2,000,000 Cablevision SA, 13.75% due 5/01/2009(e)...... 1,955,000
B+ B2 5,000,000 Globo Comunicacoes e Participacoes, Ltd.,
10.50% due 12/20/2006(e)................... 4,325,000
B- B3 5,500,000 International Cabletel, Inc.,
10.986% due 2/01/2006(d)................... 4,977,500
B- B3 2,000,000 NTL Incorporated (Series B), 10% due
2/15/2007.................................. 2,055,000
B+ B1 7,000,000 TeleWest Communications PLC, 11.45% due
10/01/2007(d).............................. 6,527,500
B- B3 5,000,000 United International Holdings, Inc., 10.75%
due 2/15/2008(d)(j)........................ 3,200,000
------------
23,121,369
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--2.5% B+ B1 4,000,000 Bucyrus International, 9.75% due 9/15/2007... 2,870,000
B B2 4,000,000 Columbus McKinnon Corp., 8.50%
due 4/01/2008.............................. 3,550,000
B- B3 4,500,000 International Wire Group, Inc., 11.75% due
6/01/2005.................................. 4,646,250
CCC- Ca 4,750,000 Morris Materials Handling, 9.50%
due 4/01/2008.............................. 1,567,500
------------
12,633,750
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS--1.5% BB- Ba3 3,500,000 ISP Holdings Inc., 9.75% due 2/15/2002....... 3,504,375
Lyondell Chemical Company:
BB Ba3 2,000,000 9.875% due 5/01/2007(e)...................... 2,040,000
B+ B2 2,000,000 10.875% due 5/01/2009........................ 2,060,000
------------
7,604,375
- ---------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--0.3% B- B3 2,500,000 Satelites Mexicanos SA, 10.125% due
11/01/2004................................. 1,700,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
152
<PAGE> 154
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMPUTER SERVICES-- BB- Ba3 $ 4,000,000 Amkor Technologies Inc., 9.25% due
ELECTRONICS--2.0% 5/01/2006(e)............................... $ 3,900,000
CCC Caa1 3,000,000 Dictaphone Corp., 11.75% due 8/01/2005....... 2,220,000
B B2 4,000,000 Hadco Corporation, 9.50% due 6/15/2008....... 3,870,000
------------
9,990,000
- ---------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES--0.3% B- B3 2,000,000 Eagle-Picher Industries, 9.375% due
3/01/2008.................................. 1,740,000
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER--SERVICES--0.2% B B2 2,000,000 Protection One Alarm Monitoring, 8.625% due
1/15/2009(e)............................... 980,000
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--0.9% B B3 2,000,000 Corning Consumer Products, 9.625%
due 5/01/2008.............................. 1,572,500
B+ B1 2,000,000 Playtex Products, Inc.,
Series B, 8.875% due 7/15/2004(e).......... 2,005,000
CCC+ Caa1 1,500,000 Syratech Corp., 11% due 4/15/2007............ 1,038,750
------------
4,616,250
- ---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED--2.0% B+ B1 500,000 Applied Power Inc., 8.75% due 4/01/2009...... 489,375
B- B3 5,000,000 Blount Inc., 13% due 8/01/2009(e)............ 5,275,000
B- B2 1,000,000 Koppers Industries, Inc., 9.875% due
12/01/2007................................. 910,000
B+ Caa1 4,000,000 RBX Corp, 12% due 1/15/2003.................. 3,080,000
------------
9,754,375
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--6.0% B- B3 2,000,000 Bellwether Exploration, 10.875% due
4/01/2007.................................. 1,835,000
B B3 4,500,000 Benton Oil and Gas Co., 11.625% due
5/01/2003.................................. 3,150,000
B B3 1,000,000 Chesapeake Energy Corp., 9.125% due
4/15/2006.................................. 900,000
B+ B3 2,500,000 Clark USA Inc., 10.875% due 12/01/2005....... 1,000,000
B- Caa1 4,000,000 Energy Corp. of America, 9.50% due
5/15/2007.................................. 2,840,000
B- Caa2 5,000,000 Northern Offshore ASA, 10% due 5/15/2005..... 3,050,000
B+ B1 3,500,000 Parker Drilling Co., 9.75% due 11/15/2006.... 3,421,250
NR* B2 3,000,000 Petroleo Brasileiro SA, 10% due
10/17/2006(e).............................. 2,842,500
BBB Baa2 1,500,000 Pool Energy Services Co., 8.625% due
4/01/2008.................................. 1,515,000
BB Ba3 300,000 Port Arthur Finance Corporation, 12.50% due
1/15/2009.................................. 303,000
CCC- Caa2 3,500,000 Southwest Royalties Inc., 10.50% due
10/15/2004................................. 1,960,000
BB- B1 3,000,000 Tesoro Petroleum Corp., 9% due 7/01/2008..... 2,865,000
NR* C 14,365,000 TransAmerican Energy Corp., 13% due
6/15/2002(c)............................... 1,436,500
B- B3 1,500,000 United Refining Co., 10.75% due 6/15/2007.... 945,000
B B2 2,500,000 Universal Compression Inc., 9.875% due
2/15/2008(d)............................... 1,550,000
------------
29,613,250
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.8% B- B3 4,000,000 Premier Parks Inc., 9.75% due 6/15/2007...... 4,020,000
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.6% CCC- Caa3 2,000,000 Amresco Inc., 9.875% due 3/15/2005........... 1,280,000
NR* ba1 2,000,000 IBJ Capital Co. LLC (Preferred), 8.79% due
12/29/2049(e)(i)(m)........................ 1,854,024
------------
3,134,024
- ---------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--0.8% BB Ba2 1,000,000 Canandaigua Brands, 8.625% due 8/01/2006..... 996,250
B+ B1 4,500,000 Chiquita Brands International Inc., 9.125%
due 3/01/2004.............................. 3,127,500
------------
4,123,750
- ---------------------------------------------------------------------------------------------------------------------------
GAMING--1.9% D Caa1 4,000,000 GB Property Funding Corp., 10.875% due
1/15/2004(c)............................... 2,790,000
Jazz Casino Co. LLC:
NR* NR* 2,060,439 5.987% due 11/15/2009(a)(m).................. 1,225,961
NR* NR* 189,000 Contigent Notes due 11/15/2009(h).......... 0
B B2 5,000,000 Trump Atlantic City Associates/Funding Inc.,
11.25% due 5/01/2006....................... 4,050,000
B- Caa1 1,500,000 Venetian Casino/LV Sands, 12.25% due
11/15/2004................................. 1,293,750
------------
9,359,711
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
153
<PAGE> 155
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH SERVICES--4.2% B+ Ba3 $ 4,000,000 Beverly Enterprises Inc., 9% due 2/15/2006... $ 3,680,000
BB+ Ba2 2,000,000 Columbia HCA/Healthcare Corp., 7.15% due
3/30/2004.................................. 1,880,000
CCC+ B3 2,000,000 Extendicare Health Services, 9.35% due
12/15/2007................................. 1,340,000
B+ ba3 3,000,000 Fresenius Medical Capital Trust II, 7.875%
due 2/01/2008.............................. 2,760,000
BB Ba3 4,000,000 ICN Pharmaceutical Inc., 8.75% due
11/15/2008(e).............................. 3,820,000
B- Caa1 2,000,000 Magellan Health Services, 9% due
2/15/2008.................................. 1,620,000
D C 2,500,000 Mariner Post - Acute Network, 9.50% due
11/01/2007(c).............................. 50,000
NR* B2 3,000,000 Quest Diagnostic Inc., 10.75% due
12/15/2006................................. 3,142,500
BB- Ba3 2,500,000 Tenet Healthcare Corp., 8.625% due
1/15/2007.................................. 2,412,500
------------
20,705,000
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS--0.4% BB Ba2 2,000,000 HMH Properties, Inc., 8.45% due 12/01/2008... 1,850,000
- ---------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER AES Corporation:
PRODUCERS--5.2% BB Ba3 5,000,000 10.25% due 7/15/2006......................... 5,075,000
BB Ba1 3,000,000 9.50% due 6/01/2009.......................... 3,026,250
BBB- Ba1 2,000,000 AES Eastern Energy, 9% due 1/02/2017(e)...... 1,871,000
BB Ba2 6,000,000 Caithness Coso Fund Corp., 9.05% due
12/15/2009................................. 5,970,000
BB+ Ba1 3,000,000 Calpine Corporation, 8.75% due 7/15/2007..... 3,007,500
BB+ Ba1 2,500,000 Cogentrix Energy Inc., 8.75% due
10/15/2008................................. 2,384,375
BB Ba1 1,950,000 ESI Tractebel Acquisition Corp., 7.99% due
12/30/2011................................. 1,740,823
BB Ba3 250,000 Midland Funding II, 11.75% due 7/23/2005..... 269,963
BB Ba1 3,000,000 Monterrey Power, SA de CV, 9.625% due
11/15/2009(e).............................. 2,730,000
------------
26,074,911
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- B B3 1,000,000 Anthony Crane Rental LP, 10.375% due
SERVICES--2.6% 8/01/2008.................................. 850,000
B NR* 10,000,000 Anthony Crane Rentals, 13.375% due
8/01/2009(d)............................... 4,400,000
B B3 4,000,000 Neff Corp., 10.25% due 6/01/2008............. 3,840,000
CCC+ Caa1 8,000,000 Thermadyne Holdings Corp., 12.50% due
6/01/2008(d)............................... 3,660,000
------------
12,750,000
- ---------------------------------------------------------------------------------------------------------------------------
INTERNET TRANSPORT--0.8% B- B3 4,000,000 PSINet, Inc., Series B, 10% due 2/15/2005.... 3,955,000
- ---------------------------------------------------------------------------------------------------------------------------
MACHINERY -- 0.6% CCC+ B3 4,000,000 Numatics Inc., 9.625% due 4/01/2008.......... 3,000,000
- ---------------------------------------------------------------------------------------------------------------------------
METALS & MINING--3.2% CC Ca 3,000,000 AEI Resources Inc., 11.50% due
12/15/2006(e).............................. 1,942,500
B- B3 5,000,000 Great Lakes Carbon Corp., 11.75% due
5/15/2008(a)............................... 4,750,000
CCC+ B3 4,500,000 Kaiser Aluminum & Chemical Corp., 12.75% due
2/01/2003.................................. 4,500,000
B B2 5,000,000 P & L Coal Holdings Corp., 9.625% due
5/15/2008.................................. 4,925,000
------------
16,117,500
- ---------------------------------------------------------------------------------------------------------------------------
PACKAGING--5.2% BB- B1 2,000,000 Ball Corporation, 8.25% due 8/01/2008........ 1,920,000
B B2 7,000,000 Consolidated Containers Company LLC, 10.125%
due 7/15/2009(e)........................... 7,122,500
B- Caa2 4,500,000 Indesco International, 9.75% due 4/15/2008... 2,025,000
B B2 4,000,000 Portola Packaging Inc., 10.75% due
10/01/2005................................. 4,010,000
Silgan Holdings, Inc.:
B NR* 2,810,000 13.25% due 7/15/2006(a)...................... 3,062,900
B B1 1,000,000 9% due 6/01/2009............................. 960,000
B- B3 6,500,000 Tekni-Plex, Inc., 9.25% due 3/01/2008........ 6,597,500
------------
25,697,900
- ---------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST B B2 3,000,000 Ainsworth Lumber Company, 12.50% due
PRODUCTS--3.3% 7/15/2007(a)............................... 3,285,000
B- B2 2,000,000 Container Corp. of America, Series B, 10.75%
due 5/01/2002.............................. 2,070,000
</TABLE>
154
<PAGE> 156
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAPER & FOREST Doman Industries Limited:
PRODUCTS (CONCLUDED) B+ B3 $ 1,700,000 12% due 7/01/2004............................ $ 1,770,125
B Caa1 5,000,000 Series B, 9.25% due 11/15/2007............... 4,000,000
CCC+ Caa1 4,000,000 Pindo Deli Financial Mauritius, 10.75% due
10/01/2007................................. 2,950,000
B+ B1 2,000,000 SD Warren Co., 12% due 12/15/2004............ 2,085,000
------------
16,160,125
- ---------------------------------------------------------------------------------------------------------------------------
PRINTING & BB- Ba3 2,000,000 Primedia, Inc., 7.625% due 4/01/2008......... 1,870,000
PUBLISHING--0.4%
- ---------------------------------------------------------------------------------------------------------------------------
PRODUCT CCC+ Caa1 4,000,000 Ameriserve Food Distributors, 10.125% due
DISTRIBUTION--0.3% 7/15/2007.................................. 1,320,000
- ---------------------------------------------------------------------------------------------------------------------------
RESTAURANTS--0.4% BB NR* 2,000,000 FM 1993A Corp., 9.75% due 11/01/2003......... 2,010,000
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.3% NR* NR* 1,502,000 Cumberland Farms, Inc., 10.50% due
10/01/2003................................. 1,441,920
- ---------------------------------------------------------------------------------------------------------------------------
STEEL--2.3% NR* B2 5,000,000 CSN Iron SA, 9.125% due 6/01/2007(e)......... 4,168,750
B Caa1 750,000 Republic Technology, 13.75% due
7/15/2009(e)(l)............................ 495,000
B B2 3,500,000 Weirton Steel Corp., 10.75% due 6/01/2005.... 3,438,750
B+ B2 3,500,000 Wheeling Pittsburgh Corp., 9.25% due
11/15/2007................................. 3,255,000
------------
11,357,500
- ---------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.4% BB B1 2,000,000 Disco SA, 9.875% due 5/15/2008............... 1,745,000
- ---------------------------------------------------------------------------------------------------------------------------
TELEPHONY-- NR* NR* 3,000,000 Comtel Brasileira Ltd., 10.75% due
COMPETITIVE LOCAL 9/26/2004(e)................................. 2,895,000
EXCHANGE--3.1% B B1 4,000,000 Energis PLC, 9.75% due 6/15/2009(e).......... 4,140,000
BB Ba2 1,000,000 Global Crossing Holding Limited, 9.50% due
11/15/2009(e).............................. 985,000
B B2 2,000,000 Intermedia Communications Inc., 8.60% due
6/01/2008.................................. 1,830,000
B B3 3,000,000 Level 3 Communications Inc., 9.125% due
5/01/2008.................................. 2,827,500
NR* B2 3,000,000 Nextlink Communications, 9.45% due
4/15/2008(d)............................... 1,920,000
BBB- B1 1,000,000 Telefonica de Argentina, 11.875% due
11/01/2004................................. 1,020,000
------------
15,617,500
- ---------------------------------------------------------------------------------------------------------------------------
TEXTILES--0.7% B- B3 2,800,000 Anvil Knitwear Inc., Series B, 10.875% due
3/15/2007.................................. 2,310,000
B Caa3 2,000,000 Galey & Lord, Inc., 9.125% due 3/01/2008..... 470,000
D Ca 4,000,000 Polysindo International Finance Company BV,
9.375% due 7/30/2007(c).................... 720,000
------------
3,500,000
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--4.4% BB- NR* 6,000,000 Autopistas del Sol SA, 10.25% due
8/01/2009(e)............................... 4,770,000
BB B1 6,000,000 GS Superhighway Holdings, 10.25% due
8/15/2007.................................. 3,713,742
B NR* 4,500,000 MRS Logistica SA, 10.625% due 8/15/2005(e)... 3,690,000
BB- B1 4,000,000 Sea Containers Ltd., 12.50% due 12/01/2004... 4,100,000
B- B2 5,700,000 Transtar Holdings LP, 13.375% due
12/15/2003(d).............................. 5,814,000
------------
22,087,742
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES--4.5% NR* NR* 2,500,000 CIA Saneamento Basico, 10% due
7/28/2005(e)............................... 2,162,500
BB Ba3 2,000,000 CMS Energy Corp., 7.50% due 1/15/2009........ 1,805,462
BB- Ba2 1,000,000 Empresa Electricidad del Norte, 10.50% due
6/15/2005(e)............................... 470,486
B+ B2 3,500,000 Espirito Santo--Escelsa, 10% due 7/15/2007... 2,940,000
BB NR* 3,000,000 Inversora de Electrica, 9% due 9/16/2004(e).. 2,040,000
BBB- B1 4,000,000 MetroGas SA, 12% due 8/15/2000............... 4,065,000
</TABLE>
155
<PAGE> 157
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UTILITIES BBB Baa3 $ 2,446,000 Niagara Mohawk Power Corp., 8.77% due
(CONCLUDED) 1/01/2018.................................... $ 2,497,635
BB+ Ba2 2,923,200 TransGas de Occidente SA, 9.79% due
11/01/2010(e)(f)........................... 2,535,876
+Tucson Electric & Power Co.(f):
NR* NR* 3,400,687 10.211% due 1/01/2009........................ 3,558,989
NR* NR* 500,000 10.732% due 1/01/2013........................ 530,025
------------
22,605,973
- ---------------------------------------------------------------------------------------------------------------------------
WASTE Allied Waste North America:
MANAGEMENT--2.0% BB- Ba3 4,000,000 7.375% due 1/01/2004......................... 3,690,000
B+ B2 2,500,000 10% due 8/01/2009(e)......................... 2,237,500
NR* Ca 3,500,000 Mid-American Waste Systems, Inc., 12.25% due
2/15/2003(c)............................... 105,000
B+ B2 4,000,000 Safety-Kleen Services, 9.25% due 6/01/2008... 3,950,000
------------
9,982,500
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS B B1 10,000,000 NEXTEL Communications, Inc., 9.75% due
COMMUNICATIONS-- 8/15/2004.................................... 10,300,000
DOMESTIC PAGING & B- B2 650,000 VoiceStream Wireless
CELLULAR--2.2% Corporation/VoiceStream Wireless Holding
Corporation, 10.375% due 11/15/2009(e)..... 669,500
------------
10,969,500
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS NR* B3 3,050,000 ClearNet Communications, 10.125% due
COMMUNICATIONS-- 5/01/2009(d)................................. 1,830,000
INTERNATIONAL--3.8% B- Caa1 7,505,000 McCaw International Ltd., 12.484% due
4/15/2007(d)............................... 5,178,450
B- Caa1 8,000,000 Millicom International Cellular, 13.31% due
6/01/2006(d)............................... 6,600,000
Orange PLC:
BBB Ba3 3,000,000 8% due 8/01/2008............................. 3,052,500
BBB Ba3 2,000,000 9% due 6/01/2009............................. 2,070,000
------------
18,730,950
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE BONDS--82.5%
(COST--$487,863,125) 411,071,750
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
HELD PREFERRED STOCKS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BROADCASTING--RADIO & TV--0.4% 1,696 Cumulus Media, Inc., Series A (Preferred),
13.75%(a)(c)............................... 1,899,520
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--DOMESTIC--1.5% 69,490 CSC Holdings Inc. (Series A)(a)(c)........... 7,591,782
- ---------------------------------------------------------------------------------------------------------------------------
CABLE--INTERNATIONAL--1.0% 4,266 NTL Incorporated (Series B)(a)(c)............ 4,735,260
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--0.1% 2,343 Clark Material Handling(a)(c)................ 632,610
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--0.1% 2,499 +Clark USA Inc.(a)(c)(e)..................... 674,730
+TCR Holdings (Convertible):
23,076 (Class B).................................... 231
12,692 (Class C).................................... 127
33,460 (Class D).................................... 335
69,227 (Class E).................................... 692
------------
676,115
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.5% 120,000 California Federal Bank (Series A)........... 2,707,500
- ---------------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING--0.3% 20,000 Primedia, Inc. (Series H).................... 1,740,000
- ---------------------------------------------------------------------------------------------------------------------------
STEEL--0.6% 120,000 USX Capital LLC, Series A.................... 2,865,000
- ---------------------------------------------------------------------------------------------------------------------------
TELEPHONY--COMPETITIVE LOCAL EXCHANGE 4,357 Intermedia Communications Inc.
CARRIERS--0.9% (Convertible)(a)(c)........................ 4,269,860
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS--DOMESTIC PAGING & 2,659 Nextel Communications, Inc. (Series
CELLULAR--0.6% D)(a)(c)................................... 2,845,130
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PREFERRED STOCKS--6.0%
(COST--$31,953,207) 29,962,777
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY--0.2% 86,526 CHI Energy, Inc.(c).......................... 951,786
- ---------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.3% 93,747 On Command Corporation(c).................... 1,746,038
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
156
<PAGE> 158
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
INDUSTRY HELD COMMON STOCKS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GAMING--0.0% 54,802 JCC Holding Company (Class A)(c)............. $ 154,131
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--0.2% 65,333 HMI(c)....................................... 751,329
- ---------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS--DOMESTIC PAGING & 9,295 Nextel Communications, Inc. (Class A)(c)..... 957,966
CELLULAR--0.2%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCK--0.9%
(COST--$6,405,729) 4,561,250
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WARRANTS(B)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ENTERTAINMENT--0.0% 29,830 On Command Corporation....................... 182,709
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.0% 17,308 Bradlees Inc. (WT04)......................... 51,924
- ---------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.0% 2,809 Grand Union Co............................... 2,809
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WARRANTS--0.0%
(COST--$4,708,111) 237,442
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER**--8.2% $23,856,000 General Motors Acceptance Corp., 5% due
1/03/2000.................................. 23,846,060
10,000,000 Morgan (J.P.) Co., Inc., 6.25% due
1/12/2000.................................. 9,979,167
7,000,000 Paccar Financial, 6.60% due 1/10/2000........ 6,987,166
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--8.2% (COST--$40,812,393) 40,812,393
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT--97.6%
(COST--$571,742,565)......................... 486,645,612
OTHER ASSETS LESS LIABILITIES -- 2.4%........ 11,745,968
------------
NET ASSETS -- 100.0%......................... $498,391,580
============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*
Not Rated.
**
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.
(a)
Represents a pay-in-kind security that 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 an 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 contigent 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.
(l)
Each $1,000 face amount contains one warrant of Republic Technology.
(m)
Floating Rate Note.
+
Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $4,765,000, representing 1.0% of net
assets.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISSUE ACQUISITION DATE(S) COST VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clark USA Inc. ............................................. 9/26/1997-9/13/1999 $2,399,466 $ 674,730
TCR Holdings (Convertible):
(Class B)................................................. 12/10/1998 1,384 231
(Class C)................................................. 12/10/1998 711 127
(Class D)................................................. 12/10/1998 1,773 335
(Class E)................................................. 12/10/1998 4,361 692
Tuscon Electric & Power Co.:
10.211% due 1/01/2009..................................... 6/16/1993-6/01/1998 3,287,974 3,558,989
10.732% due 1/01/2013..................................... 3/01/1993 461,050 530,025
- ----------------------------------------------------------------------------------------------------------------
TOTAL $6,156,719 $4,765,129
========== ==========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
157
<PAGE> 159
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$571,742,565)....... $486,645,612
Cash........................................................ 840
Receivables:
Interest.................................................. $10,438,300
Securities sold........................................... 2,064,000
Dividends................................................. 43,120
Capital shares sold....................................... 15,262 12,560,682
-----------
Prepaid expenses and other assets........................... 37,736
------------
Total assets................................................ 499,244,870
------------
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 548,695
Investment adviser........................................ 225,956 774,651
-----------
Accrued expenses and other liabilities...................... 78,639
------------
Total liabilities........................................... 853,290
------------
- ----------------------------------------------------------------------------------------
NET ASSETS.................................................. $498,391,580
============
- ----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+.......................................... $ 5,198,448
Paid-in capital in excess of par............................ 590,869,037
Undistributed investment income--net........................ 294,644
Accumulated realized capital losses on investments--net..... (12,873,596)
Unrealized depreciation on investments--net................. (85,096,953)
------------
NET ASSETS.................................................. $498,391,580
============
- ----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $498,391,580 and 51,984,482
shares outstanding.......................................... $ 9.59
============
- ----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
158
<PAGE> 160
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 49,491,756
Dividends................................................... 4,578,613
Other income................................................ 167,149
------------
Total income................................................ 54,237,518
------------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $2,396,737
Accounting services......................................... 92,411
Professional fees........................................... 54,752
Printing and shareholder reports............................ 46,956
Custodian fees.............................................. 43,801
Directors' fees and expenses................................ 11,627
Transfer agent fees......................................... 5,010
Pricing services............................................ 12,794
----------
Total expenses.............................................. 2,664,088
------------
Investment income--net...................................... 51,573,430
------------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized gain on investments--net........................... 2,376,311
Change in unrealized depreciation on investments--net....... (24,647,862)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 29,301,879
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
159
<PAGE> 161
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 51,573,430 $ 53,633,171
Realized gain (loss) on investments--net.................... 2,376,311 (14,546,617)
Change in unrealized appreciation/depreciation on
investments--net.......................................... (24,647,862) (58,641,664)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ 29,301,879 (19,555,110)
------------ ------------
- ------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (56,071,974) (53,722,935)
In excess of investment income--net:
Class A................................................... (156,872) --
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............................. (56,228,846) (55,677,255)
------------ ------------
- ------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 3,418,926 43,185,871
------------ ------------
- ------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (23,508,041) (32,046,494)
Beginning of year........................................... 521,899,621 553,946,115
------------ ------------
End of year*................................................ $498,391,580 $521,899,621
============ ============
- ------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 294,644 $ 4,498,544
============ ============
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
160
<PAGE> 162
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL CLASS A
STATEMENTS. ----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999+ 1998+ 1997+ 1996+ 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 10.11 $ 11.52 $ 11.39 $ 11.25 $ 10.61
-------- -------- -------- -------- --------
Investment income--net................................. 1.00 1.05 1.05 1.08 1.09
Realized and unrealized gain (loss) on
investments--net..................................... (.43) (1.40) .14 .12 .65
-------- -------- -------- -------- --------
Total from investment operations....................... .57 (.35) 1.19 1.20 1.74
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................... (1.09) (1.02) (1.04) (1.06) (1.10)
In excess of investment income--net.................. --++ -- -- -- --
Realized gain on investments--net.................... -- -- (.02) -- --
In excess of realized gain on investments--net....... -- (.04) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions...................... (1.09) (1.06) (1.06) (1.06) (1.10)
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 9.59 $ 10.11 $ 11.52 $ 11.39 $ 11.25
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share..................... 5.95% (3.09%) 11.00% 11.27% 17.21%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... .52% .53% .54% .54% .55%
======== ======== ======== ======== ========
Investment income--net................................. 10.10% 9.52% 9.11% 9.50% 9.92%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................. $498,392 $521,900 $553,946 $414,615 $356,352
======== ======== ======== ======== ========
Portfolio turnover..................................... 23.14% 33.63% 53.63% 48.92% 41.60%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Amount is less than $.01 per share.
See Notes to Financial Statements.
161
<PAGE> 163
- --------------------------------------------------------------------------------
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. 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 net investment
income are due primarily to differing tax treatments for post-October losses.
(e) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $451,516 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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: .55% of such average daily net
assets not exceeding $250 million; .50% of such average daily net assets in
excess of $250 million but not more than $500 million; .45% of such average
daily net assets in excess of $500 million but not more than $750 million; and
.40% of such average daily net assets in excess of $750 million. For the year
ended December 31, 1999, the aggregate average daily net assets of the Fund and
Prime Bond Fund was approximately $1,084,230,000.
162
<PAGE> 164
- --------------------------------------------------------------------------------
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 year ended December 31, 1999, Merrill Lynch Security Pricing Service,
an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a subsidiary
of ML & Co., earned $1,774 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
year ended December 31, 1999 were $109,141,864 and $136,587,215, respectively.
Net realized gains for the year ended December 31, 1999 and net unrealized
losses as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Gains Losses
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $2,376,311 $(85,096,953)
---------- ------------
Total.................................. $2,376,311 $(85,096,953)
========== ============
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $85,883,718, of which $8,687,175 related to appreciated
securities and $94,570,893 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$572,529,330.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 3,998,107 $ 39,668,944
Shares issued to shareholders in
reinvestment of dividends........... 5,721,115 56,228,846
---------- ------------
Total issued......................... 9,719,222 95,897,790
Shares redeemed...................... (9,358,501) (92,478,864)
---------- ------------
Net increase......................... 360,721 $ 3,418,926
========== ============
- -----------------------------------------------------------------
</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, 1999, the Fund had a net capital loss carryforward of
approximately $12,742,000, of which $3,029,000 expires in 2006 and $9,713,000
expires in 2007. This amount will be available to offset like amounts of any
future taxable gains.
163
<PAGE> 165
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
HIGH CURRENT INCOME FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of High Current Income Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of High Current Income
Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
164
<PAGE> 166
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES--INDEX 500 FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
The Standard & Poor's 500 (S&P 500) Composite Index had another extraordinary
year in 1999 with a total return of +21.04%. The backdrop of this strong
performance was a continued robust US economy, a global economic recovery, and
increasing bond yields and interest rates despite little evidence of actual
inflationary pressures. Topped off by a strong fourth-quarter rally, the Index
advanced for an unprecedented fifth consecutive year with annual returns in
excess of 20%. The last quarter of 1999 turned into a remarkable period for the
Index as it posted a total return of +14.88%, despite the narrowness of the
gains within the Index's universe of component stocks, which were centered
around its largest-capitalization growth stocks. In addition, 1999 became the
ninth-straight year in which the Index had a positive total return. For the
three-year and five-year periods ended December 31, 1999, the S&P 500 Index had
annual total returns of +27.56% and +28.54%, respectively.
The S&P 500 Index closed the first half of 1999 at an all-time high of
1,372.71 amid indications of a broadening out of recent return patterns in the
market as small and mid cap stocks posted strong returns in the year's second
quarter. In the second half of the year, although continued strong corporate
earning was coupled with still-tame inflationary data, the Index was mostly
confined in a trading range between 1,250 and 1,400. After the Index first
surpassed the 1,400 level in July, the second half of the year began with three
straight months of negative returns. However, this was followed by three
straight positive months, with the market ending the year on a very strong note
as the Index advanced by more than 80 points in December to finish the year at
an all-time high of 1,469.25. For the six and 12-month periods ended December
31, 1999, the S&P 500 Index posted total returns of +7.71% and +21.04%,
respectively. For the year as a whole, large-capitalization and growth stocks
once again provided strong leadership for the market, in particular the S&P
technology sector, which led all groups by outperforming the overall Index by
14.7 percentage points.
For the year ended December 31, 1999, the Fund's Class A Shares had a total
return of +20.50%, compared to the unmanaged S&P 500 Index's total return of
+21.04% for the same 12-month period. Net assets of Index 500 Fund grew from
$403.2 million on December 31, 1998 to $586.4 million on December 31, 1999, an
increase of 45.4% during the year. Nearly all of the Fund's assets are in a
fully replicating portfolio of all 500 stocks in the S&P 500 Index. Incremental
cash inflows are typically invested through the use of S&P 500 futures
contracts. At December 31, 1999, the Fund's equity portfolio was valued at
$578.7 million, which represented 98.7% of the Fund's net assets. In addition,
the Fund held a long position of 18 S&P 500 March 2000 futures contracts.
Through its holding of equities and futures contracts, it is the Fund's goal to
be 100% invested in the S&P 500 Index at all times.
We added a number of new equity positions to the Fund during the second half
of 1999, as Standard & Poor's revised its list in response to merger and
acquisition activity involving constituents within the Index. This activity
continued at a rapid pace throughout the last half of 1999. During this time, we
added to the Fund's portfolio: QUALCOMM Incorporated, ADC Telecommunications,
Inc., Allied Waste Industries, Inc., Conoco Inc. (Class B), Lexmark
International Group, Inc. (Class A), Tosco Corporation, Global Crossing Ltd.,
Bed Bath & Beyond Inc., Adaptec, Inc., Pinnacle West Capital Corporation, Analog
Devices, Inc., The Home Depot, Inc., T. Rowe Price Associates, Inc., Leggett &
Platt, Incorporated, El Paso Energy Corporation, Comverse Technology, Inc.,
Pactiv Corporation, Xilinx, Inc., Teradyne, Inc., Quintiles Transnational Corp.,
Molex Incorporated, Citrix Systems, Inc., Old Kent Financial Corporation,
Honeywell International Inc., Yahoo! Inc. and Transocean Sedco Forex Inc.
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
February 7, 2000
165
<PAGE> 167
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the S&P 500 Index. Beginning and ending
values are:
<TABLE>
<CAPTION>
12/13/96** 12/99
<S> <C> <C>
Index 500
Fund+--Class A Shares* $10,000 $20,876
S&P 500 Index++ $10,000 $21,117
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+The Fund may invest in all 500 stocks in the S&P 500 Index in approximately the
same proportions as in the S&P 500 Index, in a statistically selected sample of
the 500 stocks in the S&P 500 Index, or in related options and futures
contracts.
++This unmanaged market-weighted Index is comprised of 500 common stocks issued
by companies in a wide range of businesses and which collectively represent a
substantial portion of all common stocks publicly traded in the United States.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +20.50%
- --------------------------------------------------------------------------------
Inception (12/13/96) to 12/31/99 +27.30
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +7.52% +20.50%
- ------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
166
<PAGE> 168
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
+3Com Corporation.............. 16,209 $ 761,823
+ADC Telecommunications,
Inc.......................... 7,038 510,695
+The AES Corporation........... 9,697 724,851
AFLAC Incorporated............. 12,512 590,410
ALLTEL Corporation............. 14,748 1,219,475
+ALZA Corporation.............. 4,752 164,538
+AMR Corporation............... 6,957 466,119
AT&T Corp...................... 150,116 7,618,387
Abbott Laboratories............ 72,222 2,622,561
+Adaptec, Inc.................. 4,763 237,257
Adobe Systems Incorporated..... 5,647 379,761
Adolph Coors Company (Class
B)........................... 1,710 89,775
+Advanced Micro Devices,
Inc.......................... 6,908 199,900
Aetna Inc...................... 7,052 393,590
Air Products and Chemicals,
Inc. ........................ 10,813 362,911
Alberto-Culver Company (Class
B)........................... 2,625 67,758
Albertson's, Inc............... 19,898 641,711
Alcan Aluminium Ltd............ 10,295 424,025
Alcoa Inc...................... 17,257 1,432,331
Allegheny Technologies
Incorporated................. 4,395 98,613
Allergan Inc................... 6,177 307,306
+Allied Waste Industries,
Inc.......................... 8,854 78,026
The Allstate Corporation....... 37,837 908,088
Amerada Hess Corporation....... 4,281 242,947
Ameren Corporation............. 6,453 211,336
+America Online, Inc........... 105,022 7,922,597
American Electric Power
Company, Inc................. 9,082 291,759
American Express Company....... 21,031 3,496,404
American General Corporation... 11,609 880,833
American Greetings Corporation
(Class A).................... 3,031 71,607
American Home Products
Corporation.................. 61,342 2,419,175
American International Group,
Inc.......................... 72,736 7,864,580
+Amgen Inc..................... 48,002 2,883,120
AmSouth Bancorporation......... 18,373 354,829
Anadarko Petroleum
Corporation.................. 5,997 204,648
+Analog Devices, Inc........... 8,196 762,228
+Andrew Corporation............ 3,855 73,004
Anheuser-Busch Companies,
Inc.......................... 21,859 1,549,257
Aon Corporation................ 12,069 482,760
Apache Corporation............. 5,359 197,948
+Apple Computer, Inc........... 7,572 778,496
+Applied Materials, Inc........ 17,778 2,252,250
Archer-Daniels-Midland
Company...................... 28,580 348,319
Armstrong World Industries,
Inc. ........................ 1,885 62,912
Ashland Inc.................... 3,391 111,691
Associates First Capital
Corporation (Class A)........ 34,213 938,719
Atlantic Richfield Company
(ARCO)....................... 15,170 1,312,205
Autodesk, Inc.................. 2,866 96,727
Automatic Data Processing,
Inc. ........................ 29,367 1,582,147
+AutoZone, Inc................. 6,782 219,143
Avery Dennison Corporation..... 5,293 385,727
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
Avon Products, Inc............. 11,383 $ 375,639
BB&T Corporation............... 15,549 425,654
The B.F. Goodrich Company...... 5,166 142,065
+BMC Software, Inc............. 11,386 910,168
Baker Hughes Incorporated...... 15,477 325,984
Ball Corporation............... 1,430 56,306
Bank of America Corporation.... 80,203 4,025,188
The Bank of New York Company,
Inc.......................... 34,606 1,384,240
Bank One Corporation........... 53,880 1,727,527
Barrick Gold Corporation....... 18,523 327,626
Bausch & Lomb Incorporated..... 2,688 183,960
Baxter International Inc....... 13,668 858,521
The Bear Stearns Companies
Inc.......................... 5,599 239,357
Becton, Dickinson and Company.. 11,741 314,072
+Bed Bath & Beyond Inc......... 6,570 228,307
Bell Atlantic Corporation...... 72,949 4,490,923
BellSouth Corporation.......... 88,430 4,139,629
Bemis Company, Inc............. 2,476 86,350
+Best Buy Co., Inc............. 9,643 483,958
Bestfoods...................... 13,104 688,779
+Bethlehem Steel Corporation... 6,161 51,598
Biomet, Inc.................... 5,300 212,000
The Black & Decker
Corporation.................. 4,081 213,232
The Boeing Company............. 43,904 1,824,760
Boise Cascade Corporation...... 2,686 108,783
+Boston Scientific
Corporation.................. 19,464 425,775
Briggs & Stratton
Corporation.................. 1,131 60,650
Bristol-Myers Squibb Company... 93,193 5,981,826
Brown-Forman Corporation (Class
B)........................... 3,236 185,261
Brunswick Corporation.......... 4,333 96,409
Burlington Northern Santa Fe
Corp......................... 21,467 520,575
Burlington Resources Inc....... 10,251 338,924
+CBS Corporation............... 35,817 2,290,049
CIGNA Corporation.............. 8,752 705,083
CMS Energy Corporation......... 5,440 169,660
C.R. Bard, Inc................. 2,421 128,313
CSX Corporation................ 10,277 322,441
CVS Corporation................ 18,417 735,529
+Cabletron Systems, Inc........ 8,482 220,532
Campbell Soup Company.......... 20,100 777,619
Capital One Financial
Corporation.................. 9,285 447,421
Cardinal Health, Inc........... 13,166 630,322
Carnival Corporation........... 28,983 1,385,750
Carolina Power & Light
Company...................... 7,492 228,038
Caterpillar Inc................ 16,704 786,132
+Cendant Corporation........... 33,404 887,294
Centex Corporation............. 2,795 69,002
Central & South West
Corporation.................. 9,999 199,980
CenturyTel, Inc................ 6,564 310,969
+Ceridian Corporation.......... 6,804 146,711
Champion International
Corporation.................. 4,502 278,843
The Charles Schwab
Corporation.................. 38,522 1,478,282
</TABLE>
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
The Chase Manhattan
Corporation.................. 38,748 $ 3,010,235
Chevron Corporation............ 30,880 2,674,980
The Chubb Corporation.......... 8,291 466,887
Cincinnati Financial
Corporation.................. 7,710 240,456
Cinergy Corp................... 7,469 180,190
Circuit City Stores--Circuit
City Group................... 9,553 430,482
+Cisco Systems, Inc............ 153,670 16,461,899
Citigroup Inc.................. 158,399 8,801,044
+Citrix Systems, Inc........... 4,210 517,830
+Clear Channel Communications,
Inc.......................... 15,891 1,418,272
The Clorox Company............. 11,121 560,220
The Coastal Corporation........ 10,016 354,942
The Coca-Cola Company.......... 116,038 6,759,214
Coca-Cola Enterprises Inc...... 20,007 402,641
Colgate-Palmolive Company...... 27,369 1,778,985
Columbia Energy Group.......... 3,818 241,489
Columbia/HCA Healthcare
Corporation.................. 26,462 775,667
Comcast Corporation (Class
A)........................... 35,272 1,772,418
Comerica Incorporated.......... 7,322 341,846
Compaq Computer Corporation.... 79,865 2,161,347
Computer Associates
International, Inc........... 25,323 1,771,027
+Computer Sciences
Corporation.................. 7,822 740,157
+Compuware Corporation......... 16,807 626,061
+Comverse Technology, Inc...... 3,349 484,768
ConAgra, Inc................... 23,126 521,780
Conoco Inc. (Class B).......... 29,421 731,847
Conseco, Inc................... 15,393 275,150
Consolidated Edison, Inc....... 10,403 358,904
Consolidated Natural Gas
Company...................... 4,475 290,595
+Consolidated Stores
Corporation.................. 5,155 83,769
Constellation Energy Group..... 7,008 203,232
Cooper Industries, Inc......... 4,445 179,745
Cooper Tire & Rubber Company... 3,571 55,574
Corning Incorporated........... 11,511 1,484,200
+Costco Wholesale
Corporation.................. 10,422 951,007
Countrywide Credit Industries,
Inc.......................... 5,308 134,027
Crane Co....................... 3,096 61,533
Crown Cork & Seal Company,
Inc.......................... 5,765 128,992
Cummins Engine Company,
Inc. ........................ 1,972 95,272
DTE Energy Company............. 6,825 214,134
Dana Corporation............... 7,729 231,387
Danaher Corporation............ 6,698 323,178
Darden Restaurants, Inc........ 6,218 112,701
Dayton Hudson Corporation...... 20,702 1,520,303
Deere & Company................ 10,999 477,082
+Dell Computer Corporation..... 119,369 6,087,819
Delphi Automotive Systems
Corporation.................. 26,543 418,052
Delta Air Lines, Inc........... 6,242 310,930
Deluxe Corporation............. 3,448 94,604
Dillard's, Inc. (Class A)...... 5,033 101,604
Dollar General Corporation..... 12,496 284,284
Dominion Resources, Inc........ 8,964 351,837
Dover Corporation.............. 9,566 434,057
The Dow Chemical Company....... 10,302 1,376,605
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
Dow Jones & Company, Inc....... 4,203 $ 285,804
Duke Energy Corporation........ 17,163 860,295
The Dun & Bradstreet
Corporation.................. 7,578 223,551
E.I. du Pont de Nemours and
Company...................... 49,115 3,235,451
+EMC Corporation............... 47,802 5,222,368
Eastern Enterprises............ 1,250 71,797
Eastman Chemical Company....... 3,681 175,538
Eastman Kodak Company.......... 14,827 982,289
Eaton Corporation.............. 3,458 251,137
Ecolab Inc..................... 6,075 237,684
Edison International........... 16,359 428,401
El Paso Energy Corporation..... 10,719 416,031
Electronic Data Systems
Corporation.................. 22,117 1,480,457
Eli Lilly and Company.......... 51,232 3,406,928
Emerson Electric Co............ 20,450 1,173,319
Engelhard Corporation.......... 5,921 111,759
Enron Corp..................... 33,596 1,490,822
Entergy Corporation............ 11,605 298,829
Equifax Inc.................... 6,645 156,573
Exxon Mobil Corporation++...... 162,245 13,070,898
+FDX Corporation............... 14,014 573,698
+FMC Corporation............... 1,437 82,358
FPL Group, Inc................. 8,436 361,166
Federal Home Loan Mortgage
Association.................. 32,659 1,537,014
Federal National Mortgage
Association.................. 48,154 3,006,615
+Federated Department Stores,
Inc.......................... 9,827 496,878
Fifth Third Bancorp............ 14,503 1,064,158
First Data Corporation......... 19,688 970,864
First Union Corporation........ 46,404 1,522,631
FirstEnergy Corp............... 10,947 248,360
Firstar Corporation............ 46,049 972,785
FleetBoston Financial
Corporation.................. 43,013 1,497,390
Fleetwood Enterprises, Inc..... 1,534 31,639
Florida Progress Corporation... 4,622 195,568
Fluor Corporation.............. 3,569 163,728
Ford Motor Company............. 56,746 3,032,364
Fort James Corporation......... 10,165 278,267
Fortune Brands, Inc............ 7,708 254,846
Foster Wheeler Corporation..... 1,909 16,942
Franklin Resources, Inc........ 11,845 379,780
+Freeport-McMoRan Copper &
Gold, Inc. (Class B)......... 7,702 162,705
GPU, Inc....................... 5,798 173,578
GTE Corporation................ 45,654 3,221,460
Gannett Co., Inc............... 13,097 1,068,224
The Gap, Inc................... 40,225 1,850,350
+Gateway Inc................... 14,871 1,071,641
General Dynamics Corporation... 9,442 498,065
General Electric Company++..... 154,139 23,853,010
+General Instrument
Corporation.................. 8,135 691,475
General Mills, Inc............. 14,274 510,295
General Motors Corporation..... 30,077 2,186,222
Genuine Parts Company.......... 8,353 207,259
Georgia-Pacific Group.......... 8,033 407,675
The Gillette Company........... 50,393 2,075,562
</TABLE>
168
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
Golden West Financial
Corporation.................. 7,904 264,784
The Goodyear Tire & Rubber
Company...................... 7,388 208,249
The Great Atlantic & Pacific
Tea Company, Inc............. 1,797 50,091
Great Lakes Chemical
Corporation.................. 2,702 103,183
+Guidant Corporation........... 14,440 678,680
H & R Block, Inc............... 4,606 201,512
H.J. Heinz Company............. 16,868 671,557
+HEALTHSOUTH Corporation....... 18,146 97,535
Halliburton Company............ 20,719 833,940
Harcourt General, Inc.......... 3,333 134,153
+Harrah's Entertainment,
Inc.......................... 6,015 159,022
The Hartford Financial Services
Group, Inc................... 10,412 493,269
Hasbro, Inc.................... 9,103 173,526
Hercules Incorporated.......... 4,976 138,706
Hershey Foods Corporation...... 6,501 308,797
Hewlett-Packard Company........ 47,872 5,454,416
Hilton Hotels Corporation...... 17,357 167,061
The Home Depot, Inc............ 108,164 7,415,960
Homestake Mining Company....... 12,218 95,453
Honeywell International Inc.... 37,144 2,142,744
Household International,
Inc.......................... 22,087 822,741
+Humana Inc.................... 7,895 64,640
Huntington Bancshares
Incorporated................. 10,794 257,707
IKON Office Solutions, Inc..... 7,007 47,735
IMS Health Incorporated........ 14,466 393,294
ITT Industries, Inc............ 4,142 138,498
Illinois Tool Works Inc........ 14,132 954,793
+Inco Limited.................. 9,044 212,534
Ingersoll-Rand Company......... 7,685 423,155
Intel Corporation.............. 156,959 12,919,688
International Business Machines
Corporation.................. 84,685 9,145,980
International Flavors &
Fragrances Inc............... 4,938 186,409
International Paper Company.... 19,465 1,098,556
The Interpublic Group of
Companies, Inc............... 13,185 760,610
J.C. Penney Company, Inc....... 12,225 243,736
J.P. Morgan & Co.,
Incorporated................. 8,134 1,029,968
Jefferson - Pilot
Corporation.................. 4,920 335,790
Johnson & Johnson.............. 65,328 6,083,670
Johnson Controls, Inc.......... 3,984 226,590
Jostens, Inc................... 1,597 38,827
+KLA-Tencor Corporation........ 4,226 470,671
Kansas City Southern
Industries, Inc.............. 5,156 384,767
Kaufman and Broad Home
Corporation.................. 2,258 54,615
Kellogg Company................ 19,046 586,855
Kerr-McGee Corporation......... 4,089 253,518
KeyCorp........................ 21,014 464,935
Kimberly-Clark Corporation..... 25,573 1,668,638
+Kmart Corporation............. 23,236 233,812
Knight-Ridder, Inc............. 3,943 234,608
+Kohl's Corporation............ 7,666 553,389
+The Kroger Co................. 39,038 736,842
+LSI Logic Corporation......... 6,987 471,622
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
Leggett & Platt,
Incorporated................. 9,221 $ 197,675
Lehman Brothers Holdings,
Inc. ........................ 5,600 474,250
+Lexmark International Group,
Inc. (Class A)............... 6,039 546,530
The Limited, Inc............... 10,060 435,724
Lincoln National Corporation... 9,183 367,320
Liz Claiborne, Inc............. 2,777 104,485
Lockheed Martin Corporation.... 18,581 406,459
Loews Corporation.............. 4,982 302,345
Longs Drug Stores
Corporation.................. 1,826 47,134
Louisiana-Pacific
Corporation.................. 5,001 71,264
Lowe's Companies, Inc.......... 17,952 1,072,632
Lucent Technologies Inc........ 147,191 11,011,727
MBIA, Inc...................... 4,676 246,951
MBNA Corporation............... 37,667 1,026,426
+MCI WorldCom Inc.............. 133,344 7,067,232
MGIC Investment Corporation.... 4,966 298,891
Mallinckrodt Inc............... 3,269 103,995
+Manor Care, Inc............... 4,841 77,456
Marriott International, Inc.
(Class A).................... 11,688 368,903
Marsh & McLennan Companies,
Inc.......................... 12,534 1,199,347
Masco Corporation.............. 21,000 532,875
Mattel, Inc.................... 19,778 259,586
The May Department Stores
Company...................... 15,745 507,776
Maytag Corporation............. 3,966 190,368
McDermott International,
Inc.......................... 2,789 25,275
McDonald's Corporation......... 63,611 2,564,318
The McGraw-Hill Companies,
Inc.......................... 9,213 567,751
McKesson HBOC, Inc............. 13,238 298,682
The Mead Corporation........... 4,806 208,761
+MediaOne Group, Inc........... 28,751 2,208,436
Medtronic, Inc................. 56,153 2,046,075
Mellon Financial Corporation... 23,896 813,958
Merck & Co., Inc............... 109,811 7,364,200
Meredith Corporation........... 2,425 101,092
Merrill Lynch & Co., Inc.**.... 17,393 1,452,315
+Micron Technology, Inc........ 12,677 985,637
+Microsoft Corporation++....... 242,415 28,301,951
Milacron Inc................... 1,744 26,814
Millipore Corporation.......... 2,118 81,808
Minnesota Mining and
Manufacturing Company (3M)... 18,854 1,845,335
+Mirage Resorts,
Incorporated................. 9,076 138,976
Molex Incorporated............. 7,365 417,503
Monsanto Company............... 29,825 1,062,516
Morgan Stanley Dean Witter &
Co........................... 26,166 3,735,197
Motorola, Inc.................. 28,577 4,207,963
NACCO Industries, Inc. (Class
A)........................... 382 21,225
NICOR, Inc..................... 2,249 73,093
Nabisco Group Holdings Corp.... 15,302 162,584
National City Corporation...... 28,966 686,132
+National Semiconductor
Corporation.................. 8,058 344,983
National Service Industries,
Inc. ........................ 1,951 57,555
+Navistar International
Corporation.................. 2,987 141,509
+Network Appliance, Inc........ 6,926 575,291
</TABLE>
169
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
The New York Times Company
(Class A).................... 8,046 395,260
Newell Rubbermaid Inc.......... 13,276 385,004
Newmont Mining Corporation..... 7,854 192,423
+Nextel Communications, Inc.
(Class A).................... 17,074 1,760,756
+Niagara Mohawk Holdings
Inc.......................... 8,804 122,706
Nike, Inc. (Class B)........... 13,156 652,044
Nordstrom, Inc................. 6,509 170,454
Norfolk Southern Corporation... 17,903 367,012
Nortel Networks Corporation.... 62,746 6,337,346
Northern States Power Company.. 7,239 141,161
Northern Trust Corporation..... 10,479 555,387
Northrop Grumman Corporation... 3,243 175,325
+Novell, Inc................... 15,647 624,902
Nucor Corporation.............. 4,130 226,376
ONEOK, Inc..................... 1,452 36,482
Occidental Petroleum
Corporation.................. 17,269 373,442
+Office Depot, Inc............. 15,465 169,148
Old Kent Financial
Corporation.................. 5,577 197,286
Omnicom Group Inc.............. 8,353 835,300
+Oracle Corporation............ 66,883 7,495,076
Owens Corning.................. 2,541 49,073
+Owens-Illinois, Inc........... 7,053 176,766
PACCAR Inc..................... 3,679 163,026
PE Corp./PE Biosystems Group... 4,807 578,342
PECO Energy Company............ 8,728 303,298
PG&E Corporation............... 18,073 370,497
PNC Bank Corp.................. 13,812 614,634
PP&L Resources, Inc............ 6,751 154,429
PPG Industries, Inc............ 8,185 512,074
+Pactiv Corporation............ 8,050 85,531
Paine Webber Group Inc......... 6,705 260,238
Pall Corporation............... 5,839 125,903
+Parametric Technology
Corporation.................. 12,673 342,963
Parker-Hannifin Corporation.... 5,261 269,955
Paychex, Inc................... 11,555 462,200
Peoples Energy Corporation..... 1,650 55,275
+PeopleSoft, Inc............... 12,609 268,729
The Pep Boys--Manny, Moe &
Jack......................... 2,454 22,393
PepsiCo, Inc................... 68,388 2,410,677
PerkinElmer, Inc............... 2,154 89,795
Pfizer Inc..................... 181,870 5,899,408
Pharmacia & Upjohn, Inc........ 24,359 1,096,155
Phelps Dodge Corporation....... 3,804 255,344
Philip Morris Companies
Inc.++....................... 111,160 2,577,523
Phillips Petroleum Company..... 11,899 559,253
Pinnacle West Capital
Corporation.................. 3,981 121,669
Pitney Bowes Inc............... 12,462 602,070
Placer Dome Inc................ 15,328 164,776
Polaroid Corporation........... 2,074 39,017
Potlatch Corporation........... 1,357 60,556
Praxair, Inc................... 7,455 375,080
The Procter & Gamble Company... 61,739 6,764,279
The Progressive Corporation.... 3,435 251,184
Providian Financial
Corporation.................. 6,706 610,665
Public Service Enterprise Group
Incorporated................. 10,269 357,490
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
Pulte Corporation.............. 2,030 $ 45,675
+QUALCOMM Incorporated......... 31,000 5,463,750
The Quaker Oats Company........ 6,297 413,241
+Quintiles Transnational
Corp......................... 5,426 101,398
R.R. Donnelley & Sons Company.. 5,940 147,386
Ralston-Ralston Purina Group... 15,221 424,285
Raytheon Company (Class B)..... 15,889 422,052
+Reebok International Ltd...... 2,632 21,550
Regions Financial
Corporation.................. 10,272 258,084
Reliant Energy, Inc............ 13,891 317,757
Republic New York
Corporation.................. 4,955 356,760
Reynolds Metals Company........ 2,960 226,810
Rite Aid Corporation........... 12,201 136,499
Rockwell International
Corporation.................. 8,937 427,859
Rohm and Haas Company.......... 10,250 417,047
+Rowan Companies, Inc.......... 3,953 85,731
Royal Dutch Petroleum Company
(NY Registered Shares)....... 100,738 6,088,353
Russell Corporation............ 1,553 26,013
Ryder System, Inc.............. 3,022 73,850
SAFECO Corporation............. 6,108 151,555
SBC Communications Inc......... 160,265 7,812,919
SLM Holding Corporation........ 7,474 315,777
SUPERVALU INC. ................ 6,536 130,720
SYSCO Corporation.............. 15,474 612,190
+Safeway Inc................... 23,903 850,050
Sara Lee Corporation........... 42,690 941,848
Schering-Plough Corporation.... 69,016 2,911,613
Schlumberger Limited........... 25,831 1,452,994
Scientific-Atlanta, Inc........ 3,691 205,312
+Seagate Technology, Inc....... 9,814 456,964
The Seagram Company Ltd........ 20,354 914,658
+Sealed Air Corporation........ 3,916 202,898
Sears, Roebuck & Co............ 17,756 540,448
Sempra Energy.................. 11,340 197,033
Service Corporation
International................ 12,804 88,828
Shared Medical Systems
Corporation.................. 1,264 64,385
The Sherwin-Williams Company... 7,793 163,653
Sigma-Aldrich Corporation...... 4,736 142,376
+Silicon Graphics, Inc......... 8,635 84,731
Snap-On Incorporated........... 2,749 73,020
+Solectron Corporation......... 13,786 1,311,393
SouthTrust Corporation......... 7,885 298,152
The Southern Company........... 31,622 743,117
Southwest Airlines Co.......... 23,743 384,340
Springs Industries, Inc. (Class
A)........................... 866 34,586
Sprint Corp. (FON Group)....... 40,940 2,755,774
Sprint Corp. (PCS Group)....... 20,245 2,075,113
+St. Jude Medical, Inc......... 3,956 121,400
The St. Paul Companies, Inc.... 10,663 359,210
The Stanley Works.............. 4,183 126,013
+Staples, Inc.................. 21,819 452,744
State Street Corporation....... 7,557 552,133
Summit Bancorp................. 8,210 251,431
+Sun Microsystems, Inc......... 73,388 5,682,983
Sunoco, Inc.................... 4,261 100,134
</TABLE>
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
Synovus Financial Corp......... 13,145 261,257
T. Rowe Price Associates,
Inc.......................... 5,621 207,626
The TJX Companies, Inc......... 14,567 297,713
TRW Inc........................ 5,705 296,303
Tandy Corporation.............. 9,119 448,541
Tektronix, Inc................. 2,202 85,603
+Tellabs, Inc.................. 18,899 1,213,080
Temple-Inland, Inc............. 2,618 172,624
+Tenet Healthcare
Corporation.................. 14,592 342,912
+Teradyne, Inc................. 8,056 531,696
Texaco Inc..................... 26,014 1,412,885
Texas Instruments
Incorporated................. 37,677 3,649,959
Texas Utilities Company........ 13,009 462,633
Textron, Inc................... 6,988 535,892
+Thermo Electron Corporation... 7,439 111,585
Thomas & Betts Corporation..... 2,673 85,202
Time Warner Inc................ 60,440 4,378,123
The Times Mirror Company (Class
A)........................... 2,831 189,677
The Timken Company............. 2,936 60,005
Torchmark Corporation.......... 6,180 179,606
Tosco Corporation.............. 6,762 183,842
+Toys 'R' Us, Inc.............. 11,499 164,579
Transocean Sedco Forex Inc..... 9,691 326,462
Tribune Company................ 11,195 616,425
+Tricon Global Restaurants,
Inc.......................... 7,234 279,413
Tupperware Corporation......... 2,719 46,053
Tyco International Ltd......... 79,335 3,084,148
U S WEST, Inc.................. 23,751 1,710,072
U.S. Bancorp................... 34,185 814,030
+US Airways Group, Inc......... 3,369 108,019
UST Inc........................ 8,038 202,457
USX-Marathon Group............. 14,597 360,363
USX-U.S. Steel Group........... 4,153 137,049
Unicom Corporation............. 10,216 342,236
Unilever NV (NY Registered
Shares)...................... 26,852 1,461,756
Union Carbide Corporation...... 6,263 418,055
Union Pacific Corporation...... 11,633 507,490
Union Pacific Resources Group
Inc.......................... 11,879 151,457
Union Planters Corporation..... 6,626 261,313
+Unisys Corporation............ 14,559 464,978
United HealthCare
Corporation.................. 7,975 423,672
United Technologies
Corporation.................. 22,491 1,461,915
Unocal Corporation............. 11,364 381,404
UnumProvident Corporation...... 11,239 360,350
V. F. Corporation.............. 5,596 167,880
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
- ------------------------------------------------------
<S> <C> <C>
+Viacom, Inc. (Class B)........ 32,787 $ 1,981,564
Vulcan Materials Company....... 4,738 189,224
+W.R. Grace & Co............... 3,349 46,467
W. W. Grainger, Inc............ 4,397 210,232
Wachovia Corporation........... 9,552 649,536
Wal-Mart Stores, Inc........... 209,065 14,451,618
Walgreen Co.................... 47,143 1,378,933
The Walt Disney Company........ 96,887 2,833,945
Warner-Lambert Company......... 40,339 3,305,277
Washington Mutual, Inc......... 27,121 705,146
Waste Management, Inc.......... 29,144 500,913
+Watson Pharmaceuticals,
Inc.......................... 4,508 161,443
+Wellpoint Health Networks
Inc.......................... 2,990 197,153
Wells Fargo Company............ 77,154 3,119,915
Wendy's International, Inc..... 5,617 115,851
Westvaco Corporation........... 4,719 153,957
Weyerhaeuser Company........... 11,081 795,754
Whirlpool Corporation.......... 3,497 227,524
Willamette Industries, Inc..... 5,225 242,636
The Williams Companies, Inc.... 20,435 624,545
Winn-Dixie Stores, Inc......... 6,999 167,539
Wm. Wrigley Jr. Company........ 5,460 452,839
Worthington Industries, Inc.... 4,186 69,069
Xerox Corporation.............. 31,164 707,033
+Xilinx, Inc................... 14,980 681,122
+Yahoo! Inc.................... 12,387 5,359,700
- ------------------------------------------------------
TOTAL COMMON STOCKS
(COST--$401,607,390)--98.7% 578,714,762
- ------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
SHORT-TERM OBLIGATIONS-- FACE
COMMERCIAL PAPER* AMOUNT
- -------------------------------------------------------
Associates First Capital
Corp., 4% due 1/03/2000.... $6,630,000 6,628,527
- -------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(COST--$6,628,527)--1.1% 6,628,527
- -------------------------------------------------------
TOTAL INVESTMENTS
(COST--$408,235,917)--99.8%.. 585,343,289
VARIATION MARGIN ON FINANCIAL
FUTURES
CONTRACTS***--0.0%......... 15,719
OTHER ASSETS LESS
LIABILITIES--0.2%.......... 1,035,314
------------
NET ASSETS--100.0%........... $586,394,322
============
</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.
** An affiliate of the Fund.
*** Financial futures contracts purchased as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
NUMBER OF EXPIRATION
CONTRACTS ISSUE DATE VALUE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
18 S&P 500 Financial Futures Index March 2000 $6,678,900
- ------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED (CONTRACT
PRICE--$6,503,910) $6,678,900
==========
- ------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Portion of holdings pledged as collateral for financial futures contracts.
See Notes to Financial Statements.
171
<PAGE> 173
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$408,235,917)....... $585,343,289
Cash........................................................ 329
Receivables:
Capital shares sold....................................... $898,999
Dividends................................................. 536,740
Securities sold........................................... 49,887
Variation margin.......................................... 15,719 1,501,345
--------
Deferred organization expenses.............................. 3,997
Prepaid expenses and other assets........................... 32,030
------------
Total assets................................................ 586,880,990
------------
- ------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 178,151
Investment adviser........................................ 161,688
Capital shares redeemed................................... 15,414 355,253
--------
Accrued expenses............................................ 131,415
------------
Total liabilities........................................... 486,668
------------
- ------------------------------------------------------------------------------------
NET ASSETS.................................................. $586,394,322
============
- ------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 3,130,876
Paid-in capital in excess of par............................ 411,204,835
Undistributed investment income--net........................ 12,148
Accumulated distributions in excess of realized capital
gains on investments--net................................. (5,235,899)
Unrealized appreciation on investments--net................. 177,282,362
------------
NET ASSETS.................................................. $586,394,322
============
- ------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $586,394,322 and 31,308,759
shares outstanding........................................ $ 18.73
============
- ------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
172
<PAGE> 174
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $65,215 foreign withholding tax).......... $ 6,438,628
Interest and discount earned................................ 1,308,496
-----------
Total income................................................ 7,747,124
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $1,572,801
Accounting services......................................... 108,625
Printing and shareholder reports............................ 48,927
Professional fees........................................... 46,760
Custodian fees.............................................. 40,940
Directors' fees and expenses................................ 9,219
Transfer agent fees......................................... 5,004
Amortization of organization expenses....................... 2,086
Pricing services............................................ 1,122
Other....................................................... 237
----------
Total expenses.............................................. 1,835,721
-----------
Investment income--net...................................... 5,911,403
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET:
Realized gain on investments--net........................... 71,595
Change in unrealized appreciation on investments--net....... 91,802,534
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $97,785,532
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
173
<PAGE> 175
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 5,911,403 $ 4,385,862
Realized gain on investments and foreign currency
transactions--net......................................... 71,595 5,356,606
Change in unrealized appreciation on investments--net....... 91,802,534 65,816,752
------------ ------------
Net increase in net assets resulting from operations........ 97,785,532 75,559,220
------------ ------------
- --------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (10,285,110) (2,775,835)
Realized gain on investments--net:
Class A................................................... (4,848,855) (10,487,182)
In excess of realized gain on investments--net:
Class A................................................... (5,235,899) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (20,369,864) (13,263,017)
------------ ------------
- --------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 105,761,241 125,686,790
------------ ------------
- --------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 183,176,909 187,982,993
Beginning of year........................................... 403,217,413 215,234,420
------------ ------------
End of year*................................................ $586,394,322 $403,217,413
============ ============
- --------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 12,148 $ 4,385,855
============ ============
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
174
<PAGE> 176
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM -----------------------------------------------------
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31, DEC. 13, 1996+
------------------------------------ TO
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 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....................................... .19 .18 .17 .02
Realized and unrealized gain on investments--net............. 3.05 3.40 3.16 .15
-------- -------- -------- -------
Total from investment operations............................. 3.24 3.58 3.33 .17
-------- -------- -------- -------
Less dividends and distributions:
Investment income--net..................................... (.37) (.17) (.02) --
Realized gain on investments--net.......................... (.18) (.66) --++ --
In excess of realized gain on investments--net............. (.19) -- -- --
-------- -------- -------- -------
Total dividends and distributions............................ (.74) (.83) (.02) --
-------- -------- -------- -------
Net asset value, end of period............................... $ 18.73 $ 16.23 $ 13.48 $ 10.17
======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................... 20.50% 28.28% 32.81% 1.68%++++
======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................... .35% .36% .34% .00%*
======== ======== ======== =======
Expenses..................................................... .35% .36% .40% .60%*
======== ======== ======== =======
Investment income--net....................................... 1.13% 1.36% 2.01% 3.08%*
======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $586,394 $403,217 $215,234 $10,752
======== ======== ======== =======
Portfolio turnover........................................... 26.35% 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.
175
<PAGE> 177
- --------------------------------------------------------------------------------
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. 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 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
176
<PAGE> 178
- --------------------------------------------------------------------------------
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. 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 .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 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.
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
year ended December 31, 1999 were $223,921,929 and $130,742,189, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $(2,668,157) $177,107,372
Short-term investments................ (95) --
Financial futures contracts........... 2,739,847 174,990
----------- ------------
Total................................. $ 71,595 $177,282,362
=========== ============
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $171,206,261, of which $193,288,504 related to appreciated
securities and $22,082,243 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$414,137,028.
177
<PAGE> 179
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold......................... 13,454,001 $ 228,170,067
Shares issued to shareholders in
reinvestment of dividends and
distributions...................... 1,190,645 20,369,864
---------- -------------
Total issued........................ 14,644,646 248,539,931
Shares redeemed..................... (8,181,291) (142,778,690)
---------- -------------
Net increase........................ 6,463,355 $ 105,761,241
========== =============
- -----------------------------------------------------------------
</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>
178
<PAGE> 180
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
INDEX 500 FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Index 500 Fund of Merrill Lynch Variable Series
Funds, Inc. as of December 31, 1999, the related statements of operations for
the year then ended and changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the three-year period then ended and the period December 13, 1996 (commencement
of operations) to December 31, 1996. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Index 500 Fund of
Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the results
of its operations, the changes in its net assets, and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
179
<PAGE> 181
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
During the 12-month period ended December 31, 1999, the vast majority of
equity markets, both developed and emerging, rose in US dollar terms. Over this
period, the Fund's benchmark, the unmanaged Morgan Stanley Capital International
(MSCI) World (Ex-US) Index, rose 27.93%, while International Equity Focus Fund's
Class A Shares returned +37.63%. Essentially all aspects of our investment
decision process contributed to this outperformance. However, there were two
primary contributors to the success. First, the Fund benefited because we
correctly decided to switch from growth-style stocks to more cyclical or
value-oriented stocks at the end of 1998 before deciding to switch back at the
beginning of the fourth calendar quarter of 1999. Second, stock selection has
been successful throughout the year, especially in Japan. The Fund also
benefited from selective positions in emerging markets, which are not included
in the Fund's benchmark. Emerging markets continued to rebound in 1999 against a
background of stronger global economic growth and a rally in commodity prices,
especially oil, which reached a nine-year high of $27 per barrel. (References to
securities markets of all countries in this letter to shareholders correspond to
those countries' market weightings in the MSCI World (Ex-US) Index, unless
otherwise noted.)
The year was characterized by strong returns from most equity markets in local
currency terms. However, the effects of exchange rate volatility have increased
the spread of returns to US dollar investors. The Japanese yen strengthened by
10% over the year ended December 31, 1999, enhancing returns to dollar investors
from yen-denominated assets. In stark contrast, the euro, the new European
currency introduced at the beginning of 1999, depreciated by nearly 15% relative
to the dollar, undermining the local currency gains made by the markets in the
Eurozone.
During 1999 the global economy picked up, partly in response to the monetary
easing initiated in the fourth quarter of 1998 by the US Federal Reserve Board
and other central banks. In particular, the US economy grew strongly,
experiencing its eighth consecutive year of expansion. The unemployment rate hit
a 29-year low, raising inflationary fears and pushing the long-term bond yield
up to 6.5%. Meanwhile, the Japanese economy grew again after a sharp contraction
in 1998, supporting the wider recovery in Asia. In Europe, the weak euro aided
faster growth in the second half of the year.
The strength of the global economic pick-up rekindled the concerns of
inflation in the minds of Western central bankers. Their reactions were to raise
interest rates in the United States by 75 basis points (0.75%) and in the United
Kingdom and Euroland by 50 basis points each. The Bank of Japan was the only
leading central bank not to raise interest rates, preferring to keep its zero
interest rate policy in place to stimulate economic activity and to try to
prevent further strengthening of the yen.
The Asian region provided the highest returns from developed markets over the
12 months ended December 31, 1999, in aggregate rising by 62% over the fiscal
year, while emerging Asian markets rose 70%. Within the developed markets,
Japan, Hong Kong and Singapore Free all returned about 60%. The Japanese market
was boosted not only by cyclical economic recovery but also by increasing
evidence of companies making concerted efforts to raise their return on equity
through labor cost reductions, capital spending cutbacks, share buybacks and
even merger and acquisition (M&A) activity.
Emerging equity markets in Europe and Latin America also produced strong
performance, continuing the recoveries started in the latter part of 1998.
Emerging Europe returned +84% over the year ended December 31, 1999, with Turkey
and Russia returning approximately +250%. The Latin American region gained +65%,
with the best returns coming from Mexico and Brazil. (Returns for emerging
equity markets correspond to those countries' market weightings in the MSCI
Emerging Markets Index.)
Developed European markets produced quite diverse returns. Finland (+153%) and
Sweden (+80%) were the star performers but six European markets (including
Switzerland and Italy) produced negative returns in US dollar terms. The main
driver of these relative returns was sector composition, with those markets
containing a strong technology bias producing strong returns, while those with a
high weighting of utilities and financials generally lagged well behind.
PORTFOLIO MATTERS
For most of the fiscal year ended December 31, 1999, the Fund was
underweighted in the Continental European area, which was beneficial to the Fund
since this
180
<PAGE> 182
- --------------------------------------------------------------------------------
region lagged other regions in performance terms. In the early part of the
fourth quarter, we started to increase the Fund's exposure to Continental
European equities, becoming overweighted by the end of October. We achieved this
largely at the expense of Japanese exposure. Our shift away from Japan toward
Europe during the last three months proved timely. In local currency terms,
Europe outperformed Japan by more than 12% over the three months ended December
31, 1999. However, once currency movements are taken into account, Europe's
outperformance was reduced to around 2%.
The Fund started the year overweight in the UK market, but by the middle of
the second quarter we had reversed this position and the United Kingdom remained
underweight relative to the benchmark for the rest of the year. This was
beneficial to the Fund since the United Kingdom has been one of the poorer
performing markets, returning +12.0% for the year ended December 31, 1999.
In Japan, during the first half of the year the Fund moved from a slightly
underweighted to slightly overweighted position relative to the benchmark. (This
represented a higher weighting than most international funds throughout the
period.) Part of the increase in the allocation to Japanese equities was
directed to the smaller-companies section of the market. This proved
particularly successful since the local smaller companies' index (Tokyo Stock
Exchange Index, Second Section) outperformed the larger companies' MSCI Japan
Index markedly in the second and third quarters of the year. During the last
quarter of the year, we took profits on the small companies' portfolio and as a
result reduced the overall exposure to Japan to below benchmark weight. Overall,
Japan was the largest country exposure in the Fund, averaging around 22% of net
assets over the year.
IN CONCLUSION
An environment of possibly stronger economic growth in nearly all markets
coupled with a potentially subdued inflationary outlook can provide a good
backdrop for international equities.
During the six months ended December 31, 1999, the return from developed
markets outside the United States exceeded the return from the US market by 14%
(in US dollar terms). This is the first six-month period since 1994 that
international markets have produced such a significant outperformance of the US
domestic market.
The cyclical case for international markets is based on what may be an
economic recovery in the rest of the world arriving at a time when US growth may
be peaking. Of course, a lower US dollar adds to the returns from international
investment.
We are also seeing that value has favored international equities. Ten years
ago, price/book and price/cash earnings ratios in the United States were only
around 75% of those in the MSCI World (Ex-US) Index, while the dividend yield
was almost double. Now those two ratios are much higher in the United States:
the price/ book value ratio is 5.0 versus 2.8 internationally. At the same time,
the dividend yield is lower.
We appreciate your investment in International Equity Focus Fund of Merrill
Lynch Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Clive D. Lang
Clive D. Lang
Senior Portfolio Manager
February 7, 2000
181
<PAGE> 183
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Morgan Stanley Capital International
World (Ex-US) Index. Beginning and ending values are:
<TABLE>
<CAPTION>
7/01/93** 12/99
<S> <C> <C>
International Equity
Focus Fund+--Class A Shares* $10,000 $17,661
Morgan Stanley Capital International
World(Ex-US)Index++ $10,000 $21,360
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+International Equity Focus Fund invests in a portfolio of securities of issuers
from foreign countries, both developed and developing, throughout the world.
++This unmanaged capitalization-weighted Index is comprised of a representative
sampling of stocks of 1,178 companies in 21 countries, excluding the United
States. The starting date for the Index is from 6/30/93.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +37.63%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 + 9.75
- --------------------------------------------------------------------------------
Inception (7/01/93) through 12/31/99 + 9.14
- --------------------------------------------------------------------------------
182
<PAGE> 184
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +24.46% +37.63%
</TABLE>
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
183
<PAGE> 185
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
AFRICA INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOUTH AFRICA BANKS 170,000 FirstRand Limited.................... $ 243,252 0.1%
-----------------------------------------------------------------------------------------------------
INSURANCE 177,900 Sanlam Limited....................... 248,771 0.2
-----------------------------------------------------------------------------------------------------
METALS & MINING 7,800 De Beers............................. 227,024 0.1
-----------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 23,600 Sappi Limited........................ 233,314 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA
(COST--$991,607) 952,361 0.5
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NORTH AMERICA
- -----------------------------------------------------------------------------------------------------------------------------
CANADA AEROSPACE & 25,690 Bombardier Inc. 'B'.................. 525,788 0.2
DEFENSE 47,930 CAE, Inc. ........................... 327,540 0.2
------------ -----
853,328 0.4
-----------------------------------------------------------------------------------------------------
BANKS 3,020 Bank of Montreal..................... 102,772 0.0
3,870 Royal Bank of Canada................. 169,631 0.1
14,550 The Toronto-Dominion Bank............ 389,185 0.2
------------ -----
661,588 0.3
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 940 JDS Uniphase Corporation(d).......... 151,833 0.1
EQUIPMENT 25,610 Nortel Networks Corporation.......... 2,578,324 1.3
------------ -----
2,730,157 1.4
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 12,970 BCE Inc. ............................ 1,174,167 0.6
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS 3,280 Celestica Inc.(d).................... 182,939 0.1
-----------------------------------------------------------------------------------------------------
MEDIA 8,460 Rogers Communications, Inc. 'B'(d)... 206,142 0.1
7,390 Seagram Company...................... 330,043 0.2
4,910 The Thomson Corporation.............. 128,791 0.0
------------ -----
664,976 0.3
-----------------------------------------------------------------------------------------------------
METALS & MINING 14,550 Cominco Ltd. ........................ 304,820 0.2
16,160 Inco Limited(d)...................... 376,475 0.2
------------ -----
681,295 0.4
-----------------------------------------------------------------------------------------------------
OIL & GAS 16,330 Anderson Exploration Ltd.(d)......... 194,445 0.1
11,120 Canadian Natural Resources Ltd.(d)... 270,574 0.2
6,200 Suncor Energy, Inc. ................. 258,494 0.1
------------ -----
723,513 0.4
-----------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 7,660 Domtar, Inc. ........................ 90,416 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 7,762,379 3.9
- -----------------------------------------------------------------------------------------------------------------------------
UNITED STATES MEDIA 1,200 MediaOne Group Inc., 7%
(Preferred)........................ 576,000 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED
STATES 576,000 0.3
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH AMERICA
(COST--$5,507,894) 8,338,379 4.2
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PACIFIC BASIN
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<S> <C> <C> <C> <C> <C>
AUSTRALIA BANKS 27,500 National Australia Bank Limited...... 418,858 0.2
30,000 Westpac Banking Corporation
Limited............................ 206,053 0.1
------------ -----
624,911 0.3
-----------------------------------------------------------------------------------------------------
CHEMICALS 26,000 Orica Limited........................ 139,539 0.1
-----------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS 105,500 Boral Limited........................ 162,758 0.1
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 40,000 Colonial Limited..................... 178,068 0.0
FINANCIALS 23,500 Lend Lease Corporation Limited....... 327,824 0.2
------------ -----
505,892 0.2
-----------------------------------------------------------------------------------------------------
</TABLE>
184
<PAGE> 186
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC BASIN SHARES HELD/ PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA DIVERSIFIED 68,900 Cable & Wireless Optus Limited(d).... $ 229,253 0.1%
(CONCLUDED) TELECOMMUNICATION 80,000 Telstra Corporation Limited.......... 433,011 0.2
SERVICES 36,000 Telstra Corporation Limited
(Installment Receipts)(d)(i)....... 126,373 0.1
------------ -----
788,637 0.4
-----------------------------------------------------------------------------------------------------
HOTELS RESTAURANTS & 13,300 Aristocrat Leisure Limited........... 190,403 0.1
LEISURE
-----------------------------------------------------------------------------------------------------
INSURANCE 32,500 AMP Limited.......................... 357,558 0.2
-----------------------------------------------------------------------------------------------------
MEDIA 62,000 The News Corporation Limited......... 599,430 0.3
25,500 The News Corporation Limited
(Preferred)........................ 217,535 0.1
15,000 Publishing & Broadcasting Limited.... 114,038 0.1
------------ -----
931,003 0.5
-----------------------------------------------------------------------------------------------------
METALS & MINING 40,000 Broken Hill Proprietary Company
Limited............................ 522,986 0.3
80,000 WMC Limited.......................... 439,286 0.2
------------ -----
962,272 0.5
-----------------------------------------------------------------------------------------------------
METALS--NONFERROUS 220,000 M.I.M. Holdings Limited.............. 225,788 0.1
-----------------------------------------------------------------------------------------------------
MULTILINE RETAIL 49,500 Coles Myer Limited................... 254,594 0.1
-----------------------------------------------------------------------------------------------------
OIL & GAS 16,200 Woodside Petroleum Limited........... 119,137 0.1
-----------------------------------------------------------------------------------------------------
REAL ESTATE 19,000 Westfield Holdings Limited........... 117,744 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRALIA 5,380,236 2.7
- -----------------------------------------------------------------------------------------------------------------------------
CHINA WIRELESS 5,800 China Telecom (Hong Kong) Limited
TELECOMMUNICATIONS (ADR)(a)(d)........................ 745,663 0.4
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHINA 745,663 0.4
- -----------------------------------------------------------------------------------------------------------------------------
JAPAN AUTO COMPONENTS 23,000 Bridgestone Corp. ................... 506,410 0.3
-----------------------------------------------------------------------------------------------------
AUTOMOBILES 82,000 Fuji Heavy Industries, Ltd. ......... 561,699 0.3
29,000 Toyota Motor Corporation............. 1,404,736 0.7
------------ -----
1,966,435 1.0
-----------------------------------------------------------------------------------------------------
BANKS 77,000 The 77 Bank, Ltd. ................... 806,997 0.4
219,000 The Asahi Bank, Ltd. ................ 1,350,132 0.7
64,000 The Gunma Bank Ltd. ................. 416,479 0.2
US$ 370,000 MBL International Finance (Bermuda),
3% due 11/30/2002.................. 408,850 0.2
111,000 The Tokai Bank Ltd. ................. 699,521 0.4
------------ -----
3,681,979 1.9
-----------------------------------------------------------------------------------------------------
BROADCASTING & 12,000 Nippon Broadcasting System,
PUBLISHING Incorporated....................... 1,045,112 0.5
-----------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 21,800 Square Co., Ltd. .................... 1,482,630 0.7
SERVICES
-----------------------------------------------------------------------------------------------------
CHEMICALS 146,000 Asahi Chemical Industry Co., Ltd. ... 750,073 0.4
76,000 Kaneka Corporation................... 972,032 0.5
21,000 Shin-Etsu Chemical Co., Ltd. ........ 904,198 0.4
------------ -----
2,626,303 1.3
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT 6,000 Matsushita Communication Industrial
Co., Ltd. ......................... 1,585,282 0.8
-----------------------------------------------------------------------------------------------------
COMPUTERS & 26,000 Fujitsu Limited...................... 1,185,635 0.6
PERIPHERALS 32,000 NEC Corporation...................... 762,501 0.4
146,000 Toshiba Corporation.................. 1,114,395 0.6
------------ -----
3,062,531 1.6
-----------------------------------------------------------------------------------------------------
DATA PROCESSING & 35,200 Miroku Jyoho Service Co., Ltd. ...... 602,799 0.3
REPRODUCTION
-----------------------------------------------------------------------------------------------------
</TABLE>
185
<PAGE> 187
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC BASIN SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAPAN DIVERSIFIED 3,500 Acom Co., Ltd. ...................... $ 342,842 0.1%
(CONCLUDED) FINANCIALS 53,000 Kokusai Securities Co., Ltd. ........ 830,345 0.4
4,400 Takefuji Corporation................. 550,700 0.3
85,000 The Toyo Trust & Banking Co.,
Ltd. .............................. 349,349 0.2
------------ -----
2,073,236 1.0
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 74 NTT Mobile Communications
TELECOMMUNICATION Network, Inc....................... 2,845,875 1.5
SERVICES 189 Nippon Telegraph & Telephone
Corporation (NTT).................. 3,236,618 1.6
------------ -----
6,082,493 3.1
-----------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES 32,000 Tokyo Electric Power................. 858,010 0.4
-----------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 50,000 The Furukawa Electric Co., Ltd. ..... 758,391 0.4
-----------------------------------------------------------------------------------------------------
ELECTRONIC 85 Hakuto Company Ltd. ................. 2,150 0.0
EQUIPMENT & 56,000 Ibiden Co., Ltd. .................... 756,238 0.4
INSTRUMENTS 1,500 Keyence Corporation.................. 609,159 0.3
3,000 Rohm Company Ltd. ................... 1,232,997 0.6
6,000 TDK Corporation...................... 828,457 0.4
94,000 Toko, Inc. .......................... 445,210 0.3
------------ -----
3,874,211 2.0
-----------------------------------------------------------------------------------------------------
FOOD & DRUG RETAILING 14,000 FamilyMart Co., Ltd. ................ 931,598 0.5
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 35,000 Katokichi Co., Ltd. ................. 758,636 0.4
-----------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES 8,100 Sony Corporation..................... 2,401,703 1.2
-----------------------------------------------------------------------------------------------------
INSURANCE 129,000 Mitsui Marine and Fire Insurance
Company, Ltd. ..................... 764,987 0.4
-----------------------------------------------------------------------------------------------------
INTERNET SOFTWARE & 1,300 Softbank Corporation................. 1,244,153 0.6
SERVICES
-----------------------------------------------------------------------------------------------------
MACHINERY 153,000 Komatsu Ltd. ........................ 703,689 0.4
125,000 NSK Limited.......................... 855,025 0.4
54,000 Nippon Thompson Co., Ltd. ........... 445,993 0.2
------------ -----
2,004,707 1.0
-----------------------------------------------------------------------------------------------------
MEDIA 890 Nippon Television Network Corp. ..... 1,045,112 0.5
-----------------------------------------------------------------------------------------------------
MERCHANDISING 15,300 Kojima Co. Limited................... 598,884 0.3
-----------------------------------------------------------------------------------------------------
METALS & MINING 340,000 Nippon Steel Corporation............. 795,185 0.4
-----------------------------------------------------------------------------------------------------
MULTILINE RETAIL 10,000 Ito-Yokado Co., Ltd.(d) ............. 1,086,212 0.5
-----------------------------------------------------------------------------------------------------
OFFICE ELECTRONICS 24,000 Ricoh Co., Ltd. ..................... 452,334 0.2
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 13,000 Takeda Chemical Industries, Ltd. .... 642,431 0.3
-----------------------------------------------------------------------------------------------------
REAL ESTATE 97,000 Mitsui Fudosan Co., Ltd. ............ 656,855 0.3
-----------------------------------------------------------------------------------------------------
ROAD & RAIL 136,000 Nippon Express Co., Ltd. ............ 751,933 0.4
-----------------------------------------------------------------------------------------------------
TRADING COMPANIES & 125,000 Mitsubishi Corporation............... 965,114 0.5
DISTRIBUTORS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 45,305,666 22.8
- -----------------------------------------------------------------------------------------------------------------------------
MALAYSIA BANKS 285 Rashid Hussain BHD (Warrants)(c)..... 94 0.0
-----------------------------------------------------------------------------------------------------
CLOSED END FUNDS 14,900 Genesis Malaysia Maju Fund
Limited(d)......................... 320,350 0.2
21,400 Malaysia Fund(d)..................... 151,138 0.1
------------ -----
471,488 0.3
-----------------------------------------------------------------------------------------------------
OPEN END INVESTMENT FUND 69,395 Webs-Malaysia........................ 490,102 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MALAYSIA 961,684 0.5
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
186
<PAGE> 188
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC BASIN SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NEW ZEALAND DIVERSIFIED 104,040 Telecom Corporation of New Zealand
TELECOMMUNICATION Limited............................ $ 488,686 0.2%
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NEW ZEALAND 488,686 0.2
- -----------------------------------------------------------------------------------------------------------------------------
SINGAPORE DIVERSIFIED 125,000 Singapore Telecommunications,
TELECOMMUNICATION Ltd. .............................. 258,258 0.1
SERVICES
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 8,000 MSCI Singapore OPALS 'B'(f).......... 485,920 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SINGAPORE 744,178 0.4
- -----------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA ELECTRIC UTILITIES 18,000 Korea Electric Power Corporation
(ADR)(a)........................... 301,500 0.1
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 4,300 MSCI Korea OPALS(f).................. 563,085 0.3
-----------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES 404 Samsung Electronics (GDR)(b)(e)...... 48,985 0.0
-----------------------------------------------------------------------------------------------------
WIRELESS 781 SK Telecom Co. Ltd. (ADR)(a)(e)...... 29,088 0.0
TELECOMMUNICATIONS
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH KOREA 942,658 0.4
- -----------------------------------------------------------------------------------------------------------------------------
THAILAND EQUITY BASKET 4,000 MSCI Thailand OPALS(f)............... 425,200 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THAILAND 425,200 0.2
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC
BASIN (COST--$41,129,212) 54,993,971 27.6
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WESTERN EUROPE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DENMARK EQUITY BASKET 3,300 MSCI Denmark OPALS 'B'(e)(f)......... 561,330 0.3
-----------------------------------------------------------------------------------------------------
MARINE 90 D/S 1912 'B'......................... 1,059,985 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 1,621,315 0.8
- -----------------------------------------------------------------------------------------------------------------------------
FINLAND COMMUNICATIONS EQUIPMENT 24,500 Nokia Oyj............................ 4,440,870 2.2
-----------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 35,000 Stora Enso Oyj 'R'................... 610,091 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 5,050,961 2.5
- -----------------------------------------------------------------------------------------------------------------------------
FRANCE BANKS 12,200 Banque Nationale de Paris (BNP)...... 1,125,343 0.6
3,900 Societe Generale 'A'................. 907,206 0.4
------------ -----
2,032,549 1.0
-----------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 3,100 Compagnie de Saint Gobain............ 582,821 0.3
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT 3,000 Alcatel.............................. 688,788 0.3
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 9,200 France Telecom SA.................... 1,216,416 0.6
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 8,000 Schneider SA......................... 627,965 0.3
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 4,000 MSCI France OPALS(f)................. 1,012,760 0.5
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 1,750 Groupe Danone........................ 412,366 0.2
-----------------------------------------------------------------------------------------------------
IT CONSULTING & SERVICES 3,300 Cap Gemini SA........................ 837,421 0.4
-----------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES 12,000 Lagardere S.C.A. .................... 652,536 0.3
-----------------------------------------------------------------------------------------------------
INSURANCE 6,500 Axa.................................. 905,897 0.5
-----------------------------------------------------------------------------------------------------
METALS & MINING 46,000 Usinor SA............................ 863,905 0.4
-----------------------------------------------------------------------------------------------------
MULTI-UTILITIES 8,300 Suez Lyonnaise des Eaux.............. 1,329,774 0.7
14,700 Vivendi.............................. 1,327,080 0.6
------------ -----
2,656,854 1.3
-----------------------------------------------------------------------------------------------------
</TABLE>
187
<PAGE> 189
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FRANCE MULTILINE RETAIL 8,300 Carrefour SA......................... $ 1,530,368 0.8%
(CONCLUDED)
-----------------------------------------------------------------------------------------------------
OIL & GAS 19,000 Total Fina SA 'B'.................... 2,535,123 1.3
-----------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS 1,400 L'Oreal SA........................... 1,122,906 0.6
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 10,600 Aventis SA........................... 615,901 0.3
7,000 Sanofi-Synthelabo SA(d).............. 291,406 0.2
------------ -----
907,307 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 18,585,982 9.3
- -----------------------------------------------------------------------------------------------------------------------------
GERMANY AIRLINES 15,700 Deutsche Lufthansa AG (Registered
Shares)............................ 365,209 0.2
-----------------------------------------------------------------------------------------------------
AUTOMOBILES 11,500 DaimlerChrysler AG................... 894,015 0.4
7,000 Volkswagen AG........................ 394,392 0.2
------------ -----
1,288,407 0.6
-----------------------------------------------------------------------------------------------------
BANKS 16,000 Deutsche Bank AG (Registered
Shares)............................ 1,350,991 0.7
10,350 HypoVereinsbank...................... 706,642 0.3
------------ -----
2,057,633 1.0
-----------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC 600 SAP AG (Systeme, Anwendungen,
SERVICES Produkte in der
Datenverarbeitung)................. 295,454 0.1
600 SAP AG (Systeme, Anwendungen,
Produkte in der Datenverarbeitung)
(Preferred)........................ 361,312 0.2
------------ -----
656,766 0.3
-----------------------------------------------------------------------------------------------------
CHEMICALS 10,200 BASF AG.............................. 523,841 0.3
16,500 Bayer AG............................. 780,929 0.4
------------ -----
1,304,770 0.7
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 36,500 Deutsche Telekom AG.................. 2,598,614 1.3
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES 17,800 RWE AG............................... 697,267 0.4
6,500 RWE AG (Preferred)................... 200,292 0.1
------------ -----
897,559 0.5
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 2,650 MSCI Germany OPALS(f)................ 1,011,630 0.5
-----------------------------------------------------------------------------------------------------
INDUSTRIAL 8,500 Preussag AG.......................... 473,340 0.3
CONGLOMERATES 6,700 Siemens AG........................... 852,133 0.4
------------ -----
1,325,473 0.7
-----------------------------------------------------------------------------------------------------
INSURANCE 4,200 Allianz AG (Registered Shares)....... 1,410,505 0.7
3,000 Muenchener Rueckversicherungs-
Gesellschaft AG (Registered
Shares)............................ 760,688 0.4
------------ -----
2,171,193 1.1
-----------------------------------------------------------------------------------------------------
METALS & MINING 33,500 Thyssen Krupp AG(d).................. 1,020,469 0.5
-----------------------------------------------------------------------------------------------------
MULTI-UTILITIES 11,000 Veba AG.............................. 534,465 0.3
-----------------------------------------------------------------------------------------------------
STEEL 40,000 Salzgitter AG........................ 378,632 0.2
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 8,400 Mannesmann AG........................ 2,025,883 1.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 17,636,703 8.9
- -----------------------------------------------------------------------------------------------------------------------------
HUNGARY BANKS 11,792 OTP Bank Rt. (GDR)(b)................ 680,988 0.3
-----------------------------------------------------------------------------------------------------
OIL & GAS 19,870 MOL Magyar Olaj-es Gazipari Rt.
(GDR)(b)(d)........................ 407,335 0.2
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 2,690 EGIS Rt.............................. 106,509 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY 1,194,832 0.6
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
188
<PAGE> 190
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IRELAND BANKS 45,000 Bank of Ireland...................... $ 357,989 0.2%
-----------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS 15,603 CRH PLC.............................. 334,670 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN IRELAND 692,659 0.3
- -----------------------------------------------------------------------------------------------------------------------------
ITALY BANKS 92,000 San Paolo-IMI SpA.................... 1,249,768 0.7
210,000 Unicredito Italiano SpA.............. 1,031,974 0.5
------------ -----
2,281,742 1.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 270,000 Telecom Italia Mobile (TIM) SpA...... 3,015,260 1.5
TELECOMMUNICATION 118,000 Telecom Italia SpA................... 1,663,564 0.9
SERVICES 100,000 Telecom Italia SpA (Registered)...... 609,235 0.3
------------ -----
5,288,059 2.7
-----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 92,000 Beni Stabili(d)...................... 32,425 0.0
-----------------------------------------------------------------------------------------------------
INSURANCE 44,000 Assicurazioni Generali............... 1,453,302 0.7
-----------------------------------------------------------------------------------------------------
OIL & GAS 340,000 ENI SpA.............................. 1,869,395 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 10,924,923 5.5
- -----------------------------------------------------------------------------------------------------------------------------
NETHERLANDS BANKS 60,500 ABN AMRO Holding NV.................. 1,510,903 0.8
-----------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & 31,000 Vedior NV 'A'........................ 318,413 0.2
SUPPLIES
-----------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS 17,600 ING Groep NV......................... 1,062,329 0.5
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 9,100 Unilever NV 'A'...................... 502,537 0.3
-----------------------------------------------------------------------------------------------------
IT CONSULTING & SERVICES 9,000 Getronics NV......................... 717,790 0.3
-----------------------------------------------------------------------------------------------------
INSURANCE 11,900 Aegon NV............................. 1,149,198 0.6
-----------------------------------------------------------------------------------------------------
MARINE 16,800 Koninklijke Nedlloyd NV.............. 470,309 0.2
-----------------------------------------------------------------------------------------------------
MEDIA 12,800 Wolters Kluwer NV 'A'................ 433,091 0.2
-----------------------------------------------------------------------------------------------------
OIL & GAS 47,000 Royal Dutch Petroleum Company........ 2,879,970 1.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE NETHERLANDS 9,044,540 4.5
- -----------------------------------------------------------------------------------------------------------------------------
NORWAY EQUITY BASKET 7,800 MSCI Norway OPALS 'B'(e)(f).......... 821,262 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORWAY 821,262 0.4
- -----------------------------------------------------------------------------------------------------------------------------
PAN-EUROPE EQUITY BASKET 11,050 MSCI Euro Banking OPALS(f)........... 3,064,718 1.5
4,750 MSCI Euro Insurance OPALS 'B'(f)..... 918,460 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PAN-EUROPE 3,983,178 2.0
- -----------------------------------------------------------------------------------------------------------------------------
PORTUGAL EQUITY BASKET 18,800 MSCI Portugal OPALS 'B'(e)(f)........ 1,317,128 0.7
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PORTUGAL 1,317,128 0.7
- -----------------------------------------------------------------------------------------------------------------------------
SPAIN BANKS 125,000 Banco Santander Central Hispano,
SA................................. 1,414,835 0.7
-----------------------------------------------------------------------------------------------------
CONSTRUCTION & 41,500 Grupo Dragados SA.................... 366,085 0.2
ENGINEERING
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 81,600 Telefonica SA(d)..................... 2,037,846 1.0
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES 55,000 Endesa SA............................ 1,091,638 0.6
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 7,300 MSCI Spanish OPALS(f)................ 973,455 0.5
-----------------------------------------------------------------------------------------------------
METALS & MINING 6,500 Acerinox SA.......................... 259,202 0.1
-----------------------------------------------------------------------------------------------------
OIL & GAS 25,000 Repsol-YPF, SA....................... 579,529 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 6,722,590 3.4
- -----------------------------------------------------------------------------------------------------------------------------
SWEDEN BANKS 30,000 Skandinaviska Enskilda Banken
(SEB) 'A'.......................... 303,744 0.2
42,000 Svenska Handelsbanken AB............. 529,079 0.3
------------ -----
832,823 0.5
-----------------------------------------------------------------------------------------------------
</TABLE>
189
<PAGE> 191
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SWEDEN COMMUNICATIONS EQUIPMENT 41,000 Telefonaktiebolaget LM Ericsson
(CONCLUDED) 'B'................................ $ 2,640,334 1.3%
-----------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS 31,500 Investor AB 'B'...................... 445,020 0.2
-----------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES 24,000 Electrolux AB 'B'.................... 604,662 0.3
-----------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 21,500 Svenska Cellulosa AB (SCA) 'B'....... 637,862 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 5,160,701 2.6
- -----------------------------------------------------------------------------------------------------------------------------
SWITZERLAND BANKS 3,850 Credit Suisse Group (Registered
Shares)............................ 765,549 0.4
3,000 UBS AG (Registered Shares)........... 810,454 0.4
------------ -----
1,576,003 0.8
-----------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 4,000 ABB Ltd.(d).......................... 489,414 0.2
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 2,700 MSCI Switzerland OPALS 'B'(f)........ 928,233 0.5
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 565 Nestle SA (Registered Shares)........ 1,035,437 0.5
-----------------------------------------------------------------------------------------------------
INSURANCE 205 Schweizerische Rueckversicherungs-
Gesellschaft (Registered Shares)... 421,282 0.2
700 Zurich Allied AG..................... 399,321 0.2
------------ -----
820,603 0.4
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 1,000 Novartis AG (Registered Shares)...... 1,468,870 0.8
135 Roche Holding AG..................... 1,603,003 0.8
------------ -----
3,071,873 1.6
-----------------------------------------------------------------------------------------------------
RETAILING 6,500 Charles Voegele Holding AG(d)........ 1,167,934 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWITZERLAND 9,089,497 4.6
- -----------------------------------------------------------------------------------------------------------------------------
UNITED AEROSPACE & 122,000 British Aerospace PLC................ 807,423 0.4
KINGDOM DEFENSE 177,000 Rolls-Royce PLC...................... 611,427 0.3
------------ -----
1,418,850 0.7
-----------------------------------------------------------------------------------------------------
APPLIANCES & 99,000 Reckitt Benckiser PLC................ 927,673 0.5
HOUSEHOLD PRODUCTS
-----------------------------------------------------------------------------------------------------
BANKS 44,000 Alliance & Leicester PLC............. 569,974 0.3
29,000 Barclays PLC......................... 834,186 0.4
130,000 HSBC Holdings PLC.................... 1,810,971 0.9
8,800 HSBC Holdings PLC (ADR)(a)........... 628,100 0.3
70,000 Lloyds TSB Group PLC................. 875,139 0.5
17,000 Standard Chartered PLC............... 263,712 0.1
------------ -----
4,982,082 2.5
-----------------------------------------------------------------------------------------------------
BEVERAGES 20,000 Bass PLC............................. 248,748 0.1
40,000 Diageo PLC........................... 321,549 0.2
------------ -----
570,297 0.3
-----------------------------------------------------------------------------------------------------
CONSTRUCTION 40,000 Blue Circle Industries PLC........... 232,283 0.1
MATERIALS 40,000 RMC Group PLC........................ 548,828 0.3
------------ -----
781,111 0.4
-----------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING 150,000 Rexam PLC............................ 605,325 0.3
-----------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS 21,000 Provident Financial PLC.............. 237,287 0.1
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 64,000 British Telecommunications PLC....... 1,563,062 0.8
TELECOMMUNICATION 53,000 Cable & Wireless PLC................. 897,447 0.4
------------ -----
SERVICES
2,460,509 1.2
-----------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES 90,000 British Energy PLC................... 515,737 0.3
54,000 British Energy PLC
(Deferred Shares).................. 1 0.0
------------ -----
515,738 0.3
-----------------------------------------------------------------------------------------------------
</TABLE>
190
<PAGE> 192
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED FOOD & DRUG RETAILING 65,000 Iceland Group PLC.................... $ 261,258 0.1%
KINGDOM 80,000
Safeway PLC.......................... 273,768 0.1
(CONCLUDED) 310,000
Tesco PLC............................ 942,007 0.5
------------ -----
1,477,033 0.7
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 90,000 Unilever PLC......................... 661,741 0.3
-----------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & 90,000 Shanks & McEwan Group PLC............ 338,498 0.2
SUPPLIES
-----------------------------------------------------------------------------------------------------
HOTELS/RESTAURANTS & 45,000 Compass Group PLC.................... 617,432 0.3
LEISURE 100,000 Hilton Group PLC..................... 320,015 0.2
------------ -----
937,447 0.5
-----------------------------------------------------------------------------------------------------
INSURANCE 32,000 Allied Zurich PLC.................... 376,819 0.2
20,000 CGU PLC.............................. 322,033 0.2
68,000 Prudential Corporation PLC........... 1,339,140 0.7
170,000 Royal & Sun Alliance Insurance Group
PLC................................ 1,293,862 0.6
------------ -----
3,331,854 1.7
-----------------------------------------------------------------------------------------------------
MARINE 20,000 The Peninsular and Oriental Steam
Navigation Company................. 333,494 0.2
-----------------------------------------------------------------------------------------------------
MEDIA 15,500 Pearson PLC.......................... 501,403 0.3
-----------------------------------------------------------------------------------------------------
METALS & MINING 60,000 Billiton PLC......................... 353,752 0.2
-----------------------------------------------------------------------------------------------------
MULTILINE RETAIL 60,000 Kingfisher PLC....................... 665,373 0.3
-----------------------------------------------------------------------------------------------------
OIL & GAS 367,500 BP Amoco PLC......................... 3,692,785 1.9
40,000 Enterprise Oil PLC................... 271,186 0.1
125,000 LASMO PLC............................ 237,590 0.1
------------ -----
4,201,561 2.1
-----------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 100,000 Arjo Wiggins Appleton PLC............ 363,195 0.2
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 14,100 AstraZeneca Group PLC................ 584,482 0.3
30,000 Glaxo Wellcome PLC................... 847,455 0.4
87,500 SmithKline Beecham PLC............... 1,115,816 0.6
------------ -----
2,547,753 1.3
-----------------------------------------------------------------------------------------------------
REAL ESTATE 67,000 The British Land Company PLC......... 443,421 0.2
45,000 Canary Wharf Finance PLC(d).......... 279,660 0.1
------------ -----
723,081 0.3
-----------------------------------------------------------------------------------------------------
SOFTWARE & SERVICES 52,000 Computacenter PLC.................... 843,581 0.4
-----------------------------------------------------------------------------------------------------
SPECIALTY RETAIL 13,500 Dixons Group PLC..................... 324,478 0.2
-----------------------------------------------------------------------------------------------------
WIRELESS 215,000 Vodafone AirTouch PLC................ 1,064,585 0.5
TELECOMMUNICATIONS
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED
KINGDOM 31,167,701 15.7
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN EUROPE
(COST--$106,778,372) 123,013,972 61.8
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LATIN
AMERICA
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARGENTINA DIVERSIFIED 6,600 Telefonica de Argentina SA
TELECOMMUNICATION (ADR)(a)........................... 203,775 0.1
SERVICES
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 4,500 MSCI Argentina OPALS(f).............. 290,565 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ARGENTINA 494,340 0.2
- -----------------------------------------------------------------------------------------------------------------------------
BRAZIL EQUITY BASKET 38,600 MSCI Brazil OPALS(f)................. 2,163,530 1.1
-----------------------------------------------------------------------------------------------------
</TABLE>
191
<PAGE> 193
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BRAZIL TELECOMMUNICATIONS 7,000 Telecomunicacoes Brasileiras SA-
(CONCLUDED) Telebras (Preferred Block)
(ADR)(a)........................... $ 899,500 0.5%
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 3,063,030 1.6
- -----------------------------------------------------------------------------------------------------------------------------
CHILE CLOSED-END FUNDS 6,900 Genesis Chile Fund................... 213,900 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHILE 213,900 0.1
- -----------------------------------------------------------------------------------------------------------------------------
MEXICO DIVERSIFIED 5,000 Telefonos de Mexico SA (ADR)(a)...... 562,500 0.3
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
FOREIGN BONDS 1,538,000 Mexican Par Bond (Rights)(g)......... 15 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 562,515 0.3
- -----------------------------------------------------------------------------------------------------------------------------
PERU DIVERSIFIED 13,200 Telefonica del Peru SAA (ADR)(a)..... 176,550 0.1
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PERU 176,550 0.1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN AMERICA
(COST -- $3,405,049) 4,510,335 2.3
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SOUTH EAST ASIA
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDIA CLOSED-END FUNDS 6,000 Indocam Himalayan Fund NV(d)......... 138,900 0.1
15,500 Morgan Stanley Dean Witter India
Investment Fund(d)................. 255,750 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH EAST ASIA
(COST -- $265,813) 394,650 0.2
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE SHORT-TERM
AMOUNT SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL US$ 3,645,000 General Motors Acceptance Corp., 5%
PAPER* due 1/03/2000...................... 3,643,481 1.8
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMERCIAL PAPER 3,643,481 1.8
- -----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS* 750,000 US Treasury Bills, 5.04% due
3/09/2000(h)....................... 742,755 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN US GOVERNMENT
OBLIGATIONS 742,755 0.4
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES (COST -- $4,386,236) 4,386,236 2.2
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NOMINAL VALUE COVERED OPTIONS
BY OPTIONS PURCHASED PURCHASED ISSUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CALL OPTIONS PURCHASED 34,650 DBS, expiring March 2000 at US$0.01.. 567,914 0.3
2,208 Euro Stoxx 50, expiring February 2000
at US$4872......................... 401,495 0.2
39,900 OCBC, expiring March 2000 at
US$0.01............................ 366,282 0.2
41,000 SIA, expiring March 2000 at US$0.01.. 464,940 0.2
43,050 UOB, expiring March 2000 at US$0.01.. 379,701 0.2
------------ -----
2,180,332 1.1
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
192
<PAGE> 194
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPTIONS
PURCHASED NOMINAL VALUE COVERED PERCENT OF
(CONCLUDED) BY OPTIONS PURCHASED ISSUE VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PUT OPTIONS PURCHASED 1,033 CAC, expiring February 2000
at US$4923......................... $ 20,594 0.0%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED (PREMIUMS
PAID--$1,146,268).................. 2,200,926 1.1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$163,610,451)............... 198,790,830 99.9
UNREALIZED APPRECIATION ON INTEREST
RATE SWAPS......................... 31,931 0.0
VARIATION MARGIN ON FINANCIAL FUTURES
CONTRACTS**........................ 2,272 0.0
UNREALIZED DEPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS***...... (111,550) 0.0
OTHER ASSETS LESS LIABILITIES........ 205,860 0.1
------------ -----
NET ASSETS........................... $198,919,343 100.0%
============ =====
- -----------------------------------------------------------------------------------------------------------------------------
</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 6/30/2003.
(h) Security held as collateral in connection with open financial futures
contracts.
(i) Receipts evidence payment by the Fund of 61% of the purchase price of common
stock of Telstra Corporation Limited. The Fund is obligated to pay the remaining
39%, approximately $68,000, over the next year.
* 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 December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
NUMBER OF EXPIRATION
CONTRACTS ISSUE EXCHANGE DATE VALUE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
51 Taiwan MSCI Simex January 2000 $1,997,670
5 IBEX35 MEFF January 2000 591,109
- ------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT
PRICE--$2,391,538) $2,588,779
==========
- ------------------------------------------------------------------------------
Financial futures contracts sold as of December 31, 1999 were as follows:
<CAPTION>
- ------------------------------------------------------------------------------
NUMBER OF EXPIRATION
CONTRACTS ISSUE EXCHANGE DATE VALUE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5 MIB--30 FIB March 2000 $1,091,814
- ------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT
PRICE--$998,566) $1,091,814
==========
- ------------------------------------------------------------------------------
</TABLE>
*** Forward foreign exchange contracts as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
FOREIGN CURRENCY EXPIRATION UNREALIZED
PURCHASED DATE DEPRECIATION
- ------------------------------------------------------------------
<S> <C> <C> <C>
Y 920,700,000 February 2000 $ (11,735)
- ------------------------------------------------------------------
(US$ COMMITMENT--$9,070,266) (11,735)
---------
- ------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- ------------------------------------------------------------------
Y 2,628,276,000 February 2000 $ (99,815)
- ------------------------------------------------------------------
(US$ COMMITMENT--$25,759,118) (99,815)
---------
- ------------------------------------------------------------------
UNREALIZED DEPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS--NET $(111,550)
=========
- ------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
193
<PAGE> 195
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$162,464,183)....... $196,589,904
Options purchased, at value (cost--$1,146,268).............. 2,200,926
Unrealized appreciation on interest rate swaps.............. 31,931
Cash........................................................ 1,527
Foreign cash................................................ 2,565,646
Receivables:
Dividends................................................. $ 305,100
Interest.................................................. 14,473
Variation margin.......................................... 2,272
Capital shares sold....................................... 195 322,040
----------
Prepaid expenses and other assets........................... 11,732
------------
Total assets................................................ 201,723,706
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts................................................. 111,550
Payables:
Securities purchased...................................... 2,157,707
Capital shares redeemed................................... 183,923
Investment adviser........................................ 136,848
Options................................................... 2,171
Interest rate swap contracts.............................. 1,501 2,482,150
----------
Accrued expenses and other liabilities...................... 210,663
------------
Total liabilities........................................... 2,804,363
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $198,919,343
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 1,421,680
Paid-in capital in excess of par............................ 166,370,389
Accumulated distributions in excess of investment
income--net............................................... (473,147)
Accumulated distributions in excess of realized capital
gains on investments and foreign currency
transactions--net......................................... (3,598,231)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 35,198,652
------------
NET ASSETS.................................................. $198,919,343
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $198,919,343 and 14,216,797
shares outstanding........................................ $ 13.99
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
194
<PAGE> 196
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $320,208 foreign withholding tax)......... $ 2,814,196
Interest and discount earned................................ 665,072
Other income................................................ 662,477
-----------
Total income................................................ 4,141,745
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 1,360,388
Custodian fees.............................................. 113,056
Interest rate swap expense.................................. 58,894
Accounting services......................................... 49,201
Professional fees........................................... 27,246
Pricing services............................................ 24,523
Printing and shareholder reports............................ 23,447
Transfer agent fees......................................... 5,005
Directors' fees and expenses................................ 4,208
Other....................................................... 8,982
-----------
Total expenses.............................................. 1,674,950
-----------
Investment income--net...................................... 2,466,795
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 28,171,192
Foreign currency transactions--net........................ (408,876) 27,762,316
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 28,164,927
Foreign currency transactions--net........................ 25,107 28,190,034
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 55,952,350
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $58,419,145
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
195
<PAGE> 197
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 2,466,795 $ 6,431,295
Realized gain (loss) on investments and foreign currency
transactions--net......................................... 27,762,316 (25,283,812)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 28,190,034 53,994,815
------------ -------------
Net increase in net assets resulting from operations........ 58,419,145 35,142,298
------------ -------------
- -------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (9,348,952) (3,758,390)
In excess of investment income--net:
Class A................................................... (211,899) --
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............................. (9,560,851) (35,326,723)
------------ -------------
- -------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (43,395,754) (231,581,631)
------------ -------------
- -------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 5,462,540 (231,766,056)
Beginning of year........................................... 193,456,803 425,222,859
------------ -------------
End of year*................................................ $198,919,343 $ 193,456,803
============ =============
- -------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ (473,147) $ 6,882,157
============ =============
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
196
<PAGE> 198
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. -----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999+ 1998+ 1997+ 1996+ 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.............. $ 10.68 $ 10.80 $ 11.63 $ 11.06 $ 10.90
-------- -------- -------- -------- --------
Investment income--net.......................... .16 .21 .20 .23 .20
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net............................. 3.71 .56 (.71) .49 .37
-------- -------- -------- -------- --------
Total from investment operations................ 3.87 .77 (.51) .72 .57
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................ (.55) (.09) (.23) (.15) (.01)
In excess of investment income--net........... (.01) -- -- -- --
Realized gain on investments--net............. -- (.03) (.09) -- (.17)
In excess of realized gain on
investments--net............................ -- (.77) -- -- (.23)
-------- -------- -------- -------- --------
Total dividends and distributions............... (.56) (.89) (.32) (.15) (.41)
-------- -------- -------- -------- --------
Net asset value, end of year.................... $ 13.99 $ 10.68 $ 10.80 $ 11.63 $ 11.06
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.............. 37.63% 7.80% (4.55%) 6.62% 5.48%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ .92% .89% .90% .89% .89%
======== ======== ======== ======== ========
Investment income--net.......................... 1.36% 2.03% 1.69% 1.96% 1.95%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).......... $198,919 $193,457 $425,223 $349,080 $265,602
======== ======== ======== ======== ========
Portfolio turnover.............................. 154.72% 126.23% 127.96% 49.87% 100.02%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
197
<PAGE> 199
- --------------------------------------------------------------------------------
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. 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 or 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.
- - Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the
198
<PAGE> 200
- --------------------------------------------------------------------------------
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--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. Distributions in excess of net investment
income are due primarily to differing tax treatments for post-October losses.
Distributions in excess of realized capital gains are due primarily to differing
tax treatments for futures and foreign currency transactions.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $261,248 have been reclassified between accumulated net
realized capital losses and accumulated distributions in excess of net
investment income. These reclassifications have no effect on net assets or net
asset value per share.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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 .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 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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $20,149 in commissions
on the execution of portfolio security transactions.
199
<PAGE> 201
- --------------------------------------------------------------------------------
For the year ended December 31, 1999, Merrill Lynch Security Pricing Service,
an affiliate of MLPF&S, earned $50 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
year ended December 31, 1999 were $267,892,358 and $315,781,290, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains (losses) as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Investments:
Long-term.......................... $ 27,462,862 $ 34,125,721
Short-term......................... (146) --
Financial futures contracts........ 460,758 103,993
Interest rate swaps................ 80,435 31,931
Options written.................... 211,793 --
Options purchased.................. (44,510) 1,054,658
------------ ------------
Total investments................... 28,171,192 35,316,303
------------ ------------
Currency transactions:
Options written.................... 71,600 --
Options purchased.................. (71,600) --
Foreign currency transactions...... (155,088) (6,101)
Forward foreign exchange
contracts........................ (253,788) (111,550)
------------ ------------
Total currency transactions......... (408,876) (117,651)
------------ ------------
Total............................... $ 27,762,316 $ 35,198,652
============ ============
- ---------------------------------------------------------------------
The Fund has entered into the following equity swaps as of
December 31, 1999:
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------
Interest Paid
--------------------
Notional Current
Amount Return Received Rate Type Expiration
- -------------------------------------------------- Date
<S> <C> <C> <C> <C>
$ 616,612 Price return+ 7.97% Variable* 5/02/2000
- ----------------------------------------------------------------------------
</TABLE>
+ Hang Seng China Affiliated Corporations Index.
* 3-month US$ LIBOR plus 1.50% at reset date.
Transactions in options written for the year ended December 31, 1999, were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding call options
written, beginning of year... 8,000,000 $ 71,600
Options written............... 850 107,045
Options closed................ (850) (107,045)
Options expired............... (8,000,000) (71,600)
---------- ------------
Outstanding call options
written, end of year......... -- $ --
========== ============
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Nominal Value
Covered by Premiums
Put Options Written Written Options Received
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding put options
written, beginning of year... -- --
Options written............... 850 $ 120,442
Options closed................ (850) (120,442)
---------- ------------
Outstanding put options
written, end of year......... -- $ --
========== ============
- ---------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $34,222,834, of which $40,774,295 related to appreciated
securities and $6,551,461 related to depreciated securities. At December 31,
1999, the aggregate cost of investments, for Federal income tax purposes was
$164,567,996.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold........................ 2,232,377 $ 24,152,546
Shares issued to shareholders in
reinvestment of dividends......... 863,539 9,560,851
----------- -------------
Total issued....................... 3,095,916 33,713,397
Shares redeemed.................... (6,990,543) (77,109,151)
----------- -------------
Net decrease....................... (3,894,627) $ (43,395,754)
=========== =============
- -----------------------------------------------------------------
</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. CAPITAL LOSS CARRYFORWARD:
At December 31, 1999, the Fund had a net capital loss carryforward of
approximately $2,760,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
200
<PAGE> 202
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
INTERNATIONAL EQUITY FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of International Equity Focus Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of International Equity
Focus Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999,
the results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
201
<PAGE> 203
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
During the 12 months ended December 31, 1999, the Fund's Class A Shares had a
total return of +26.77%. The Fund outperformed the +24.60% total return of the
unmanaged Morgan Stanley Capital International (MSCI) Natural Resource Fund
Index. Additionally, the Fund's Class A Shares' total return exceeded the
+25.65% return of the Lipper Natural Resources Fund Group average and the
+24.67% return for the Lipper Natural Resources Annuity Group average.
We continued to follow a strategy of identifying commodity sectors with rising
capacity utilization trends and selecting attractively valued companies within
favored sectors. Early in 1999, we identified favorable trends in North American
natural gas markets, as well as selected paper and forest products. We
overweighted these sectors in the Fund, largely at the expense of the chemical
sector, where rising energy feedstock costs and excess capacity were expected to
result in margin pressures for chemical producers. This strategy generated
favorable absolute and relative returns for the Fund through October 1999, as
many natural gas and paper stocks delivered dramatic double-digit returns. The
chemical sector, suffering from our forecast of margins pressures and earnings
disappointments, lagged almost all other commodity groups.
The Fund's performance stagnated during the fourth quarter of 1999, despite
generally rising commodity prices. While selected paper stocks continued to
deliver strong relative and absolute performance, we surrendered significant
gains in our natural gas holdings as the winter heating season started with
temperatures averaging 25% warmer than normal. This unseasonably warm start to
winter was even greater than the record warm start to the 1998--1999 heating
season, and resulted in the Fund falling sharply from the strong gains it
delivered during the first ten months of 1999. However, the fundamental outlook
for energy stocks remains favorable, and we intend to maintain the Fund's
exposure to oil, oil service and natural gas leveraged companies. OPEC has
continued to maintain solid compliance with its production quotas set in March
1999. This is leading to a rapid fall in global inventories, as economic
activity remains robust in the United States and continues to recover in Asia.
With oil prices currently above $25 per barrel, profits from oil and gas
production are likely to post strong earnings gains. We also believe that
refining margins have the potential to recover, as global gasoline and heating
oil inventories are reduced. However, it is likely that this recovery will be
slower since surplus capacity constructed in Asia in recent years needs to be
absorbed by rising consumption in the region. Nonetheless, as the large surplus
supplies continue to be reduced, gasoline prices have the potential to rally
during the upcoming summer driving season. Petrochemical prices have also shown
strength in 2000; however, we remain concerned that further gains may be muted
by the construction of new petrochemical plants in Canada and the Middle East.
The valuation of energy sector stocks remains highly attractive when compared
to historic relative benchmarks. Large-capitalization stocks are trading at near
record low relative price/ earnings and dividend yields. In addition, we believe
that earnings will likely recover in the oil service sector, as drilling
expenditures resume following a release of budget constraints set during last
year's oil price weakness, and as recently merged energy companies turn to their
core businesses following consolidation and restructuring activities. Finally,
North American natural gas producers continue to have a favorable supply and
demand outlook, provided normal weather patterns return. North American natural
gas storage continues to run below year ago levels, so normal withdrawal rates
for the remainder of the year could drive gas prices back to the $2.50 per
thousand cubic feet range that prevailed last year. However, we will be
monitoring demand and supply factors closely in this sector.
We also sold all of the Fund's gold holdings by the end of 1999. This had a
generally favorable impact on Fund performance, as gold stocks have continued to
languish in the current benign inflation environment, and from ongoing sales
from various central banks. While we believe that there is the potential for
commodity inflation to accelerate in 2000, we believe that other commodity
investments may offer a better inflation hedge than gold. Gold's failure to
exhibit its defensive characteristics during the recent periods of economic
uncertainty and unrest has dimmed its investment appeal, in our view.
We continue to maintain a relatively high exposure to the paper and forest
products industry. Positive supply and demand fundamentals continued to exert
themselves in several forest and paper products, and price
202
<PAGE> 204
- --------------------------------------------------------------------------------
increases have been announced across several products. The industry continues to
maintain capital spending discipline, and we believe that there is the potential
for further consolidation among companies in this sector. We are inclined to
continue our overweighting of paper and forest product stocks, although we did
sell some of our holdings to companies leveraged to lumber production. While
housing starts remain strong, we are concerned that higher interest rates may
slow the pace of new home construction. Therefore, we sold our long-term
holdings in Riverside Forest Products Ltd. and Slocan Forest Products Ltd.
In the metals/mining sector, we continued to hold a neutral weighting relative
to the MSCI Natural Resource Index during the year. Alcoa Inc. was the best
performer in this sector, with a total return exceeding 100% during the year.
Good gains were also achieved in Fund holdings M.I.M. Holdings Limited and WMC
Limited in Australia. While we expect these stocks to continue to perform well
in sympathy with strong global economic growth, we continue to fear that idled
capacity could return to global markets should metal prices continue to rally.
INVESTMENT OUTLOOK
Should the trend in improving global economic conditions persist, we believe
that the Fund could continue to enjoy positive investment results in the first
year of the new millennium. The energy and forest products sectors continue to
show the best supply and demand fundamentals, so we are maintaining our
concentrations in these sectors. However, we have been marginally increasing our
oil service exposure, as these stocks appear to have stronger earnings growth
profiles as we progress to the second half of the year. We continue to be
confident that our investment focus on companies subject to improving supply and
demand conditions will generate strong relative and absolute returns. While the
unseasonably warm start to winter surrendered some of the year's strong gains,
we believe that valuations of resource sector stocks are compelling at current
levels and continue to be 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 M. Shearer
Robert M. Shearer
Senior Vice President and Portfolio Manager
February 7, 2000
203
<PAGE> 205
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
[NATURAL RESOURCES FOCUS FUND GRAPH]
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Standard & Poor's Industrials Index,
the Lipper Natural Resources Average and the Consumer Price Index. Beginning and
ending values are:
<TABLE>
<CAPTION>
12/89 12/99
<S> <C> <C>
Natural Resources Focus Fund+--
Class A Shares* $10,000 $12,970
Standard & Poor's Industrials
Index++ $10,000 $56,772
Lipper Natural Resources
Average+++ $10,000 $18,073
Consumer Price Index++++ $10,000 $13,354
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
+Natural Resources Focus Fund invests primarily in a portfolio of equity
securities of domestic and foreign companies with substantial natural resource
assets.
++This unmanaged Index measures the pattern of movements of the common stocks of
400 large industrial companies and their weighting by capitalization.
+++This unmanaged Index is comprised of all US mutual funds classified by Lipper
Analytical Services as natural resource-related funds.
++++This unmanaged Index is the most widely used Index of price changes over
time and is designed to measure changes in the typical market basket of
purchases by urban consumers.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD COVERED % RETURN
- ----------------------------------------------------------------------
<S> <C>
Year Ended 12/31/99 +26.77%
- ----------------------------------------------------------------------
Five Years Ended 12/31/99 + 3.74
- ----------------------------------------------------------------------
Ten Years Ended 12/31/99 + 2.64
- ----------------------------------------------------------------------
</TABLE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +0.78% +26.77%
- ------------------------------------------------------------------------------------------
</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.
204
<PAGE> 206
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALUMINUM 2,978 Alcoa Inc. .................................... $ 247,174 1.7%
- ----------------------------------------------------------------------------------------------------------------------
CANADIAN INDEPENDENTS 10,800 Alberta Energy Company Ltd. ................... 335,473 2.3
15,000 Anderson Exploration Ltd. ..................... 178,608 1.2
19,800 +Baytex Energy Ltd. ........................... 120,273 0.8
28,000 +Canadian Hunter Exploration Ltd. ............. 459,032 3.1
6,500 +Canadian Natural Resources Ltd. .............. 158,159 1.1
11,800 Canadian Occidental Petroleum Ltd. ............ 232,139 1.6
8,509 +Northrock Resources Ltd. ..................... 56,386 0.4
12,200 +Rio Alto Exploration Ltd. .................... 171,795 1.2
8,000 +Talisman Energy Inc. ......................... 203,769 1.4
----------- -----
1,915,634 13.1
- ----------------------------------------------------------------------------------------------------------------------
CHEMICALS 4,800 Air Products and Chemicals, Inc. .............. 161,100 1.1
- ----------------------------------------------------------------------------------------------------------------------
COAL 4,000 CONSOL Energy Inc. ............................ 40,500 0.3
- ----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCES 3,900 Ashland Inc. .................................. 128,456 0.9
COMPANIES 8,800 +UCAR International Inc. ...................... 156,750 1.1
----------- -----
285,206 2.0
- ----------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL COMPANIES 3,000 Amerada Hess Corporation....................... 170,250 1.2
5,400 Chevron Corporation............................ 467,775 3.2
3,100 Conoco Inc. (Class A).......................... 76,725 0.5
5,400 Conoco Inc. (Class B).......................... 134,325 0.9
4,300 ENI SpA (ADR)*................................. 237,037 1.6
5,800 Exxon Mobil Corporation........................ 467,262 3.2
6,800 Murphy Oil Corporation......................... 390,150 2.7
1,600 Phillips Petroleum Company..................... 75,200 0.5
2,900 Royal Dutch Petroleum Company (NY Registered
Shares)...................................... 175,269 1.2
1,800 +Stone Energy Corporation...................... 64,125 0.5
6,800 USX-Marathon Group............................. 167,875 1.2
----------- -----
2,425,993 16.7
- ----------------------------------------------------------------------------------------------------------------------
METALS & MINING 215,200 M.I.M. Holdings Limited........................ 220,862 1.5
13,700 Noranda, Inc. ................................. 183,461 1.3
1,500 Phelps Dodge Corporation....................... 100,687 0.7
14,750 +Stillwater Mining Company..................... 470,156 3.2
44,300 WMC Limited.................................... 243,255 1.7
26,300 +Zimbabwe Platinum Mines Limited............... 12,035 0.1
----------- -----
1,230,456 8.5
- ----------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 5,700 Anadarko Petroleum Corporation................. 194,513 1.3
9,000 Apache Corporation............................. 332,438 2.3
4,500 +Barrett Resources Corporation................. 132,469 0.9
3,912 Burlington Resources Inc. ..................... 129,341 0.9
4,400 Cabot Oil & Gas Corporation (Class A).......... 70,675 0.5
4,350 +Chieftain International, Inc. ................ 75,038 0.5
10,625 Devon Energy Corporation....................... 349,297 2.4
18,100 EOG Resources, Inc. ........................... 317,881 2.2
3,466 Kerr-McGee Corporation......................... 214,892 1.5
14,300 Paramount Resources Ltd. ...................... 167,806 1.1
23,800 +Quicksilver Resources Inc. ................... 104,125 0.7
2,900 Texaco Inc. ................................... 157,506 1.1
6,800 Unocal Corporation............................. 228,225 1.6
5,900 Vastar Resources, Inc. ........................ 348,100 2.4
----------- -----
2,822,306 19.4
- ----------------------------------------------------------------------------------------------------------------------
OIL SERVICES 6,600 +BJ Services Company........................... 275,963 1.9
5,400 Baker Hughes Incorporated...................... 113,738 0.8
4,200 Coflexip SA (ADR)*............................. 157,500 1.1
4,700 +Cooper Cameron Corporation.................... 230,006 1.6
6,900 Ensign Resource Service Group, Inc. ........... 159,557 1.1
6,200 Helmerich & Payne, Inc. ....................... 135,238 0.9
4,900 McDermott International, Inc. ................. 44,406 0.3
6,800 +Noble Drilling Corporation.................... 222,700 1.6
10,000 Precision Drilling Corporation................. 255,401 1.8
7,800 +R&B Falcon Corporation........................ 103,350 0.7
</TABLE>
205
<PAGE> 207
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OIL SERVICES 8,200 +Stolt Comex Seaway, SA........................ $ 90,200 0.6%
(CONCLUDED) 4,100 +Stolt Comex Seaway, SA (ADR)*................. 45,100 0.3
5,900 +Weatherford International, Inc. .............. 235,631 1.6
----------- -----
2,068,790 14.3
- ----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 19,000 Abitibi-Consolidated Inc. ..................... 221,647 1.5
5,766 Aracruz Celulose SA (ADR)*..................... 151,357 1.0
17,300 Canfor Corporation............................. 201,815 1.4
56,100 Smurfit Jefferson Group PLC.................... 167,983 1.2
6,980 +Smurfit-Stone Container Corporation........... 170,574 1.2
27,500 +St. Laurent Paperboard Inc. .................. 365,414 2.5
31,800 +Tembec Inc. 'A'............................... 353,406 2.4
----------- -----
1,632,196 11.2
- ----------------------------------------------------------------------------------------------------------------------
PIPELINES 4,500 The Coastal Corporation........................ 159,469 1.1
5,300 Equitable Resources, Inc. ..................... 176,888 1.2
----------- -----
336,357 2.3
- ----------------------------------------------------------------------------------------------------------------------
REFINING 3,700 Sunoco, Inc. .................................. 86,950 0.6
- ----------------------------------------------------------------------------------------------------------------------
STEEL 26,000 The LTV Corporation............................ 107,250 0.7
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$12,300,322) 13,359,912 91.9
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT AGENCY
OBLIGATIONS** $1,184,000 Federal Home Loan Banks, 1.50% due 1/03/2000... 1,183,852 8.2
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES (COST--$1,183,852) 1,183,852 8.2
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$13,484,174).......... 14,543,764 100.1
LIABILITIES IN EXCESS OF OTHER ASSETS.......... (8,461) (0.1)
----------- -----
NET ASSETS..................................... $14,535,303 100.0%
=========== =====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** 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.
+ Non-income producing security.
See Notes to Financial Statements.
206
<PAGE> 208
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$13,484,174)........ $14,543,764
Dividends receivable........................................ 12,771
Prepaid expenses and other assets........................... 1,170
-----------
Total assets................................................ 14,557,705
-----------
- --------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser........................................ $ 8,740
Capital shares redeemed................................... 2,617 11,357
--------
Accrued expenses and other liabilities...................... 11,045
-----------
Total liabilities........................................... 22,402
-----------
- --------------------------------------------------------------------------------------
NET ASSETS.................................................. $14,535,303
===========
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 153,372
Paid-in capital in excess of par............................ 17,441,744
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (1,810,614)
Accumulated distributions in excess of realized capital
gains on investments and foreign currency
transactions--net......................................... (2,308,824)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 1,059,625
-----------
NET ASSETS.................................................. $14,535,303
===========
- --------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $14,535,303 and 1,533,716
shares outstanding........................................ $ 9.48
===========
- --------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
207
<PAGE> 209
---------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $12,600 foreign withholding tax).......... $ 230,754
Interest and discount earned................................ 22,041
-----------
Total income................................................ 252,795
-----------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 99,600
Custodian fees.............................................. 17,682
Professional fees........................................... 9,890
Transfer agent fees......................................... 5,010
Accounting services......................................... 3,125
Printing and shareholder reports............................ 2,035
Pricing services............................................ 1,660
Directors' fees and expenses................................ 331
Other....................................................... 647
-----------
Total expenses.............................................. 139,980
-----------
Investment income--net...................................... 112,815
-----------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized loss from:
Investments--net.......................................... (1,810,175)
Foreign currency transactions--net........................ (3,876) (1,814,051)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 5,296,166
Foreign currency transactions--net........................ (264) 5,295,902
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 3,481,851
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 3,594,666
===========
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
208
<PAGE> 210
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 112,815 $ 282,701
Realized loss on investments and foreign currency
transactions--net......................................... (1,814,051) (2,061,246)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 5,295,902 (1,338,941)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ 3,594,666 (3,117,486)
----------- ------------
- -----------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (341,600) (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............................. (341,600) (4,129,251)
----------- ------------
- -----------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (4,257,841) (4,192,551)
----------- ------------
- -----------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (1,004,775) (11,439,288)
Beginning of year........................................... 15,540,078 26,979,366
----------- ------------
End of year*................................................ $14,535,303 $ 15,540,078
=========== ============
- -----------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ -- $ 231,997
=========== ============
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
209
<PAGE> 211
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. ---------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999+ 1998+ 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......................... $ 7.65 $ 10.66 $ 13.12 $ 11.95 $ 10.82
------- ------- ------- ------- -------
Investment income--net..................................... .07 .12 .14 .18 .20
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net....................... 1.95 (1.50) (1.68) 1.40 1.15
------- ------- ------- ------- -------
Total from investment operations........................... 2.02 (1.38) (1.54) 1.58 1.35
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................... (.19) (.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.......................... (.19) (1.63) (.92) (.41) (.22)
------- ------- ------- ------- -------
Net asset value, end of year............................... $ 9.48 $ 7.65 $ 10.66 $ 13.12 $ 11.95
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share......................... 26.77% (15.30%) (12.52%) 13.52% 12.65%
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................... .91% .88% .81% .78% .78%
======= ======= ======= ======= =======
Investment income--net..................................... .74% 1.36% .99% 1.43% 1.75%
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)..................... $14,535 $15,540 $26,979 $45,197 $43,102
======= ======= ======= ======= =======
Portfolio turnover......................................... 60.83% 29.65% 20.93% 31.11% 30.15%
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
210
<PAGE> 212
- --------------------------------------------------------------------------------
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. 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.
When the contract is closed, the Fund records a
211
<PAGE> 213
- --------------------------------------------------------------------------------
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.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $3,437 have been reclassified between undistributed net
investment income and accumulated net realized capital losses and $225 has been
reclassified between paid-in capital in excess of par and undistributed net
investment income. These reclassifications have no effect on net assets or net
asset value per share.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLAM is responsible for the management of the Company's 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 .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 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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $5,366 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.
212
<PAGE> 214
- --------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1999 were $8,851,415 and $12,397,380, respectively.
Net realized losses for the year ended December 31, 1999 and net unrealized
gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Losses Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $(1,810,175) $ 1,059,590
Foreign currency transactions.......... (3,876) 35
----------- -----------
Total.................................. $(1,814,051) $ 1,059,625
=========== ===========
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $1,054,349, of which $2,014,979 related to appreciated
securities and $960,630 related to depreciated securities. At December 31, 1999,
the aggregate cost of investments for Federal income tax purposes was
$13,489,415.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 16,215 $ 147,005
Shares issued to shareholders in
reinvestment of dividends.............. 42,468 341,600
-------- -----------
Total issued............................ 58,683 488,605
Shares redeemed......................... (555,904) (4,746,446)
-------- -----------
Net decrease............................ (497,221) $(4,257,841)
======== ===========
- -----------------------------------------------------------------
</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, 1999, the Fund had a net capital loss carryforward of
approximately $4,114,000, of which $1,939,000 expires in 2006 and $2,175,000
expires in 2007. This amount will be available to offset like amounts of any
future taxable gains.
213
<PAGE> 215
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
NATURAL RESOURCES FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Natural Resources Focus Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Natural Resources
Focus Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999,
the results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
214
<PAGE> 216
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
For the 12 months ended December 31, 1999, the Fund's Class A Shares had a
total return of -2.35% compared to a total return of -1.89% for the unmanaged
Merrill Lynch Corporate Master Index and an average total return of -1.96% for
the Lipper Corporate A Rated Annuity Group. Overall, Fund performance benefited
from the Fund's 35% allocation to corporate bonds rated BBB/Baa by the major
rating agencies. However, Fund performance was negatively impacted as a result
of its holdings in two bonds, Frontier Corp. and Flowers Industries Inc. With
respect to Frontier Corp., this company was acquired by Global Crossing in 1999.
Although well-known, Global Crossing had a non-investment grade rating on their
bonds, which caused Frontier's investment-grade rated bonds to suffer spread
widening and price erosion. Flowers Industries, which makes Mrs. Smith's pies
and Keebler cookies, was hurt by manufacturing problems that arose when the
company implemented a new automation process. As a result, market share suffered
and profitability was negatively impacted. In both cases, we believe that these
bonds can recover during the coming year since both companies possess strong
business models.
THE ENVIRONMENT
During the six-month period ended December 31, 1999, the fixed-income markets
remained very volatile as interest rates continued to trend higher. Investor
expectations that the Federal Reserve Board would move to tighten monetary
policy in the face of strong economic growth around the world, led to the rise
in Treasury yields. Although inflationary pressures were relatively well
contained, the Federal Reserve Board raised interest rates 0.75% during the
period in response to significant improvements in productivity, the growth of
gross domestic product (GDP) and the correlating effect it has had on the labor
market. This shift in monetary policy served to reverse the accommodative policy
that was implemented during the financial crises of 1998.
Despite second quarter GDP growth of 1.8%, the US economy continued to move
forward at a strong pace, as highlighted by the strong rebound in third quarter
GDP to 5.7%. Consumer spending continued to lead the way, although recent
reports related to housing and auto purchases are beginning to show the effect
of higher interest rates. Consumers continued to benefit from low unemployment
rates and the wealth effect generated from a strong stock market, although much
of the gains have been limited to only a few sectors with performance in many of
the established industries lagging. Overseas, Asian countries at the heart of
the crises in 1998 continue to recover. This global recovery has, at times, led
to fears of a rekindling of inflation. Commodities, such as copper, plywood and
other building materials, and chemicals gained in price. More importantly, the
price of oil surged, spurred on mainly by an agreement by the Organization of
Petroleum Exporting Countries to limit production, but also on expectations of
increased demand by recovering economies. Wage inflation continued to be of
concern given the level of unemployment that the economy has achieved. However,
inflation as measured by both the producer price index and consumer price index
remains well within acceptable levels, for the most part, with productivity
measurements still extremely favorable. Beyond the gain in interest rates, the
market environment was still being influenced by a flight from quality. This is
in stark reversal of the flight to quality trades we saw in the third quarter of
1998.
On the corporate bond front, by mid-year underwriting activity increased
significantly as issuers sought to get their funding programs in before the
final quarter of 1999. Corporate yield spreads relative to US Treasury
securities widened across all sectors during the period from May through
September. With respect to sector performance, Yankee or foreign issues
outperformed the domestic issues, and bonds rated BBB outperformed those rated A
or better on both a price and total return basis. However, since late September,
corporate yield spreads tightened following a sooner-than-expected drop in new
underwriting activity. Furthermore, investors began to pump new money into the
investment-grade sector, given the higher yields and strong relative value
attributes.
PORTFOLIO MATTERS
The Fund's investment strategy remained somewhat conservative given the
outlook for higher interest rates and wider yield spreads. From a duration
perspective, we continued to maintain a duration that was modestly short (0.15
year-0.25 year) as compared to the benchmark Merrill Lynch Corporate Master
Index. Initially, it was our strategy to bring
215
<PAGE> 217
- --------------------------------------------------------------------------------
duration closer to the Index when yields would climb closer to the high end of
the expected range. By early August, we began to reallocate a portion of assets
away from securities with a spread to US Treasury issues and into cash and
Treasury securities, in preparation for year-end liquidity needs. Initially, we
shifted approximately 10% of the Fund into this sector, although improved
fundamentals within the investment-grade market prompted a partial reallocation
back into high-grade, large benchmark issues. By period-end, we reduced the
Fund's allocation to cash and Treasury issues down to the 5% area.
With respect to the Fund's corporate holdings, we remained committed to the
bigger, more liquid issues as well as those issues with higher coupons. As part
of our liquidity strategy, we attempted to consolidate industry holdings into
the benchmark issues. Although this comes at modest yield concessions, we
believed this was the prudent course of action given the uncertainty surrounding
the Year 2000. Given the increased supply and higher interest rate environment,
many of the new corporate transactions were done at larger-than-anticipated
yield spread concessions in order to attract investors. In view of the temporary
supply factor and wider spreads, we believed corporate bonds possessed some very
attractive long-term relative value attributes. Accordingly, during the final
quarter of 1999, we continued to redirect excess assets back to corporate bonds
in an effort to seek to enhance current income.
With respect to security-specific issues, we held an overweighted position in
electric utilities, finance companies, cable and media entities, retailers,
energy-related issuers, airlines and defense contractors and information
technology entities for most of the period. During the latter part of the
period, we began to reduce the Fund's holdings in defense issues, high-end
retailers, airlines and real estate investment trusts. On the other hand, we
concentrated on adding to positions in domestic banks, supermarkets, railroads
and metals/mining companies. We also continued to underweight property and
casualty insurers and health care companies.
INVESTMENT OUTLOOK
Going forward, we have formulated an investment strategy based on our belief
that the long-term trend will be toward lower interest rates and a flatter yield
curve as the economy slows during the second half of 2000. With respect to
corporate bonds, we are looking for yield spread relationships to exhibit
further improvement as we proceed through the first quarter of 2000. However, in
the near term, the Treasury market will remain under pressure as the Federal
Reserve Board is likely to move short-term interest rates higher in the coming
months.
IN CONCLUSION
We appreciate your investment in Prime Bond Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Christopher G. Ayoub
Christopher G. Ayoub
Senior Vice President and Portfolio Manager
February 7, 2000
216
<PAGE> 218
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Merrill Lynch Corporate Master Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
12/89 12/99
<S> <C> <C>
Prime Bond Fund+--
Class A Shares* $10,000 $20,044
Merrill Lynch Corporate
Master Index++ $10,000 $22,277
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
+Prime Bond Fund invests primarily in long-term corporate bonds rated A or
better by either Standard & Poor's Corp. or Moody's Investors Service, Inc.
++This unmanaged broad-based Index is comprised of all industrialized bonds
rated BBB3 or higher, of all maturities.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 -2.35%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +7.04
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/99 +7.20
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +0.13% -2.35%
</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.
217
<PAGE> 219
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET-BACKED AAA Aaa $ 3,000,000 Aames Mortgage Trust, 5.912%
SECURITIES+--7.7% due 9/15/2028(a)........................... $ 2,959,350
NR* Aaa 5,000,000 Bear Stearns Commercial Mortgage Securities,
1999-WF2-A2, 7.08%
due 6/15/2009.............................. 4,880,009
NR* Baa2 6,000,000 Bistro Trust 1998-1000, 6.58%
due 3/26/2001(b)........................... 5,823,960
BB Aaa 5,000,000 FUNCM 1999-C2-C1-A2, 6.645%
due 4/15/2009.............................. 4,724,550
AAA Aaa 5,762,591 Federal Home Loan Mortgage Corporation, 6.30%
due 5/15/2026.............................. 5,469,143
A A3 6,000,000 First Dominion Funding I, 6.254%
due 7/10/2013(a)(b)........................ 5,664,375
AAA Aaa 5,500,000 IMC Home Equity Loan Trust, 6.36%
due 8/20/2022(a)........................... 5,409,745
AAA Aaa 3,000,000 Nationslink Funding Corporation, 6.476%
due 7/20/2008(a)........................... 2,814,271
AAA Aaa 4,000,000 Saxon Asset Securities Trust Series 1999-3,
7.55% due 10/25/2026....................... 3,987,320
------------
41,732,723
- ---------------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--8.3% Bank of New York Co., Inc.:
A A2 4,000,000 7.625% due 7/15/2002......................... 4,053,080
A A2 2,000,000 7.875% due 11/15/2002........................ 2,040,060
A Aa3 500,000 Boatman's Bancshares, 9.25% due 11/01/2001... 518,145
A A1 1,000,000 Chase Manhattan Corporation, 7% due
11/15/2009................................. 962,150
A+ A1 2,000,000 First Interstate, 11.25%
due 3/27/2001.............................. 2,107,160
A- A2 3,500,000 Firstar Bank NA, 7.125%
due 12/01/2009............................. 3,387,860
BBB+ a2 8,000,000 Fleet Capital Trust II, 7.92%
due 12/11/2026............................. 7,359,120
BBB+ A3 3,000,000 Great Western Bank, 9.875%
due 6/15/2001.............................. 3,110,100
A- a1 1,000,000 HSBC Americas Capital Trust, 7.808%
due 12/15/2026(b).......................... 883,281
A A2 3,000,000 HSBC Americas Inc., 7%
due 11/01/2006............................. 2,891,070
A- A2 1,750,000 Key Bank NA, 7.55%
due 9/15/2006.............................. 1,745,607
A- a2 3,000,000 Mellon Capital II, 7.995%
due 1/15/2027.............................. 2,842,230
Merita Bank Ltd.:
A- A2 1,500,000 6.50% due 1/15/2006.......................... 1,418,505
A- A2 2,500,000 6.50% due 4/01/2009.......................... 2,282,450
A- A2 2,000,000 National City Corp., 5.75%
due 2/01/2009.............................. 1,749,880
A Aa3 5,000,000 NationsBank Corp., 6.50%
due 8/15/2003.............................. 4,891,300
BBB- Baa3 3,000,000 Providian National Bank, 6.65%
due 2/01/2004.............................. 2,832,300
------------
45,074,298
- ---------------------------------------------------------------------------------------------------------------------------
FINANCE--12.0% AA- Aa3 7,000,000 Associates Corporation NA, 6.25%
due 11/01/2008............................. 6,456,660
A- a1 6,100,000 CIT Capital Trust I, 7.70%
due 2/15/2027.............................. 5,500,126
BBB+ Baa1 2,500,000 Comdisco Inc., 6%
due 1/30/2002.............................. 2,423,125
AA- Aa3 4,350,000 Commercial Credit Co., 10%
due 5/15/2009.............................. 5,060,485
Ford Motor Company:
A+ A1 2,000,000 7.45% due 7/16/2031.......................... 1,924,080
A+ A1 2,000,000 8.90% due 1/15/2032.......................... 2,250,880
Ford Motor Credit Co.:
A+ A1 3,000,000 8.20% due 2/15/2002.......................... 3,068,400
A+ A1 7,000,000 6.55% due 9/10/2002.......................... 6,909,350
A+ A1 2,500,000 7.75% due 3/15/2005.......................... 2,546,150
A+ A1 6,500,000 7.375% due 10/28/2009........................ 6,417,125
AAA Aaa 3,245,000 General Electric Capital Corp., 8.125%
due 5/15/2012................................ 3,419,354
General Motors Acceptance Corp.:
A A2 2,000,000 6.85% due 6/17/2004.......................... 1,971,080
A A2 3,000,000 5.85% due 1/14/2009.......................... 2,650,380
</TABLE>
218
<PAGE> 220
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCE A A2 $ 4,000,000 General Motors Corporation, 8.80%
(CONCLUDED) due 3/01/2021.............................. $ 4,399,040
A A2 1,500,000 Household Finance Corporation, 6%
due 5/01/2004.............................. 1,413,390
A+ A1 3,000,000 Newcourt Credit Group, 6.875%
due 2/16/2005.............................. 2,938,860
A+ Aa3 6,000,000 Norwest Corp., 6.50%
due 6/01/2005.............................. 5,769,900
------------
65,118,385
- ---------------------------------------------------------------------------------------------------------------------------
FINANCE--OTHER-- Bear Stearns Companies, Inc.:
10.6% A A2 4,250,000 6.75% due 4/15/2003.......................... 4,163,470
A A2 3,000,000 7.625% due 12/07/2009........................ 2,945,760
A aa3 2,000,000 Citigroup Capital II, 7.75%
due 12/01/2036............................. 1,822,360
AA- Aa2 1,000,000 Citigroup Inc., 9.50%
due 3/01/2002.............................. 1,048,320
BBB+ Baa3 4,000,000 Conseco Inc., 9%
due 10/15/2006............................. 4,122,000
A- A3 4,500,000 Donaldson, Lufkin & Jenrette Inc., 6.875%
due 11/01/2005............................. 4,349,970
BBB+ Baa1 2,500,000 Duke-Weeks Realty LP, 7.75%
due 11/15/2009............................. 2,425,850
BBB+ A3 1,000,000 ERP Operating LP, 7.125%
due 10/15/2017............................. 872,900
A+ A2 1,500,000 Equitable Life Assurance Society of the US,
7.70% due 12/01/2015(b).................... 1,467,364
AAA Aaa 1,600,000 Florida Windstorm Underwriters, 7.125%
due 2/25/2019(b)........................... 1,468,389
Lehman Brothers Holdings, Inc.:
A A3 4,000,000 7% due 5/15/2003............................. 3,946,720
A A3 1,000,000 7.125% due 9/15/2003......................... 983,800
A A3 1,000,000 6.625% due 2/05/2006......................... 944,760
A A3 1,500,000 6.625% due 2/15/2008......................... 1,391,730
BBB Baa3 1,000,000 Mack-Cali Realty LP, 7.25%
due 3/15/2009.............................. 927,830
Morgan Stanley Group:
A+ Aa3 3,500,000 8.875% due 10/15/2001........................ 3,605,525
A+ Aa3 500,000 6.125% due 10/01/2003........................ 481,180
Paine Webber Group Inc.:
BBB+ Baa1 3,000,000 9.25% due 12/15/2001......................... 3,103,710
BBB+ Baa1 2,000,000 8.875% due 3/15/2005......................... 2,098,900
A+ A2 4,500,000 Prudential Insurance Co., 6.375% due
7/23/2006(b)............................... 4,195,733
Salomon Smith Barney Holdings, Inc.:
A Aa3 2,000,000 5.875% due 2/01/2001......................... 1,979,620
A Aa3 2,000,000 6.625% due 11/15/2003........................ 1,957,060
BBB+ Baa1 4,000,000 Simon Debartolo LP, 6.75%
due 6/15/2005.............................. 3,720,800
BBB Baa2 3,200,000 Spieker Properties LP, 7.35%
due 12/01/2017............................. 2,828,480
BBB Baa3 1,000,000 Susa Partnership LP, 7.45%
due 7/01/2018.............................. 853,980
------------
57,706,211
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--CONSUMER A+ A1 5,000,000 Anheuser-Busch Companies Inc., 7.375% due
GOODS--3.3% 7/01/2023.................................. 4,624,650
BBB- Ba1 4,000,000 Flowers Industries Inc., 7.15%
due 4/15/2028.............................. 2,768,920
A+ A1 3,500,000 Hershey Foods Co., 8.80%
due 2/15/2021.............................. 3,754,415
A A1 3,000,000 PepsiCo, Inc., 5.75%
due 1/02/2003.............................. 2,886,360
A A2 4,000,000 Phillip Morris Companies, Inc., 9%
due 1/01/2001.............................. 4,055,200
------------
18,089,545
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- Amerada Hess Corporation:
ENERGY--7.0% BBB Baa1 1,500,000 7.375% due 10/01/2009........................ 1,463,865
BBB Baa1 2,000,000 7.875% due 10/01/2029........................ 1,950,600
BBB+ Baa1 5,385,000 Apache Corporation, 7%
due 2/01/2018.............................. 4,891,626
AA+ Aa1 2,000,000 BP America Inc., 9.375%
due 11/01/2000............................. 2,043,960
A- A3 5,000,000 Burlington Resources, 7.375%
due 3/01/2029.............................. 4,678,050
</TABLE>
219
<PAGE> 221
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDUSTRIAL--ENERGY BBB Baa2 $ 2,500,000 Coastal Corp., 6.375%
(CONCLUDED) due 2/01/2009.............................. $ 2,274,575
A- A3 3,000,000 Conoco Inc., 6.95%
due 4/15/2029.............................. 2,706,120
AA- Aa3 3,000,000 Dresser Industries, Inc., 7.60%
due 8/15/2096.............................. 2,862,570
BBB Baa2 5,000,000 El Paso Energy Corporation, 6.75%
due 5/15/2009.............................. 4,668,000
BBB+ Baa2 2,000,000 Enron Corp., 6.625%
due 11/15/2005............................. 1,908,000
A- A3 2,000,000 Murphy Oil Corporation, 7.05%
due 5/01/2029.............................. 1,797,540
BBB Baa3 2,000,000 Occidental Petroleum Corp. (MOPPRS), 6.40%
due 4/01/2013(a)........................... 1,928,280
BBB- Baa2 5,000,000 Williams Companies, Inc., 7.625%
due 7/15/2019.............................. 4,804,700
------------
37,977,886
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A A2 3,500,000 AlliedSignal Inc., 6.20%
MANUFACTURING--4.9% due 2/01/2008.............................. 3,226,125
A+ A1 2,000,000 DaimlerChrysler NA Holdings, 7.20%
due 9/01/2009.............................. 1,964,480
BBB- Baa3 4,500,000 Equistar Chemicals LP, 8.75%
due 2/15/2009.............................. 4,446,990
NR* NR* 3,000,000 Jones Apparel Group, 7.875%
due 6/15/2006.............................. 2,912,679
BBB- Baa3 2,500,000 Martin Marietta Corp., 6.50%
due 4/15/2003.............................. 2,398,925
A A1 2,500,000 PPG Industries Inc., 7.05%
due 8/15/2009.............................. 2,433,800
BBB+ Baa1 2,000,000 Sun Microsystems Inc., 7.50%
due 8/15/2006.............................. 1,995,820
BBB Baa2 2,000,000 Union Carbide Corp., 6.25%
due 6/15/2003.............................. 1,935,820
A+ A2 5,000,000 United Tech Corp., 7.50%
due 9/15/2029.............................. 4,886,500
A A2 700,000 Xerox Corporation, 6.25%
due 11/15/2026............................. 671,748
------------
26,872,887
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--OTHER--0.1% BBB- Baa3 500,000 Northrop-Grumman Corp., 8.625%
due 10/15/2004............................. 516,615
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A A2 4,000,000 Carnival Corp., 7.70%
SERVICES--11.7% due 7/15/2004.............................. 4,037,760
Comcast Cable Communications:
BBB Baa2 3,000,000 6.20% due 11/15/2008......................... 2,713,080
BBB Baa2 2,000,000 8.875% due 5/01/2017......................... 2,166,940
BBB+ Baa1 8,000,000 Computer Associates International, 6.25%
due 4/15/2003.............................. 7,642,000
Dillard's Inc.:
BBB Baa1 3,000,000 9.125% due 8/01/2011......................... 3,137,850
BBB Baa1 1,500,000 7.85% due 10/01/2012......................... 1,420,050
A A2 1,628,553 +Disney Custom Repackaged Asset Vehicle-403,
6.85%
due 1/10/2007(b)........................... 1,598,425
BBB- Baa3 5,500,000 Fred Meyer Inc., 7.45%
due 3/01/2008.............................. 5,355,900
A- A3 1,500,000 Hertz Corporation, 7.625%
due 8/15/2007.............................. 1,499,820
AAA Aaa 3,000,000 Johnson & Johnson, 8.72%
due 11/01/2024............................. 3,282,900
BBB- Baa3 4,500,000 J Seagrams & Sons, 7%
due 4/15/2008.............................. 4,277,700
A+ A1 615,000 May Department Stores Co., 8.30%
due 7/15/2026................................ 609,059
A A2 4,000,000 Nordstrom, Inc., 6.95%
due 3/15/2028.............................. 3,534,280
A- A3 7,000,000 Sears Roebuck Acceptance Corp., 6.82%
due 10/17/2002............................. 6,845,930
AA- A2 2,500,000 TCI Communications Inc., 8.75%
due 8/01/2015.............................. 2,727,425
BBB Baa2 4,000,000 Time Warner Entertainment Co., 8.375%
due 3/15/2023.............................. 4,158,920
</TABLE>
220
<PAGE> 222
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDUSTRIAL-- BBB Ba1 $ 1,000,000 USA Waste Services, 6.50%
SERVICES (CONCLUDED) due 12/15/2002............................. $ 926,120
AA Aa2 7,000,000 Wal-Mart Stores, Inc., 8.50%
due 9/15/2024.............................. 7,453,670
------------
63,387,829
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- BBB+ Baa2 2,750,000 Burlington Northern Santa Fe, 6.75%
TRANSPORTATION--4.5% due 3/15/2029.............................. 2,378,750
BBB Baa2 5,500,000 CSX Corp., 7.90%
due 5/01/2017.............................. 5,450,005
AA+ Aa3 5,000,000 Continental Airlines, 7.056%
due 9/15/2009.............................. 4,753,000
BBB- Baa3 3,500,000 Delta Airlines, 9.75%
due 5/15/2021.............................. 3,913,315
Southwest Airlines Co.:
A- A3 3,000,000 9.40% due 7/01/2001.......................... 3,093,090
A- A3 4,000,000 8% due 3/01/2005............................. 4,032,080
A- A3 1,000,000 7.875% due 9/01/2007......................... 998,870
------------
24,619,110
- ---------------------------------------------------------------------------------------------------------------------------
SUPRANATIONAL**--0.3% AAA Aaa 1,500,000 International Bank for Reconstruction &
Development, 5.625% due 3/17/2003(1)....... 1,448,640
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES-- AA+ Aa3 2,450,000 Ameritech Capital Funding, 6.45%
COMMUNICATIONS--6.5% due 1/15/2018.............................. 2,161,537
BB Ba2 7,725,000 Frontier Corp., 6%
due 10/15/2013(a).......................... 7,129,248
AA- A2 6,000,000 GTE California, Inc., 8.07%
due 4/15/2024.............................. 5,820,300
GTE Corp.:
A Baa1 1,500,000 9.375% due 12/01/2000........................ 1,536,105
A Baa1 1,500,000 6.84% due 4/15/2018.......................... 1,372,425
AAA Aa2 3,000,000 Indiana Bell Telephone Co., Inc., 7.30%
due 8/15/2026.............................. 2,850,420
A- A3 5,300,000 MCI WorldCom Inc., 6.125%
due 4/15/2012(a)........................... 5,214,034
Southwestern Bell Telecommunications Corp.:
AA Aa2 1,000,000 6.625% due 4/01/2005......................... 978,210
AA Aa2 2,000,000 6.375% due 11/15/2007........................ 1,880,740
Sprint Capital Corporation:
BBB+ Baa1 1,500,000 5.70% due 11/15/2003......................... 1,423,275
BBB+ Baa1 2,500,000 6.125% due 11/15/2008........................ 2,266,700
A+ A2 3,000,000 US West Communications, 7.20%
due 11/01/2004(b).......................... 2,982,306
------------
35,615,300
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES-- AAA Aaa 8,000,000 Cleveland Electric/Toledo Edison, 7.13%
ELECTRIC--7.1% due 7/01/2007.............................. 7,639,360
BBB+ Baa1 2,000,000 Commonwealth Edison, 7%
due 7/01/2005.............................. 1,965,200
BBB+ Baa1 2,000,000 Conectiv Inc., 6.73%
due 6/01/2006.............................. 1,937,660
A A3 2,500,000 Duke Capital Corp., 7.50%
due 10/01/2009............................. 2,470,900
AA- Aa3 5,950,000 Florida Power Corp., 6.875%
due 2/01/2008.............................. 5,746,748
A A1 3,000,000 Mississippi Power Co., 6.05%
due 5/01/2003.............................. 2,915,070
BBB- Baa3 3,000,000 Niagara Mohawk Power Corp., 7.75%
due 10/01/2008............................. 2,995,890
AA- A1 1,500,000 Pacific Gas & Electric Corp., 6.25%
due 8/01/2003.............................. 1,459,530
A- A3 2,000,000 Pennsylvania Power & Light Co., 6.125%
due 5/01/2006(a)............................. 1,985,100
BBB Baa3 2,000,000 Texas Utilities Company, 5.94%
due 10/15/2011(a).......................... 1,966,040
A A2 7,500,000 Virginia Electric & Power Co., 8.625%
due 10/01/2024............................. 7,532,250
------------
38,613,748
- ---------------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES**--6.5% A+ A1 6,000,000 Australia & New Zealand Banking Group Ltd.,
7.55% due 9/15/2006(1)..................... 5,940,000
A- A3 5,000,000 BHP Finance USA, 8.50%
due 12/01/2012(1).......................... 5,189,900
BBB Baa2 1,500,000 Canadian National Railway Co., 6.90%
due 7/15/2028(3)........................... 1,324,170
BBB+ Baa3 4,000,000 Fairfax Financial Holdings Ltd., 7.375%
due 4/15/2018(1)........................... 3,169,120
</TABLE>
221
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YANKEE A+ A1 $ 2,000,000 Ford Capital BV, 9.50%
CORPORATES** due 6/01/2010(1)............................. $ 2,247,880
(CONCLUDED) A- A3 4,000,000 Israel Electric Corp. Ltd., 7.75%
due 3/01/2009(3)(b)........................ 3,867,584
A A2 5,000,000 Norsk Hydro A/S, 6.70%
due 1/15/2018(3)........................... 4,415,500
BBB Baa3 5,000,000 Petro Geo-Services ASA, 7.125%
due 3/30/2028(3)........................... 4,400,450
A+ Aa3 2,000,000 Sony Corporation, 6.125%
due 3/04/2003(3)........................... 1,949,900
BBB Baa2 1,000,000 Telecom de Puerto Rico, 6.15%
due 5/15/2002(3)........................... 974,306
A- A2 1,000,000 Trans-Canada Pipelines, 6.43%
due 3/15/2029(3)........................... 960,600
A A2 1,000,000 WMC Finance (USA) Ltd., 6.75%
due 12/01/2006(1).......................... 940,040
------------
35,379,450
- ---------------------------------------------------------------------------------------------------------------------------
YANKEE Korea Development Bank(1):
SOVEREIGN**--2.8% BBB Baa2 3,000,000 7.125% due 4/22/2004......................... 2,923,980
BBB Baa2 2,500,000 7.375% due 9/17/2004......................... 2,451,650
AA- Aa3 1,000,000 Province of Manitoba, 5.50%
due 10/01/2008(2).......................... 884,880
A+ A2 3,500,000 Province of Quebec, 8.80%
due 4/15/2003(2)........................... 3,678,815
BBB Baa2 5,000,000 Republic of Korea, 8.875%
due 4/15/2008(2)........................... 5,244,100
------------
15,183,425
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES
(COST--$531,148,199)--93.3% 507,336,052
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Bonds & Notes:
OBLIGATIONS--1.8% AAA Aaa 3,000,000 5.50% due 5/31/2003.......................... 2,920,770
AAA Aaa 1,000,000 4.75% due 2/15/2004.......................... 943,280
AAA Aaa 1,000,000 7.25% due 5/15/2004.......................... 1,030,160
AAA Aaa 2,600,000 6% due 8/15/2009............................. 2,518,750
AAA Aaa 1,000,000 6.125% due 11/15/2027........................ 930,620
AAA Aaa 2,000,000 5.25% due 2/15/2029.......................... 1,653,740
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS
(COST--$10,454,125)--1.8% 9,997,320
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE 17,103,000 Warburg Dillon Read LLC, purchased on
AGREEMENTS***--3.2% 12/31/1999 to yield 2.70% to 1/03/2000..... 17,103,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$17,103,000)--3.2% 17,103,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$558,705,324)--98.3%.................. 534,436,372
OTHER ASSETS LESS LIABILITIES--1.7%.......... 9,141,134
------------
NET ASSETS--100.0%........................... $543,577,506
============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Rated.
** Corresponding industry groups for foreign securities:
(1) Financial Institution
(2) Government Entity
(3) Industrial
*** Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
+ Subject to principal paydowns.
(a) Floating rate note.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
222
<PAGE> 224
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$558,705,324)....... $534,436,372
Cash........................................................ 236
Receivables:
Interest.................................................. $9,776,803
Capital shares sold....................................... 985 9,777,788
----------
Prepaid expenses and other assets........................... 42,029
------------
Total assets................................................ 544,256,425
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 373,589
Investment adviser........................................ 222,390 595,979
----------
Accrued expenses and other liabilities...................... 82,940
------------
Total liabilities........................................... 678,919
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $543,577,506
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 4,880,490
Paid-in capital in excess of par............................ 587,443,026
Undistributed investment income--net........................ 32
Accumulated realized capital losses on investments--net..... (24,477,090)
Unrealized depreciation on investments--net................. (24,268,952)
------------
NET ASSETS.................................................. $543,577,506
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $543,577,506 and 48,804,900
shares outstanding........................................ $ 11.14
============
- ---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
223
<PAGE> 225
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 40,158,575
Other income................................................ 16,825
------------
Total income................................................ 40,175,400
------------
- ----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 2,403,511
Accounting services......................................... 111,006
Professional fees........................................... 63,462
Custodian fees.............................................. 49,269
Printing and shareholder reports............................ 47,518
Directors' fees and expenses................................ 13,033
Pricing services............................................ 12,346
Transfer agent fees......................................... 5,010
Other....................................................... 7,939
-----------
Total expenses.............................................. 2,713,094
------------
Investment income--net...................................... 37,462,306
------------
- ----------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET:
Realized loss on investments--net........................... (15,646,836)
Change in unrealized appreciation/depreciation on
investments--net.......................................... (35,545,222)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(13,729,752)
============
- ----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
224
<PAGE> 226
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 37,462,306 $ 35,431,023
Realized gain (loss) on investments--net.................... (15,646,836) 7,560,501
Change in unrealized appreciation/depreciation on
investments--net.......................................... (35,545,222) (1,000,179)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (13,729,752) 41,991,345
------------ ------------
- --------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (40,541,994) (35,531,406)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (40,541,994) (35,531,406)
------------ ------------
- --------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 3,548,694 60,070,576
------------ ------------
- --------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (50,723,052) 66,530,515
Beginning of year........................................... 594,300,558 527,770,043
------------ ------------
End of year*................................................ $543,577,506 $594,300,558
============ ============
- --------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 32 $ 3,079,720
============ ============
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
225
<PAGE> 227
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A
FINANCIAL STATEMENTS. -----------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................... $ 12.25 $ 12.11 $ 11.91 $ 12.45 $ 11.12
-------- -------- -------- -------- --------
Investment income--net................................ .77 .77 .78 .80 .82
Realized and unrealized gain (loss) on investments--
net................................................. (1.05) .15 .20 (.55) 1.34
-------- -------- -------- -------- --------
Total from investment operations...................... (.28) .92 .98 .25 2.16
-------- -------- -------- -------- --------
Less dividends from investment income--net............ (.83) (.78) (.78) (.79) (.83)
-------- -------- -------- -------- --------
Net asset value, end of year.......................... $ 11.14 $ 12.25 $ 12.11 $ 11.91 $ 12.45
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.................... (2.35%) 7.85% 8.64% 2.21% 20.14%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................. .47% .48% .47% .49% .50%
======== ======== ======== ======== ========
Investment income--net................................ 6.53% 6.35% 6.62% 6.67% 7.00%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................ $543,578 $594,301 $527,770 $538,394 $489,838
======== ======== ======== ======== ========
Portfolio turnover.................................... 97.14% 103.24% 89.22% 91.88% 90.12%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
226
<PAGE> 228
- --------------------------------------------------------------------------------
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. 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. If the counterparty defaults and the
fair value of the collateral declines, liquidation of the collateral by the Fund
may be delayed or limited.
(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:
.50% of such average daily net assets not exceeding $250 million; .45% of such
average daily net assets in excess of $250 million but not more than $500
million; .40% of such average daily net assets in excess of $500 million but not
more than $750 million; and .35% of such average daily net assets in excess of
$750 million. For the year ended December 31, 1999, the aggregate average daily
net assets of the Fund and the Company's High Current Income Fund was
approximately $1,084,230,000.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement that
227
<PAGE> 229
- --------------------------------------------------------------------------------
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 year ended December 31, 1999, the Fund paid Merrill Lynch Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
$5,344 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
year ended December 31, 1999 were $534,941,173 and $543,745,810, respectively.
Net realized losses for the year ended December 31, 1999 and net unrealized
losses as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized Unrealized
Losses Losses
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $(15,646,836) $(24,268,952)
------------ ------------
Total................................ $(15,646,836) $(24,268,952)
============ ============
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $24,435,588, of which $1,374,305 related to appreciated
securities and $25,809,893 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$558,871,960.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 2,013,890 $ 23,706,106
Shares issued to shareholders in
reinvestment of dividends........... 3,502,823 40,541,994
---------- ------------
Total issued......................... 5,516,713 64,248,100
Shares redeemed...................... (5,243,367) (60,699,406)
---------- ------------
Net increase......................... 273,346 $ 3,548,694
========== ============
- -----------------------------------------------------------------
</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, 1999, the Fund had a net capital loss carryforward of
approximately $21,021,000, of which $7,112,000 expires in 2002, $855,000 expires
in 2003, $681,000 expires in 2005 and $12,373,000 expires in 2007. This amount
will be available to offset like amounts of any future taxable gains.
228
<PAGE> 230
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
PRIME BOND FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Prime Bond Fund of Merrill Lynch Variable Series
Funds, Inc. as of December 31, 1999, the related statements of operations for
the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prime Bond Fund of
Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the results
of its operations, the changes in its net assets, and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
229
<PAGE> 231
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the 30-year
Treasury bond yield hit a two-year high over concerns of the continued strength
of the economy and potential future action by the Federal Reserve Board.
FISCAL YEAR IN REVIEW
For the year ended December 31, 1999, the Fund's Class A Shares had a total
return of +31.43%. This compares to the +21.04% total return for the unmanaged
Standard & Poor's 500 (S&P 500) Index for the same 12-month period.
During 1999, the US equity market was characterized by outperformance of a
narrow group of common stocks, particularly technology-related sectors. For the
12 months ended December 31, 1999, the Fund benefited by having the largest
concentration of its US equity assets in the technology group. In the foreign
equity sector, we focused on the shares of companies in "new economy" sectors,
such as telecommunications equipment and technology. This strategy proved
rewarding, given the similar outperformance of equities in these sectors
relative to markets outside of the United States during 1999.
PORTFOLIO MATTERS
As of December 31, 1999, the Fund's asset allocation was: US equities, 73% of
net assets; foreign equities, 22%; and cash reserves, 5%.
We increased the foreign equity sector from 11% of net assets to 22% during
the six months ended December 31, 1999. Our strategy was to continue to focus on
the shares of companies that we believed offered the best potential to
outperform the US equity market as reflected by the benchmark S&P 500 Index.
Technology continued to account for the major portion of foreign equity assets.
Positions included Nortel Networks Corporation, Nokia Oyj, STMicro-electronics
NV, Telefonaktiebolaget LM Ericsson, Flextronics International Ltd. and Sony
Corporation.
We reduced the Fund's position in US equities from 91% of net assets to 73%.
Technology remained the largest single group represented in the portfolio,
accounting for nearly one-third of the portfolio's US equity assets. This
commitment reflects our continuing emphasis on the shares of companies where we
believe a consistent and above-average rate of earnings growth has the potential
to be extended over the next several years and where valuations appear
reasonable relative to earnings growth potential. Consistent with this focus is
the Fund's significant commitments in the consumer staples, communications
services, financial and health care sectors.
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
February 7, 2000
230
<PAGE> 232
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
- --------------------------------------------------------------------------------
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Standard & Poor's 500 Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
12/89 12/99
<S> <C> <C>
Quality Equity Fund+--
Class A Shares* $10,000 $41,376
Standard & Poor's 500 Index++ $10,000 $53,277
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
+Quality Equity Fund, which uses a fully managed investment policy, invests
primarily in common stocks of large-capitalization companies, as well as
investment-grade debt and convertible securities.
++This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +31.43%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +22.12
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/99 +15.26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +16.10% +31.43%
- ------------------------------------------------------------------------------------------
</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.
231
<PAGE> 233
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE & DEFENSE 98,525 United Technologies Corporation........... $ 6,404,125 0.7%
- ----------------------------------------------------------------------------------------------------------------------
APPLICATION DEVELOPMENT 114,000 +Siebel Systems, Inc. .................... 9,604,500 1.0
SOFTWARE
- ----------------------------------------------------------------------------------------------------------------------
BANKING 201,736 Bank of America Corporation............... 10,124,625 1.0
209,700 The Bank of New York Company, Inc. ....... 8,388,000 0.9
44,800 The Chase Manhattan Corporation........... 3,480,400 0.4
------------ -----
21,993,025 2.3
- ----------------------------------------------------------------------------------------------------------------------
BEVERAGES 52,000 The Coca-Cola Company..................... 3,029,000 0.3
251,500 PepsiCo, Inc. ............................ 8,865,375 0.9
------------ -----
11,894,375 1.2
- ----------------------------------------------------------------------------------------------------------------------
BROADCASTING--CABLE 364,034 AT&T Corp.-Liberty Media Group (Class
A)...................................... 20,658,929 2.2
- ----------------------------------------------------------------------------------------------------------------------
BROADCASTING--MEDIA 48,800 +Clear Channel Communications, Inc. ...... 4,355,400 0.5
- ----------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 26,600 +Oracle Corporation....................... 2,979,200 0.3
- ----------------------------------------------------------------------------------------------------------------------
CABLE 548,900 +Charter Communications, Inc. (Class A)... 12,007,187 1.3
- ----------------------------------------------------------------------------------------------------------------------
CHEMICALS 91,900 E.I. du Pont de Nemours and Company....... 6,053,913 0.6
210,700 Rohm and Haas Company..................... 8,572,856 0.9
------------ -----
14,626,769 1.5
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 104,500 +Convergys Corporation.................... 3,213,375 0.3
- ----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 84,000 +Network Associates, Inc. ................ 2,236,500 0.2
- ----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 31,800 +America Online, Inc. .................... 2,398,912 0.3
273,000 +Cisco Systems, Inc. ..................... 29,228,062 3.0
------------ -----
31,626,974 3.3
- ----------------------------------------------------------------------------------------------------------------------
COMPUTERS 79,800 Compaq Computer Corporation............... 2,159,587 0.2
92,000 +EMC Corporation.......................... 10,051,000 1.1
24,200 +Gateway Inc. ............................ 1,743,913 0.2
83,665 International Business Machines
Corporation............................. 9,035,820 0.9
131,000 +Sun Microsystems, Inc. .................. 10,136,125 1.1
194,100 Tandy Corporation......................... 9,547,294 1.0
------------ -----
42,673,739 4.5
- ----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 55,700 Honeywell International Inc. ............. 3,213,194 0.3
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS 197,400 The Dial Corporation...................... 4,799,287 0.5
- ----------------------------------------------------------------------------------------------------------------------
COSMETICS 50,000 The Gillette Company...................... 2,059,375 0.2
- ----------------------------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS 29,500 +The AES Corporation...................... 2,205,125 0.2
- ----------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 235,100 General Electric Company.................. 36,381,725 3.8
- ----------------------------------------------------------------------------------------------------------------------
ELECTRONICS 10,900 +Broadcom Corporation (Class A)........... 2,968,206 0.3
100,950 Intel Corporation......................... 8,303,138 0.9
38,600 Texas Instruments Incorporated............ 3,739,375 0.4
------------ -----
15,010,719 1.6
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 218,350 Associates First Capital Corporation
(Class A)............................... 5,990,978 0.6
205,400 Citigroup Inc. ........................... 11,412,537 1.2
206,200 Wells Fargo Company....................... 8,338,213 0.9
------------ -----
25,741,728 2.7
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- 145,630 Household International, Inc. ............ 5,424,718 0.6
CONSUMER
- ----------------------------------------------------------------------------------------------------------------------
FOODS 199,300 +Keebler Foods Company.................... 5,605,313 0.6
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--AUSTRALIA* 286,400 The News Corporation Limited (Convertible
Preferred)(ADR)**(11)................... 9,576,500 1.0
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA* 239,600 Nortel Networks Corporation(4)............ 24,199,600 2.5
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--FINLAND* 135,300 Nokia Oyj(4).............................. 24,524,478 2.5
68,900 UPM-Kymmene Oyj(9)........................ 2,775,292 0.3
------------ -----
27,299,770 2.8
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
232
<PAGE> 234
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN--FRANCE* 34,000 Banque Nationale de Paris (BNP)(3)........ $ 3,136,201 0.3%
135,200 +STMicroelectronics NV (NY Registered
Shares)(10)............................. 20,474,350 2.2
------------ -----
23,610,551 2.5
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--GERMANY* 40,700 Deutsche Bank AG (Registered)(3).......... 3,436,584 0.3
54,800 Dresdner Bank AG (Registered)(3).......... 2,979,914 0.3
------------ -----
6,416,498 0.6
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--JAPAN* 21,000 Kyocera Corporation(6).................... 5,445,738 0.6
556 Nippon Telegraph & Telephone Corporation
(NTT)(11)............................... 9,521,480 1.0
94,500 Sony Corporation (ADR)**(1)............... 26,908,875 2.8
123,000 Toyota Motor Corporation (ADR)**(2)....... 11,977,125 1.2
------------ -----
53,853,218 5.6
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--NETHERLANDS* 52,600 +ASM Lithography Holding NV(6)............ 5,842,392 0.6
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--SINGAPORE* 260,800 +Flextronics International Ltd.(6)........ 11,996,800 1.2
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--SWEDEN* 99,100 Telefonaktiebolaget LM Ericsson 'B'(11)... 6,381,881 0.7
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN--UNITED KINGDOM* 262,400 AstraZeneca Group PLC(5).................. 10,877,177 1.2
1,449,900 BP Amoco PLC(8)........................... 14,569,168 1.5
292,500 Shell Transport & Trading Company
(ADR)**(7).............................. 14,405,625 1.5
320,000 SmithKline Beecham PLC(5)................. 4,080,698 0.4
------------ -----
43,932,668 4.6
- ----------------------------------------------------------------------------------------------------------------------
HEALTHCARE--PRODUCTS & 114,900 Columbia/HCA Healthcare Corporation....... 3,368,006 0.3
SERVICES
- ----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 242,900 Colgate-Palmolive Company................. 15,788,500 1.6
61,000 The Procter & Gamble Company.............. 6,683,313 0.7
------------ -----
22,471,813 2.3
- ----------------------------------------------------------------------------------------------------------------------
INFORMATION PROCESSING 254,300 +Unisys Corporation....................... 8,121,706 0.8
- ----------------------------------------------------------------------------------------------------------------------
INSTRUMENTS--SCIENTIFIC 88,700 Millipore Corporation..................... 3,426,038 0.4
- ----------------------------------------------------------------------------------------------------------------------
INSURANCE 111,600 AXA Financial, Inc. ...................... 3,780,450 0.4
88,875 American International Group, Inc. ....... 9,609,609 1.0
------------ -----
13,390,059 1.4
- ----------------------------------------------------------------------------------------------------------------------
INTERNETWORKING 9,900 +InfoSpace.com, Inc. ..................... 2,117,981 0.2
27,600 +Inktomi Corporation...................... 2,446,050 0.3
15,700 +Internet Capital Group, Inc. ............ 2,662,131 0.3
------------ -----
7,226,162 0.8
- ----------------------------------------------------------------------------------------------------------------------
LASER SYSTEMS & COMPONENTS 166,000 +JDS Uniphase Corporation................. 26,767,500 2.8
- ----------------------------------------------------------------------------------------------------------------------
MACHINERY & EQUIPMENT 34,600 Caterpillar Inc. ......................... 1,628,362 0.2
- ----------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 93,050 Johnson & Johnson......................... 8,665,281 0.9
- ----------------------------------------------------------------------------------------------------------------------
METALS 134,000 Alcoa Inc. ............................... 11,122,000 1.2
- ----------------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES 152,300 Burlington Resources Inc. ................ 5,035,419 0.5
- ----------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 261,450 Enron Corp. .............................. 11,601,844 1.2
- ----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 150,893 Exxon Mobil Corporation................... 12,156,317 1.3
- ----------------------------------------------------------------------------------------------------------------------
OIL SERVICES 94,300 Schlumberger Limited...................... 5,304,375 0.5
18,256 Transocean Sedco Forex Inc. .............. 615,015 0.1
------------ -----
5,919,390 0.6
- ----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 82,100 International Paper Company............... 4,633,519 0.5
- ----------------------------------------------------------------------------------------------------------------------
PETROLEUM 163,800 Unocal Corporation........................ 5,497,538 0.6
- ----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 58,525 American Home Products Corporation........ 2,308,080 0.2
158,550 Bristol-Myers Squibb Company.............. 10,176,928 1.0
119,750 Cardinal Health, Inc. .................... 5,733,031 0.6
22,800 Eli Lilly and Company..................... 1,516,200 0.2
</TABLE>
233
<PAGE> 235
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD STOCKS VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PHARMACEUTICALS 164,810 Merck & Co., Inc. ........................ $ 11,052,571 1.2%
(CONCLUDED) 213,800 Pfizer Inc. .............................. 6,935,138 0.7
123,700 Pharmacia & Upjohn, Inc. ................. 5,566,500 0.6
------------ -----
43,288,448 4.5
- ----------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 221,200 +AMFM Inc. ............................... 17,308,900 1.8
- ----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 195,000 McDonald's Corporation.................... 7,860,938 0.8
- ----------------------------------------------------------------------------------------------------------------------
RETAIL 80,400 +Federated Department Stores, Inc. ....... 4,065,225 0.5
193,600 +Safeway Inc. ............................ 6,884,900 0.7
211,000 Wal-Mart Stores, Inc. .................... 14,585,375 1.5
------------ -----
25,535,500 2.7
- ----------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 161,100 Lowe's Companies, Inc. ................... 9,625,725 1.0
- ----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 124,000 Motorola, Inc. ........................... 18,259,000 1.9
- ----------------------------------------------------------------------------------------------------------------------
SOFTWARE 13,900 +i2 Technologies, Inc. ................... 2,705,288 0.3
291,400 +Microsoft Corporation.................... 34,002,738 3.5
46,200 +Symantec Corporation..................... 2,708,475 0.3
8,300 +Yahoo! Inc. ............................. 3,591,306 0.4
------------ -----
43,007,807 4.5
- ----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 85,000 +3Com Corporation......................... 3,989,688 0.4
249,079 AT&T Corp. ............................... 12,640,759 1.3
58,500 +Adelphia Business Solutions, Inc. ....... 2,767,781 0.3
102,000 +Amdocs Limited........................... 3,519,000 0.4
108,700 +American Tower Corporation (Class A)..... 3,322,144 0.3
59,900 BCE Inc. ................................. 5,402,231 0.6
179,600 GTE Corporation........................... 12,673,025 1.3
52,000 +Global TeleSystems Group, Inc. .......... 1,800,500 0.2
87,500 Lucent Technologies Inc. ................. 6,546,094 0.7
215,400 +MCI WorldCom, Inc. ...................... 11,416,200 1.2
------------ -----
64,077,422 6.7
- ----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS & 65,400 +Global Crossing Ltd. .................... 3,265,912 0.3
EQUIPMENT
- ----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION SERVICES 37,900 United Parcel Service, Inc. (Class B)..... 2,615,100 0.3
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 297,152 SBC Communications Inc. .................. 14,486,160 1.5
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC & GAS 124,600 +Calpine Corporation...................... 7,974,400 0.8
- ----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 34,800 +Nextel Communications, Inc. (Class A).... 3,586,575 0.4
DOMESTIC PAGING & CELLULAR
54,300 Sprint Corp. (PCS Group).................. 5,565,750 0.6
------------ -----
9,152,325 1.0
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS (COST--$614,855,762) 915,313,751 95.5
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER*** $43,528,000 General Motors Acceptance
Corp., 5% due 1/03/2000................. 43,509,863 4.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$43,509,863)....................... 43,509,863 4.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$658,365,625).... 958,823,614 100.1
LIABILITIES IN EXCESS OF OTHER ASSETS..... (510,503) (0.1)
------------ -----
NET ASSETS................................ $958,313,111 100.0%
============ =====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Corresponding industry groups for foreign securities:
(1) Appliances
(2) Automobiles
(3) Banking
(4) Communications Equipment
(5) Drugs
(6) Electronics Components
(7) Oil--Integrated
(8) Oil--Related
(9) Paper & Forest Products
(10) Semiconductors
(11) Telecommunications
** 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.
234
<PAGE> 236
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$658,365,625)....... $958,823,614
Cash........................................................ 844
Receivables:
Dividends................................................. $482,863
Capital shares sold....................................... 9,905 492,768
--------
Prepaid expenses and other assets........................... 55,038
------------
Total assets................................................ 959,372,264
------------
- -------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 575,681
Investment adviser........................................ 375,476 951,157
--------
Accrued expenses............................................ 107,996
------------
Total liabilities........................................... 1,059,153
------------
- -------------------------------------------------------------------------------------
NET ASSETS.................................................. $958,313,111
============
- -------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 2,399,830
Paid-in capital in excess of par............................ 635,986,731
Undistributed investment income--net........................ 23,994
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 19,444,876
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 300,457,680
------------
NET ASSETS.................................................. $958,313,111
============
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $958,313,111 and 23,998,302
shares outstanding........................................ $ 39.93
============
- -------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
235
<PAGE> 237
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $139,887 foreign withholding tax)......... $ 7,628,996
Interest and discount earned................................ 1,036,007
------------
Total income................................................ 8,665,003
------------
- -----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 3,724,200
Accounting services......................................... 158,957
Custodian fees.............................................. 96,033
Printing and shareholder reports............................ 93,021
Professional fees........................................... 87,456
Directors' fees and expenses................................ 18,059
Pricing services............................................ 8,344
Transfer agent fees......................................... 5,150
Other....................................................... 13,397
------------
Total expenses.............................................. 4,204,617
------------
Investment income--net...................................... 4,460,386
------------
- -----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET:
Realized gain from:
Investments--net.......................................... 120,451,009
Foreign currency transactions--net........................ 570,281 121,021,290
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 114,788,478
Foreign currency transactions--net........................ 94,483 114,882,961
------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 235,904,251
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $240,364,637
============
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
236
<PAGE> 238
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 4,460,386 $ 8,231,369
Realized gain on investments and foreign currency
transactions--net......................................... 121,021,290 80,712,384
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 114,882,961 36,226,100
------------- -------------
Net increase in net assets resulting from operations........ 240,364,637 125,169,853
------------- -------------
- -------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (12,176,029) (8,061,972)
In excess of investment income--net:
Class A................................................... (546,276) --
Realized gain on investments--net:
Class A................................................... (181,024,012) (115,958,721)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (193,746,317) (124,020,693)
------------- -------------
- -------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ 48,797,714 (13,316,065)
------------- -------------
- -------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 95,416,034 (12,166,905)
Beginning of year........................................... 862,897,077 875,063,982
------------- -------------
End of year*................................................ $ 958,313,111 $ 862,897,077
============= =============
- -------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 23,994 $ 7,715,643
============= =============
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
237
<PAGE> 239
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A+
FINANCIAL STATEMENTS. -------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................... $ 38.12 $ 38.42 $ 32.83 $ 32.76 $ 27.74
-------- -------- -------- -------- --------
Investment income--net................................... .19 .34 .41 .58 .58
Realized and unrealized gain on investments and foreign
currency transactions--net............................. 10.46 4.80 6.94 4.44 5.48
-------- -------- -------- -------- --------
Total from investment operations......................... 10.65 5.14 7.35 5.02 6.06
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net................................. (.56) (.35) (.22) (.66) (.45)
In excess of investment income--net.................... (.02) -- -- -- --
Realized gain on investments--net...................... (8.26) (5.09) (1.54) (4.29) (.59)
-------- -------- -------- -------- --------
Total dividends and distributions........................ (8.84) (5.44) (1.76) (4.95) (1.04)
-------- -------- -------- -------- --------
Net asset value, end of year............................. $ 39.93 $ 38.12 $ 38.42 $ 32.83 $ 32.76
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....................... 31.43% 15.58% 23.70% 17.90% 22.61%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. .49% .49% .48% .49% .51%
======== ======== ======== ======== ========
Investment income--net................................... .52% .95% 1.16% 1.89% 1.94%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................... $958,313 $862,897 $875,064 $794,275 $644,551
======== ======== ======== ======== ========
Portfolio turnover....................................... 77.73% 100.29% 100.08% 88.30% 140.32%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
238
<PAGE> 240
- --------------------------------------------------------------------------------
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. 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 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
239
<PAGE> 241
- --------------------------------------------------------------------------------
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 investment
income are due primarily to differing tax treatments for foreign currency
transactions.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $570,270 have been reclassified between undistributed
net realized capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. MLAM is responsible for the management of the Company's
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:
.500% of the Fund's average daily net assets not exceeding $250 million; .450%
of average daily net assets in excess of $250 million but not exceeding $300
million; .425% of average daily net assets in excess of $300 million but not
exceeding $400 million; and .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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $164,943 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
year ended December 31, 1999 were $651,530,132 and $832,566,790, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains (losses) as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $120,451,201 $300,457,989
Short-term investments.............. (192) --
Forward foreign exchange
contracts.......................... (74,962) --
Foreign currency transactions....... 645,243 (309)
------------ ------------
Total............................... $121,021,290 $300,457,680
============ ============
- ---------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $300,289,778, of which $321,281,090 related to appreciated
securities and $20,991,312 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$658,533,836.
240
<PAGE> 242
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold.......................... 189,776 $ 6,857,700
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 5,277,783 193,746,317
---------- -------------
Total issued......................... 5,467,559 200,604,017
Shares redeemed...................... (4,103,233) (151,806,303)
---------- -------------
Net increase......................... 1,364,326 $ 48,797,714
========== =============
- -----------------------------------------------------------------
</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>
241
<PAGE> 243
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
QUALITY EQUITY FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Quality Equity Fund of Merrill Lynch Variable
Series Funds, Inc. as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Quality Equity Fund
of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
242
<PAGE> 244
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the year ended December 31, 1999, the Reserve Assets Fund's Class A Shares
had a net annualized yield of 4.76%. For the six-month period ended December 31,
1999, the Fund's Class A Shares had a net annualized yield of 4.96%. The Fund's
Class A Shares' 7-day yield as of December 31, 1999 was 5.36%. The average
portfolio maturity was 55 days at December 31, 1999, compared to 71 days at June
30, 1999.
THE ENVIRONMENT
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the two-
year Treasury note yield hit a two-year high over concerns of the continued
strength of the economy and potential future action by the Federal Reserve
Board. Against the background of still higher interest rates, we positioned the
Fund more conservatively. We expect to continue to concentrate new investments
in the one-month and three-month areas as we wait for a clearer economic picture
to emerge.
The Fund's composition at the end of December and as of our last report to
shareholders is detailed below:
<TABLE>
<CAPTION>
- -------------------------------------------------------
12/31/99 6/30/99
- -------------------------------------------------------
<S> <C> <C>
Bank Notes....................... 10.0% 13.7%
Certificates of Deposit.......... 1.2 1.2
Certificates of
Deposit--Yankee................ 2.9 2.8
Commercial Paper................. 40.4 34.8
Corporate Notes.................. 33.4 35.2
Funding Agreements............... 4.8 4.7
Repurchase Agreements............ 1.0 --
US Government, Agency &
Instrumentality Obligations--
Discount....................... -- 2.1
US Government, Agency &
Instrumentality Obligations--
Non-Discount................... 5.6 6.2
Other Assets Less Liabilities.... 0.7 --
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,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ David Chesney
David J. Chesney
Vice President and Portfolio Manager
February 7, 2000
- --------------------------------------------------------
We are pleased to announce that David J. Chesney is responsible for the
day-to-day management of Reserve Assets Fund. Mr. Chesney was Vice President and
analyst of Merrill Lynch Convertible Fund, Inc. from 1997 to 1999. From 1994 to
1997, he was an analyst in the fixed-income department.
- --------------------------------------------------------
243
<PAGE> 245
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--10.0% $ 650,000 American Express Centurion Bank+...... 5.70 % 4/24/2000 $ 649,759
250,000 First USA Bank, NA+................... 6.551 1/21/2000 250,048
500,000 Harris Trust & Savings+............... 5.66 4/06/2000 500,036
250,000 KeyBank NA+........................... 6.478 2/21/2000 249,976
200,000 NationsBank NA+....................... 5.67 3/16/2000 199,959
250,000 NationsBank NA+....................... 5.66 4/05/2000 249,975
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$2,099,696) 2,099,753
- ------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 250,000 Fleet National Bank+.................. 5.65 4/17/2000 249,966
DEPOSIT--1.2%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$249,966) 249,966
- ------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 250,000 Bayerische Hypo-und-Vereinsbank AG.... 5.27 3/03/2000 249,618
DEPOSIT--YANKEE--2.9% 250,000 Commerzbank AG, NY.................... 5.085 2/17/2000 249,573
100,000 Societe Generale, NY.................. 5.18 2/28/2000 99,853
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT--YANKEE
(COST--$599,953) 599,044
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--40.4% 250,000 Alpine Securitization Corporation..... 6.17 1/19/2000 249,342
250,000 Amsterdam Funding Corporation......... 6.52 1/11/2000 249,630
250,000 Amsterdam Funding Corporation......... 6.80 1/11/2000 249,630
250,000 Amsterdam Funding Corporation......... 5.92 1/13/2000 249,594
282,000 Apreco, Inc. ......................... 5.87 2/03/2000 280,572
250,000 Asset Securitization Cooperative
Corp. .............................. 6.00 1/18/2000 249,383
250,000 Asset Securitization Cooperative
Corp................................ 6.571 3/13/2000 250,000
250,000 Atlantis One Funding Corp. ........... 6.50 2/17/2000 247,969
300,000 Bear Stearns Companies, Inc. ......... 5.79 3/09/2000 296,704
250,000 Bear Stearns Companies, Inc. ......... 5.88 3/22/2000 246,713
330,000 CSW Credit Inc. ...................... 6.00 2/01/2000 328,405
250,000 Corporate Receivables Corp. .......... 6.05 1/19/2000 249,342
250,000 Edison Asset Securitization, LLC...... 5.80 2/29/2000 247,743
391,000 Edison Asset Securitization, LLC...... 5.95 2/29/2000 387,469
375,000 Finova Capital Corp. ................. 5.90 1/20/2000 373,952
140,000 Finova Capital Corp. ................. 6.05 2/03/2000 139,291
281,000 Greenwich Funding Corp. .............. 6.25 1/14/2000 280,463
596,000 Knight-Ridder, Inc. .................. 6.00 2/18/2000 591,357
300,000 Lehman Brothers Holdings Inc. ........ 5.90 2/16/2000 297,760
742,000 Lehman Brothers Holdings Inc. ........ 5.95 3/21/2000 732,369
755,000 Old Line Funding Corp. ............... 6.40 1/11/2000 753,926
1,000,000 Park Avenue Receivables Corp. ........ 6.561 2/11/2000 999,979
252,000 Tulip Funding Corp. .................. 6.19 1/26/2000 251,060
250,000 Variable Funding Capital Corp. ....... 6.40 1/10/2000 249,689
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$8,452,413) 8,452,342
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--33.4% 240,000 AT&T Capital Corporation.............. 7.50 11/15/2000 241,173
250,000 American Honda Finance Corp.+......... 6.476 8/01/2000 249,957
250,000 Associates Corporation of North
America+............................ 7.45 3/28/2000 250,884
150,000 Associates Corporation of North
America............................. 6.375 6/15/2000 150,038
150,000 Bear Stearns Companies, Inc.+......... 6.561 1/20/2000 150,001
250,000 The CIT Group Holdings, Inc. ......... 6.70 5/02/2000 250,529
250,000 The CIT Group Holdings, Inc.+......... 5.80 9/15/2000 249,829
500,000 Caterpillar Inc.+..................... 6.228 1/20/2000 499,984
250,000 Chase Manhattan Corp.+................ 6.37 12/08/2000 250,615
250,000 Countrywide Home Loans, Inc.+......... 6.225 2/09/2000 250,000
250,000 Deutsche Bank AG, NY.................. 7.00 7/10/2000 250,650
500,000 Finova Capital Corp. ................. 8.13 4/26/2000 502,610
550,000 Ford Motor Credit Company............. 8.375 1/15/2000 550,346
200,000 Ford Motor Credit Company+............ 5.70 5/05/2000 200,000
150,000 Ford Motor Credit Company............. 6.85 8/15/2000 150,311
250,000 General Electric Capital Corp.+....... 5.185 4/17/2000 249,903
250,000 General Electric Capital Corp.+....... 6.111 5/03/2000 250,052
</TABLE>
244
<PAGE> 246
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE NOTES $ 100,000 General Electric Capital Corp.+....... 5.39 % 5/12/2000 $ 100,008
(CONCLUDED) 150,000 General Motors Acceptance Corp.+...... 6.158 7/20/2000 149,971
100,000 General Motors Acceptance Corp.+...... 6.26 12/01/2000 100,062
100,000 General Motors Acceptance Corp.+...... 6.136 2/27/2001 99,917
250,000 Goldman Sachs Group, Inc. ............ 6.55 12/22/2000 250,000
100,000 Goldman Sachs Group, Inc.+............ 5.39 1/12/2001 100,000
200,000 Household Finance Corp.+.............. 4.85 3/13/2000 199,751
500,000 Household Finance Corp.+.............. 6.095 5/15/2000 499,960
250,000 New Court Credit Group Inc.+.......... 6.83 12/01/2000 250,453
200,000 PepsiCo, Inc. ........................ 5.875 6/01/2000 199,809
250,000 Wells Fargo & Co. .................... 5.225 4/10/2000 249,597
100,000 Xerox Credit Corp.+................... 5.62 4/06/2000 99,980
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$7,001,672) 6,996,390
- ------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--4.8% 1,000,000 Jackson National Life Insurance
Co.+................................ 6.496 5/01/2000 1,000,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$1,000,000) 1,000,000
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY & 100,000 Federal Home Loan Mortgage
INSTRUMENTALITY Corporation........................... 5.25 1/19/2001 98,805
OBLIGATIONS--
NON-DISCOUNT--5.6% 200,000 Federal National Mortgage
Association......................... 5.07 12/14/2000 197,606
75,000 Federal National Mortgage
Association......................... 5.21 1/26/2001 74,088
250,000 Student Loan Marketing Association+... 5.908 2/04/2000 249,995
250,000 Student Loan Marketing Association+... 6.216 9/29/2000 249,965
100,000 US Treasury Notes..................... 4.625 11/30/2000 98,750
100,000 US Treasury Notes..................... 4.625 12/31/2000 98,562
100,000 US Treasury Notes..................... 4.50 1/31/2001 98,344
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$1,174,977) 1,166,115
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE 215,000 Nomura Securities International, Inc.,
AGREEMENTS**--1.0% purchased on 12/31/1999 to yield 5% to
1/03/2000........................... 215,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (COST--$215,000) 215,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$20,793,677)--99.3%............ 20,778,610
OTHER ASSETS LESS LIABILITIES--0.7%... 154,238
-----------
NET ASSETS--100.0%.................... $20,932,848
===========
- ------------------------------------------------------------------------------------------------------------------------
</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
December 31, 1999.
** Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
+ Variable rate notes.
See Notes to Financial Statements.
245
<PAGE> 247
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$20,793,677*)....... $20,778,610
Cash........................................................ 2,554
Receivables:
Interest.................................................. $164,294
Capital shares sold....................................... 38,704 202,998
--------
Prepaid expenses and other assets........................... 1,583
-----------
Total assets................................................ 20,985,745
-----------
- -------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 36,469
Investment adviser........................................ 9,864 46,333
--------
Accrued expenses and other liabilities...................... 6,564
-----------
Total liabilities........................................... 52,897
-----------
- -------------------------------------------------------------------------------------
NET ASSETS.................................................. $20,932,848
===========
- -------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 500,000,000
shares authorized+........................................ $ 2,094,792
Paid-in capital in excess of par............................ 18,853,123
Unrealized depreciation on investments--net................. (15,067)
-----------
NET ASSETS.................................................. $20,932,848
===========
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $20,932,848 and 20,947,915
shares outstanding........................................ $ 1.00
===========
- -------------------------------------------------------------------------------------
</TABLE>
* As of December 31, 1999, net unrealized depreciation for Federal income tax
purposes amounted to $15,075, of which $917 related to appreciated securities
and $15,992 related to depreciated securities. The aggregate cost of
investments at December 31, 1999 for Federal income tax purposes was
$20,793,685.
+ The Fund is also authorized to issue 500,000,000 Class B Shares.
See Notes to Financial Statements.
246
<PAGE> 248
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $1,107,804
- ------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $104,515
Custodian fees.............................................. 10,697
Professional fees........................................... 10,610
Transfer agent fees......................................... 5,006
Accounting services......................................... 2,267
Printing and shareholder reports............................ 1,300
Directors' fees and expenses................................ 505
Other....................................................... 503
--------
Total expenses.............................................. 135,403
----------
Investment income--net...................................... 972,401
----------
- ------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized gain on investments--net........................... 1,061
Change in unrealized appreciation/depreciation on
investments--net.......................................... (15,102)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 958,360
==========
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
247
<PAGE> 249
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 972,401 $ 1,083,752
Realized gain on investments--net........................... 1,061 6,717
Change in unrealized appreciation/depreciation on
investments--net.......................................... (15,102) (453)
------------ ------------
Net increase in net assets resulting from operations........ 958,360 1,090,016
------------ ------------
- --------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (972,401) (1,083,752)
Realized gain on investments--net:
Class A................................................... (1,061) (6,717)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (973,462) (1,090,469)
------------ ------------
- --------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares............................ 9,779,215 9,448,388
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions............... 973,472 1,090,589
------------ ------------
10,752,687 10,538,977
Cost of shares redeemed..................................... (11,142,863) (10,302,620)
------------ ------------
Net increase (decrease) in net assets derived from capital
share transactions........................................ (390,176) 236,357
------------ ------------
- --------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (405,278) 235,904
Beginning of year........................................... 21,338,126 21,102,222
------------ ------------
End of year................................................. $ 20,932,848 $ 21,338,126
============ ============
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
248
<PAGE> 250
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM CLASS A
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ---------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Investment income--net....................................... .0464 .0496 .0506 .0501 .0543
Realized and unrealized gain (loss) on investments--net...... (.0006) .0003 .0001 (.0005) .0018
------- ------- ------- ------- -------
Total from investment operations............................. .0458 .0499 .0507 .0496 .0561
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net..................................... (.0464) (.0496) (.0506) (.0501) (.0543)
Realized gain on investments--net.......................... (.0001) (.0003) (.0001) (.0001) (.0004)
------- ------- ------- ------- -------
Total dividends and distributions............................ (.0465) (.0499) (.0507) (.0502) (.0547)
------- ------- ------- ------- -------
Net asset value, end of year................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share........................... 4.76% 5.10% 5.19% 5.13% 5.61%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................................... .65% .68% .62% .61% .61%
======= ======= ======= ======= =======
Investment income and realized gain on investments--net...... 4.66% 4.96% 5.06% 4.96% 5.47%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)....................... $20,933 $21,338 $21,102 $22,885 $25,550
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
249
<PAGE> 251
- --------------------------------------------------------------------------------
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. 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, for which market quotations are readily available,
are valued at market value. 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 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. If the counterparty defaults
and the fair value of the collateral declines, liquidation of the collateral by
the Fund may be delayed or limited.
(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: .500% of the Fund's average daily net assets not
exceeding $500 million; .425% of average daily net assets in excess of $500
million but not exceeding $750 million; .375% of average daily net assets in
excess of $750 million but not exceeding $1 billion; .350% of average daily net
assets in excess of $1 billion but not exceeding $1.5 billion; .325% of average
daily net assets in excess of $1.5 billion but not exceeding $2 billion; .300%
of average daily net assets in excess of $2 billion but not exceeding $2.5
billion and .275% of average daily net assets in excess of $2.5 billion.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement
250
<PAGE> 252
- --------------------------------------------------------------------------------
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, reinvested and redeemed during the periods
corresponds to the amounts included in the Statements of Changes in Net Assets
for net proceeds from sale of shares, value of shares reinvested and cost of
shares redeemed, respectively, since shares are recorded at $1.00 per share.
251
<PAGE> 253
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
RESERVE ASSETS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Reserve Assets Fund of Merrill Lynch Variable
Series Funds, Inc. as of December 31, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Reserve Assets Fund
of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
252
<PAGE> 254
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
DECEMBER 31, 1999--ANNUAL REPORT
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The US economy finished 1999 with strong growth, low inflation, accelerating
productivity, strong earnings and rising real wages. At its meeting on November
16, 1999, the Federal Reserve Board announced its move to tighten interest rates
by 25 basis points (0.25%), essentially putting short-term interest rates back
to where they were before the three quarter-point cuts that were made in the
fall of 1998. Monetary policy was kept steady at the central bank's last meeting
in 1999 on December 21 over Year 2000 concerns, but indications point to further
tightening in early 2000. (The Federal Reserve Board did raise the Federal Funds
rate by 0.25% on February 2, 2000.)
US stock markets rebounded in October and advanced on a technology-driven
rally in November. Significant strength in small-capitalization stocks also
emerged in November, particularly in the small cap growth sector. Overall, US
stock markets ended the year at new highs. In the fixed-income area, the 30-year
Treasury bond yield hit a two-year high over concerns of the continued strength
of the economy and potential future action by the Federal Reserve Board.
FISCAL YEAR IN REVIEW
For the 12 months ended December 31, 1999, Special Value Focus Fund sharply
outperformed the unmanaged Russell 2000 Index. Total returns for the Fund's
Class A and Class B Shares were +34.15% and +33.99%, respectively. These returns
compare to the total return of +21.26% for the Russell 2000 Index for the same
period. Positive sector positioning and strong stock selection combined to
produce favorable investment results for the year.
Individual stocks that most benefited the Fund's investment results for the
year included APAC Customer Services Inc., VISX, Incorporated and DSP
Communications, Inc. Shares of APAC Customer Services appreciated sharply in the
final months of the year on improved fundamentals in the teleservices business
and the launch of an Internet-based customer service initiative. Shares of VISX,
Incorporated, a provider of systems for laser vision correction, also
contributed favorably to investment results. VISX shares rallied on market share
advances and strong industry growth in laser vision correction procedures. We
dramatically reduced the Fund's position in VISX as the stock reached our
valuation objective and concerns surfaced with the entry of a new competitor
into the US market. DSP Communications, Inc., a designer of chipsets used
primarily in wireless devices, also benefited the Fund's investment results.
Demand for DSP's wireless chipsets surged and the company was acquired by Intel
Corp. at a substantial premium.
During the fiscal year, the Fund's investment results were hindered by an
investment in shares of CHS Electronics, Inc., an international distributor of
microcomputers and related products. We eliminated the Fund's entire position in
CHS Electronics after the discovery of accounting irregularities at the company.
We reinvested the proceeds into distribution stocks where we had greater
confidence in the near-term earnings outlook.
Within the Russell 2000 Index, the technology, utility and producer durables
sectors posted sharp gains for the year, while the consumer staples, financial
services and transportation sectors declined. On balance, sector positioning had
a positive effect on the Fund's investment results for the fiscal year. The
portfolio was overweighted in the technology sector, which outperformed the
benchmark index. Relative to the Russell 2000 Index, the Fund's underweighting
in financial services and consumer staples stocks further benefited investment
results. Approximately one-third of the Fund's total return in excess of the
Russell 2000 Index was the result of sector positioning. The remaining
two-thirds was attributable to positive stock selection.
As small-capitalization stocks surged during the year, we realized gains in
stocks that had reached our internal price objectives, and re-deployed the
proceeds in stocks trading near the low end of their historical valuation
ranges. Notable changes to the Fund's investment positioning included an
increase in consumer discretionary stocks. We added a mix of retail, educational
services, customer relationship management and temporary staffing stocks to the
portfolio. We made minor reductions in the weight of the energy, materials
processing and producers durables sectors.
Despite the strong recent performance of the Russell 2000 Index, we continued
to find many attractive small-capitalization investment opportunities. The
returns of the past year are remarkable because performance gains were
253
<PAGE> 255
- --------------------------------------------------------------------------------
more heavily concentrated in high growth companies. Many small-capitalization
companies with solid earnings and moderate growth prospects are still trading at
extremely attractive valuation levels.
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/ LOGO TO COME
Terry K. Glenn
President and Director
/S/ LOGO TO COME
Daniel V. Szemis
Senior Vice President and Co-Portfolio Manager
/s/ LOGO TO COME
R. Elise Baum
Senior Vice President and Co-Portfolio Manager
February 7, 2000
254
<PAGE> 256
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A AND CLASS B SHARES
- --------------------------------------------------------------------------------
SPECIAL VALUE FOCUS FUND GRAPH
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Russell 2000 Small Stock Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
12/89 12/99
<S> <C> <C>
Special Value Focus Fund+--
Class A Shares* $10,000 $31,516
Russell 2000 Small Stock Index++ $10,000 $35,164
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class B Shares
compared to growth of an investment in the Russell 2000 Small Stock Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
10/23/97** 12/99
<S> <C> <C>
Special Value Focus Fund+--
Class B Shares* $10,000 $11,126
Russell 2000 Small Stock Index++ $10,000 $11,524
</TABLE>
*Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
+Special Value Focus Fund invests primarily in common stocks of small companies
and emerging growth companies regardless of size.
++This unmanaged Index is comprised of approximately 2,000 smaller-
capitalization common stocks from various industrial sectors.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +34.15%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 +17.19
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/99 +12.17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
- --------------------------------------------------------------------------------
PERIOD COVERED % RETURN
- --------------------------------------------------------------------------------
Year Ended 12/31/99 +33.99%
- --------------------------------------------------------------------------------
Inception (10/23/97) through 12/31/99 + 5.00
- --------------------------------------------------------------------------------
255
<PAGE> 257
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +12.18% +34.15%
- ------------------------------------------------------------------------------------------
Class B Shares +12.15 +33.99
- ------------------------------------------------------------------------------------------
</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.
256
<PAGE> 258
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
SECTOR* HELD COMMON STOCKS VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO & TRANSPORTATION
- ---------------------------------------------------------------------------------------------------------------------
196,700 Air Express International Corporation........ $ 6,355,869 1.2%
344,700 Circle International Group, Inc. ............ 7,540,312 1.4
71,900 +Forward Air Corporation..................... 3,114,169 0.6
191,000 +Gentex Corporation.......................... 5,300,250 1.0
502,500 +Keystone Automotive Industries, Inc. ....... 2,936,484 0.5
208,300 +Landair Corporation......................... 1,041,500 0.2
67,700 Meritor Automotive, Inc. .................... 1,311,687 0.3
894,700 +Miller Industries, Inc. .................... 2,572,262 0.5
------------ -----
30,172,533 5.7
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY
- ---------------------------------------------------------------------------------------------------------------------
1,476,700 +APAC Customer Services Inc. ................ 20,581,506 3.9
222,000 +Ambassadors International, Inc. ............ 2,428,125 0.5
786,100 +Boise Cascade Office Products Corp. ........ 11,791,500 2.2
265,000 +Boron, LePore & Associates, Inc. ........... 1,722,500 0.3
532,700 +Buffets, Inc. .............................. 5,327,000 1.0
331,200 +Caribiner International, Inc. .............. 1,200,600 0.2
164,100 +The Cheesecake Factory Incorporated......... 5,733,244 1.1
878,000 +Danka Business Systems PLC (ADR)**.......... 11,029,875 2.1
130,000 +Education Management Corporation............ 1,811,875 0.3
1,114,850 +HA-LO Industries, Inc. ..................... 8,361,375 1.6
1,005,100 Heilig-Meyers Company........................ 2,764,025 0.5
121,700 +ITI Technologies, Inc. ..................... 3,643,394 0.7
194,300 +The Men's Warehouse, Inc. .................. 5,707,562 1.1
293,100 +Micro Warehouse, Inc. ...................... 5,404,031 1.0
338,867 +Midway Games Inc. .......................... 8,111,629 1.5
134,000 +Modis Professional Services, Inc. .......... 1,909,500 0.4
554,000 +PETsMART, Inc. ............................. 3,116,250 0.6
551,800 +Paxson Communications Corporation........... 6,587,113 1.2
558,600 Pier 1 Imports, Inc. ........................ 3,561,075 0.7
307,600 +SITEL Corporation........................... 2,153,200 0.4
576,500 +Safety-Kleen Corp. ......................... 6,521,656 1.2
173,800 +Snyder Communications, Inc. ................ 3,345,650 0.6
447,400 +Stein Mart, Inc. ........................... 2,544,588 0.5
140,900 Strayer Education, Inc. ..................... 2,782,775 0.5
182,000 +Suiza Foods Corporation..................... 7,211,750 1.3
301,200 +United Rentals (North America), Inc. ....... 5,158,050 1.0
420,200 +Veterinary Centers of America, Inc. ........ 5,410,075 1.0
668,100 +WMS Industries Inc. ........................ 8,768,813 1.6
81,500 +West TeleServices Corporation............... 1,991,656 0.4
------------ -----
156,680,392 29.4
- ---------------------------------------------------------------------------------------------------------------------
ENERGY
- ---------------------------------------------------------------------------------------------------------------------
115,100 +Barrett Resources Corporation............... 3,388,256 0.6
210,000 +Basin Exploration, Inc. .................... 3,688,125 0.7
65,800 +Evergreen Resources, Inc. .................. 1,283,100 0.3
150,700 +Louis Dreyfus Natural Gas Corp. ............ 2,731,437 0.5
50,000 +Plains Resources Inc. ...................... 625,000 0.1
207,000 +Tom Brown, Inc. ............................ 2,768,625 0.5
------------ -----
14,484,543 2.7
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES
- ---------------------------------------------------------------------------------------------------------------------
47,350 American National Insurance Company.......... 3,012,644 0.6
609,500 +Billing Concepts Corp. ..................... 3,923,656 0.7
130,800 Brandywine Reality Trust..................... 2,141,850 0.4
74,800 Camden Property Trust........................ 2,047,650 0.4
380,000 Capitol Federal Financial.................... 3,705,000 0.7
353,136 Charter One Financial, Inc. ................. 6,753,726 1.3
50,500 Commerce Bancorp, Inc. ...................... 2,042,094 0.4
81,400 FelCor Lodging Trust Inc. ................... 1,424,500 0.3
</TABLE>
257
<PAGE> 259
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
SECTOR* HELD COMMON STOCKS VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL SERVICES (CONCLUDED)
- ---------------------------------------------------------------------------------------------------------------------
166,000 Frontier Insurance Group, Inc. .............. $ 570,625 0.1%
160,800 Investment Technology Group, Inc. ........... 4,623,000 0.9
44,500 Kimco Realty Corporation..................... 1,507,437 0.3
723,600 Meditrust Companies.......................... 3,979,800 0.7
115,300 National Data Corporation.................... 3,912,994 0.7
187,100 PXRE Group Limited........................... 2,432,300 0.4
291,000 Peoples Heritage Financial Group, Inc. ...... 4,365,000 0.8
188,800 +Primark Corporation......................... 5,251,000 1.0
133,000 Roslyn Bancorp, Inc. ........................ 2,435,563 0.4
------------ -----
54,128,839 10.1
- ---------------------------------------------------------------------------------------------------------------------
HEALTHCARE
- ---------------------------------------------------------------------------------------------------------------------
909,400 +Caremark Rx, Inc. .......................... 4,603,837 0.9
276,000 +Covance Inc. ............................... 2,984,250 0.6
392,600 +EndoSonics Corporation...................... 1,717,625 0.3
24,200 +Gilead Sciences, Inc. ...................... 1,306,800 0.3
9,000 +Incyte Pharmaceuticals, Inc. ............... 532,125 0.1
95,600 Mentor Corporation........................... 2,473,650 0.5
291,000 +Nabi........................................ 1,327,687 0.3
45,700 +Neurogen Corporation........................ 756,906 0.1
193,900 +Novoste Corporation......................... 3,223,588 0.6
705,200 +Orthodontic Centers of America, Inc. ....... 8,418,325 1.6
20,900 +PAREXEL International Corporation........... 246,881 0.0
56,100 +Pharmaceutical Product Development, Inc. ... 666,188 0.1
95,600 +Pharmacopeia, Inc. ......................... 2,156,975 0.4
66,700 ++Quintiles Transnational Corp. ............. 1,242,288 0.2
175,000 +Scios Inc. ................................. 716,406 0.1
273,400 Scottish Annuity & Life Holdings, Ltd. ...... 2,221,375 0.4
85,500 +Sierra Health Services, Inc. ............... 571,781 0.1
160,000 +Sunrise Assisted Living, Inc. .............. 2,200,000 0.4
16,000 +VISX, Incorporated.......................... 828,000 0.2
------------ -----
38,194,687 7.2
- ---------------------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING
- ---------------------------------------------------------------------------------------------------------------------
276,900 AK Steel Holding Corporation................. 5,226,487 1.0
278,800 A.M. Castle & Company........................ 3,310,750 0.6
152,200 Carpenter Technology Corporation............. 4,175,987 0.8
357,000 Commonwealth Industries, Inc. ............... 4,596,375 0.9
161,100 Gibraltar Steel Corporation.................. 3,665,025 0.7
124,900 +Insituform Technologies, Inc. (Class A)..... 3,497,200 0.7
382,000 Intermet Corporation......................... 4,440,750 0.8
72,600 Kaydon Corp. ................................ 1,946,587 0.4
124,800 +Novamerican Steel, Inc. .................... 1,060,800 0.2
299,800 +Paxar Corporation........................... 2,529,563 0.5
191,100 Quanex Corporation........................... 4,873,050 0.9
70,500 Rock-Tenn Company (Class A).................. 1,039,875 0.2
697,476 Ryerson Tull, Inc. .......................... 13,557,190 2.5
464,600 +Shiloh Industries, Inc. .................... 5,110,600 0.9
21,000 The Timken Company........................... 429,188 0.1
669,200 Watsco, Inc. ................................ 7,737,625 1.4
95,200 +Wolverine Tube, Inc. ....................... 1,344,700 0.2
------------ -----
68,541,752 12.8
- ---------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS
- ---------------------------------------------------------------------------------------------------------------------
639,200 +Metromedia International Group, Inc. ....... 3,036,200 0.6
136,000 +Sinclair Broadcast Group, Inc. (Class A).... 1,657,500 0.3
------------ -----
4,693,700 0.9
- ---------------------------------------------------------------------------------------------------------------------
PRODUCER DURABLES
- ---------------------------------------------------------------------------------------------------------------------
53,000 +ANTEC Corporation........................... 1,934,500 0.4
365,350 Applied Industrial Technologies, Inc. ....... 6,073,944 1.1
</TABLE>
258
<PAGE> 260
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1999 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
SECTOR* HELD COMMON STOCKS VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRODUCER DURABLES
(CONCLUDED)
- ---------------------------------------------------------------------------------------------------------------------
110,700 +BE Aerospace, Inc. ......................... $ 934,031 0.2%
116,000 +BI Incorporated............................. 877,250 0.2
400,600 +Brown & Sharpe Manufacturing Company (Class
A)......................................... 851,275 0.2
253,100 +DONCASTERS PLC (ADR)**...................... 2,277,900 0.4
259,800 +ESCO Electronics Corporation................ 3,020,175 0.6
174,400 +Kent Electronics Corporation................ 3,967,600 0.7
251,700 Oakwood Homes Corporation.................... 802,294 0.1
72,600 The Ryland Group, Inc. ...................... 1,674,338 0.3
84,300 +Toll Brothers, Inc. ........................ 1,570,088 0.3
95,000 +Triumph Group, Inc. ........................ 2,297,813 0.4
------------ -----
26,281,208 4.9
- ---------------------------------------------------------------------------------------------------------------------
TECHNOLOGY
- ---------------------------------------------------------------------------------------------------------------------
238,500 +Anixter International Inc. ................. 4,919,062 0.9
166,010 +Aspen Technology, Inc. ..................... 4,388,889 0.8
68,700 +Black Box Corporation....................... 4,602,900 0.9
90,000 +C.P. Clare Corporation...................... 922,500 0.2
106,600 +Cognos, Inc. ............................... 4,876,950 0.9
38,500 +Documentum, Inc. ........................... 2,305,187 0.4
120,500 +FileNET Corporation......................... 3,087,812 0.6
324,800 IKON Office Solutions, Inc. ................. 2,212,700 0.4
554,044 +InterVoice, Inc. ........................... 12,881,523 2.4
718,100 +Mentor Graphics Corporation................. 9,380,181 1.8
585,000 +NetManage, Inc. ............................ 2,888,438 0.5
7,800 +NetOptix Corporation........................ 520,650 0.1
113,200 Newport Corporation.......................... 5,051,550 0.9
59,700 +PairGain Technologies, Inc. ................ 843,263 0.2
65,000 +Pegasystems Inc. ........................... 727,188 0.1
278,603 +Peoplesoft Inc. ............................ 5,937,716 1.1
376,600 +Phoenix Technologies Ltd. .................. 5,884,375 1.1
374,900 +Planar Systems Inc. ........................ 2,436,850 0.4
72,200 +Rational Software Corporation............... 3,546,825 0.7
191,000 +Read-Rite Corporation....................... 895,313 0.2
427,700 +Sensormatic Electronics Corporation......... 7,458,019 1.4
167,500 +Sterling Commerce, Inc. .................... 5,705,469 1.1
616,251 +Structural Dynamics Research Corporation.... 7,857,200 1.5
352,400 +Sybase, Inc. ............................... 5,968,775 1.1
158,200 Telxon Corporation........................... 2,531,200 0.5
------------ -----
107,830,535 20.2
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$486,483,709) 501,008,189 93.9
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER*** $24,440,000 General Motors Acceptance Corp., 5% due
1/03/2000.................................. 24,429,817 4.6
8,000,000 Paccar Financial Corp., 6.60% due 1/10/2000.. 7,985,333 1.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$32,415,150) 32,415,150 6.1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$518,898,859)....... 533,423,339 100.0
LIABILITIES IN EXCESS OF OTHER ASSETS........ (234,504) 0.0
------------ -----
NET ASSETS................................... $533,188,835 100.0%
============ =====
- ---------------------------------------------------------------------------------------------------------------------
</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.
259
<PAGE> 261
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$518,898,859)....... $533,423,339
Cash........................................................ 534,607
Receivables:
Securities sold........................................... $2,825,719
Capital shares sold....................................... 457,556
Dividends................................................. 181,313 3,464,588
----------
Prepaid expenses and other assets........................... 32,936
------------
Total assets................................................ 537,455,470
------------
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 3,146,299
Capital shares redeemed................................... 695,199
Investment adviser........................................ 358,711
Distributor............................................... 534 4,200,743
----------
Accrued expenses and other liabilities...................... 65,892
------------
Total liabilities........................................... 4,266,635
------------
- ---------------------------------------------------------------------------------------
NET ASSETS.................................................. $533,188,835
============
- ---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized......................................... $ 2,263,530
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized......................................... 19,776
Paid-in capital in excess of par............................ 489,029,213
Accumulated distributions in excess of investment
income--net............................................... (102,477)
Undistributed realized capital gains on investments--net.... 27,454,313
Unrealized appreciation on investments--net................. 14,524,480
------------
NET ASSETS.................................................. $533,188,835
============
- ---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $528,571,251 and 22,635,300
shares outstanding........................................ $ 23.35
============
Class B--Based on net assets of $4,617,584 and 197,764
shares outstanding........................................ $ 23.35
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
260
<PAGE> 262
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................... $ 2,634,101
Interest and discount earned................................ 2,346,931
------------
Total income................................................ 4,981,032
------------
- ---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $3,304,754
Accounting services......................................... 82,733
Custodian fees.............................................. 56,965
Printing and shareholder reports............................ 50,080
Professional fees........................................... 49,810
Directors' fees and expenses................................ 8,579
Transfer agent fees......................................... 5,010
Distribution fees--Class B.................................. 3,271
Pricing services............................................ 1,766
Other....................................................... 6,080
----------
Total expenses.............................................. 3,569,048
------------
Investment income--net...................................... 1,411,984
------------
- ---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET:
Realized gain on investments--net........................... 41,465,516
Change in unrealized appreciation/depreciation on
investments--net.......................................... 93,096,217
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $135,973,717
============
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
261
<PAGE> 263
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,411,984 $ 625,435
Realized gain on investments--net........................... 41,465,516 44,232,014
Change in unrealized appreciation/depreciation on
investments--net.......................................... 93,096,217 (71,727,863)
------------ -------------
Net increase (decrease) in net assets resulting from
operations................................................ 135,973,717 (26,870,414)
------------ -------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (2,027,342) (1,476,063)
Class B................................................... (10,062) (726)
In excess of investment income--net:
Class A................................................... (101,971) --
Class B................................................... (506) --
Realized gain on investments--net:
Class A................................................... (57,708,553) (109,791,778)
Class B................................................... (239,993) (56,535)
------------ -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (60,088,427) (111,325,102)
------------ -------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 9,518,990 104,118,352
------------ -------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 85,404,280 (34,077,164)
Beginning of year........................................... 447,784,555 481,861,719
------------ -------------
End of year*................................................ $533,188,835 $ 447,784,555
============ =============
- ------------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ (102,477) $ 625,420
============ =============
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
262
<PAGE> 264
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE CLASS A+
FINANCIAL STATEMENTS. --------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 19.95 $ 27.75 $ 26.22 $ 27.98 $ 19.26
-------- -------- -------- -------- --------
Investment income--net................................. .06 .03 .09 .13 .17
Realized and unrealized gain (loss) on
investments--net..................................... 6.03 (1.41) 2.80 1.84 8.64
-------- -------- -------- -------- --------
Total from investment operations....................... 6.09 (1.38) 2.89 1.97 8.81
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................... (.09) (.09) (.08) (.14) (.09)
In excess of investment income--net.................. (.01) -- -- -- --
Realized gain on investments--net.................... (2.59) (6.33) (1.28) (3.59) --
-------- -------- -------- -------- --------
Total dividends and distributions...................... (2.69) (6.42) (1.36) (3.73) (.09)
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 23.35 $ 19.95 $ 27.75 $ 26.22 $ 27.98
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share..................... 34.15% (6.50%) 11.72% 8.11% 45.90%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... .81% .81% .80% .81% .81%
======== ======== ======== ======== ========
Investment income--net................................. .32% .13% .32% .50% .72%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................. $528,571 $446,510 $481,614 $453,029 $339,921
======== ======== ======== ======== ========
Portfolio turnover..................................... 89.90% 56.29% 147.06% 80.84% 96.79%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
See Notes to Financial Statements.
263
<PAGE> 265
- --------------------------------------------------------------------------------
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
FINANCIAL STATEMENTS. YEAR ENDED
DECEMBER 31, FOR THE PERIOD
------------------------- OCT. 23, 1997+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 DEC. 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 19.94 $ 27.74 $ 31.23
------- ------- --------
Investment income (loss)--net............................... .03 --+++ (.01)
Realized and unrealized gain (loss) on investments--net..... 6.03 (1.39) (3.48)
------- ------- --------
Total from investment operations............................ 6.06 (1.39) (3.49)
------- ------- --------
Less dividends and distributions:
Investment income--net.................................... (.06) (.08) --
In excess of investment income--net....................... --+++ -- --
Realized gain on investments--net......................... (2.59) (6.33) --
------- ------- --------
Total dividends and distributions........................... (2.65) (6.41) --
------- ------- --------
Net asset value, end of period.............................. $ 23.35 $ 19.94 $ 27.74
======= ======= ========
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 33.99% (6.52%) (11.18%)++
======= ======= ========
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses.................................................... .96% .97% .96%*
======= ======= ========
Investment income (loss)--net............................... .17% .02% (.24%)*
======= ======= ========
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $ 4,618 $ 1,275 $ 248
======= ======= ========
Portfolio turnover.......................................... 89.90% 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.
264
<PAGE> 266
- --------------------------------------------------------------------------------
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. 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. Distributions in excess of net investment
income 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. The Company has also entered into a Distribution
265
<PAGE> 267
- --------------------------------------------------------------------------------
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 .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 .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 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 year ended December 31, 1999, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $132,225 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
year ended December 31, 1999 were $356,387,009 and $360,186,931, respectively.
Net realized gains (losses) for the year ended December 31, 1999 and net
unrealized gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Gains
- ------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $41,465,595 $14,524,480
Short-term investments................. (79) --
----------- -----------
Total.................................. $41,465,516 $14,524,480
=========== ===========
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $13,682,054, of which $89,150,516 related to appreciated
securities and $75,468,462 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$519,741,285.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$9,518,990 and $104,118,352 for the years ended December 31, 1999 and December
31, 1998, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 1,944,306 $ 39,665,650
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 3,187,384 59,837,866
---------- ------------
Total issued........................... 5,131,690 99,503,516
Shares redeemed........................ (4,877,558) (92,692,960)
---------- ------------
Net increase........................... 254,132 $ 6,810,556
========== ============
- --------------------------------------------------------------------
</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 Year Ended Dollar
December 31, 1999 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 155,450 $ 3,156,822
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 12,596 250,561
---------- ------------
Total issued........................... 168,046 3,407,383
Shares redeemed........................ (34,175) (698,949)
---------- ------------
Net increase........................... 133,871 $ 2,708,434
========== ============
- --------------------------------------------------------------------
</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>
266
<PAGE> 268
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SPECIAL VALUE FOCUS FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
SPECIAL VALUE FOCUS FUND OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Special Value Focus Fund of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Special Value Focus
Fund of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 2000
267
<PAGE> 269
- --------------------------------------------------------------------------------
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<PAGE> 270
- --------------------------------------------------------------------------------
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<PAGE> 271
- --------------------------------------------------------------------------------
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<PAGE> 272
- ---------------------------------------------------------
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
DIRECTORS AND OFFICERS
Terry K. Glenn
Kevin M. Rendino
President
Senior Vice President
Joe Grills
Thomas R. Robinson
Director
Senior Vice President
Walter Mintz
Walter D. Rogers
Director
Senior Vice President
Robert S. Salomon Jr.
Kurt Schansinger
Director
Senior Vice President
Melvin R. Seiden
Robert M. Shearer
Director
Senior Vice President
Stephen B. Swensrud
Daniel V. Szemis
Director
Senior Vice President
Arthur Zeikel
David Chesney
Director
Vice President
Christopher G. Ayoub
Robert F. Murray
Vice President
Senior Vice President
R. Elise Baum
Jacqueline L. Rogers
Senior Vice President
Vice President
Donald C. Burke
Lawrence R. Fuller
Senior Vice President
Vice President and
Treasurer
Vincent T. Lathbury III
Senior Vice President
Allan J. Oster
Secretary
Kevin J. McKenna
Senior Vice President
Eric S. Mitofsky
Senior Vice President
Joseph T. Monagle Jr.
Senior Vice President
Grace Pineda
Senior Vice President
<PAGE> 273
- --------------------------------------------------------------------------------
This report is only for distribution to shareholders of one of the Funds of
Merrill Lynch Variable Series Funds, Inc. 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 or Reserve Assets
Fund is neither insured nor guaranteed by the US Government. There can be no
assurance that the money market Funds will be able to maintain a stable net
asset value of $1.00 per share. 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
#16897-12/99
